How Mortgage Foreclosure can Affect a Homeowner
Is a Short Sale Better for Your Credit Score?
May 16, 2009
Increasing numbers of US homeowners are 'underwater' with negative equity. They are also struggling to make their mortgage payments because of money problems caused by job losses and spiraling consumer debt. According to a year-end report by RealtyTrac, there were a total of 861,664 mortgage foreclosures over the course of 2008. As many as 3.1 million households received a notice.
What is Mortgage Foreclosure?
Mortgage foreclosure involves 'walking away' from home ownership and not making any further mortgage payments. The mortgage lender then takes legal action against the borrower to repossess their secured asset; they are entitled to sell the home in order to recover their money. Whilst a lender will attempt to get the best market price, the former homeowner is responsible for any deficit.
Will a Mortgage Lender Pursue a Homeowner?
A mortgage lender is entitled to pursue a homeowner for the difference between their mortgage and the price the house is sold for. In practice, this isn't likely to happen unless that person has a high disposable income or other saleable assets. John Mechem, a spokesman for the Mortgage Bankers Association. “You can't squeeze blood from a stone.” Some States, such as California and Arizona, have laws in place that prevent a homeowner being pursued.
Mortgage Foreclosure Will Cause a Credit Score to Fall
Stopping mortgage payments is clearly going to have implications for personal credit scores. Michael Hollman, an attorney for Village Settlements in Gaithersburg, said that he'd seen FICO scores "drop by as much as 300 points." Whilst this entry will show on a credit report for up to seven years, provided other repayments are made in-full and punctually, a credit score will start to improve within a couple of years.
Tax Implications of Mortgage Foreclosure
A debt write-off has always been treated by the IRS as an income. However, a recent legislative change by the Obama administration means that this is no longer the case. Mark Luscombe, principal analyst for CCH, a tax information service, stated that those who arrange a short sale or a deed in lieu of foreclosure can benefit from tax relief by using special tax form 1099-C.
Is a Short Sale a Better Solution?
With the agreement of the mortgage lender, a short sale allows a homeowner who is unable to make mortgage payments to privately sell their home for less than market value. The remaining debt is written-off. This helps lenders as they are able to avoid legal proceedings and having to sell the property. Short selling can help a credit score, provided that it is reported as "paid in-full". If it shows as "settled for less than the full amount due" the affect is the same as mortgage foreclosure.
Mortgage foreclosure is a plausible way of escaping money problems. Increasing numbers are 'underwater' and struggling to make their mortgage payments. A homeowner should speak to their mortgage lender and get their agreement to make a short sale. There aren't currently any tax implications, but the difference between the mortgage and final sale price remains collectable.
Readers may also be interested in discovering how filing for bankruptcy can prevent mortgage foreclosure.
Sources
Lieber, Ron. (March 13, 2009). "Thoughts on walking away from your home loan." The New York Times.
Christie, Les. (Jan 15, 2009). "Foreclosure up a record 81% in 2008." CNN Money.
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
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