The dark side of foreclosure
Glenwood Springs, CO Colorado
“The camera pans on an All-American subdivision with three-car garages and meticulous landscaping. Then it focuses on one house, where a moving van is parked and movers are loading precious pieces of the homeowners’ lives. Tears flow as the family bids farewell to their foreclosed home. Cut to black – the end of an American tragedy.”
But, unfortunately, not really the end in a lot of instances.
Lenders are now pursuing deficiencies, if they sell a foreclosed property for less than the outstanding loan amount. The borrower signs a note for the loan amount, which is a promise to repay the entire loan. If the property sale doesn’t pay that loan off in its entirety, then the borrower still owes the difference.
Of course, the lender can, and in some instances, does, relieve the borrower of liability. This is what generally happens in a so-called “short sale”, when all parties agree on a sales price that falls short of clearing the indebtedness on the property. In this case, the lender will often wipe the slate clean. Then the homeowner breathes a sigh of relief. “At least it’s finally over”.
Not yet; there’s more.
If you’ve signed a note making you personally liable, and a portion of that note is forgiven by the lender, then the difference is income to you, and you owe taxes on it. Lenders are sending out 1099 forms to borrowers in this situation.
Hardly seems fair, does it? A borrower, say, buys a property for $500,000, and gets a 90 percent loan for $450,000. Can’t make the payments, lender forecloses, and sells the property for $400,000. Imagine finding out at the end of the year that you owe taxes on $50,000 of ordinary income.
Everybody’s getting tougher in these interesting times, from banks to the feds. For example some lenders are going after foreclosed borrowers who strip the property before leaving. The call it theft, if you can imagine that.
Before you contemplate letting the lender foreclose, seek legal, and maybe accounting, advice. There are pitfalls that you might not have imagined.
Pat Dalrymple is a valley native. He’s been in the mortgage and banking business since 1961. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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