OK, OK, sorry I made you wait. So what are the consequences you have to worry about if your house is sold at a short sale or foreclosure sale, transferred by a deed in lieu of foreclosure or is just getting smaller in the rear view mirror as you drive away? A big one is taxes.You know those things you pay when you earn money, when you buy property, when you sell property, when you give property away, and ultimately when you die – yep – you get taxed.
So the honeymoon is over and you can’t pay your mortgage. You call the bank and ask for one of these new-fangled ways of getting out from under your upside-down, underwater and gurgling house. “Can I please give you the deed to my house so I no longer have to pay this mortgage?” If they say yes, you’re home free, right? Nope, you can still get the dreaded “1099.”
If the value of your house when it goes back to the bank is less than what you owe (and DUH, of course it is), the bank’s loss is considered your gain. The difference between what you owed and what the house was worth when you did the “deed in lieu” is now INCOME to you. Yep, for the privilege of giving away your house, you will have to pay – wait, wait, wait for it – TAXES on that “income.” Let’s see, you can’t pay your mortgage so you lose your house. Yeah, that’s the perfect time to pay taxes on imaginary income.
If the bank decides they would like your house AND the rest of the money you owe them, they could reserve all their rights, wait a few years and sue you for that money, getting a judgment against you for the deficiency. Judgments have all kinds of consequences of their own which I don’t have enough space for right here.
So let’s say you are a darn good little negotiator and you get the bank to “waive their rights” to go after you for the deficiency judgment. A waiver of their right to a judgment has nothing to do with the fact that they have to send you a “1099”, meaning you still have to pay taxes on that imaginary income.
Another little consequence that’s not even in the fine print of your mortgage, is the wham, bam, thank you mam hit that your credit score takes at those mysterious credit agencies – the big three – when you have a foreclosure, a deed in lieu, a short sale or a walk-away. Like the Wizard of Oz, they hold the secret to your future. Spin the wheel and come up with 780, you’re golden and get credit to buy just about anything. If the Wizard says, sorry, you only rate a 520, you’ll be lucky to be able to buy a bicycle on time at Sam’s Club. The really sad part is that no one is doing anything to fix this and I think we all know the credit agencies don’t even pretend anymore to keep your records up to date. Removing the old stuff after seven years so you can improve your credit score, yeah, like that really happens.
Finally, what does it all mean? Well, unless you’ve got a bunch of money under your mattress or buried in the backyard, be prepared to be a renter for a while, typically 5 to 7 years, before you get another home loan. Or maybe you qualify for one of the “gov’mt’” programs everyone is talking about, but that’s for another article.
I want to make sure ya’ll understand that there are always exceptions to the rules and rules for the exceptions (homestead). There are ways to solve this Rubik’s cube. The people who are going to come through all of this with the least battle scars are those who “think outside the box” and come up with creative solutions that are not wholly dependent on the banks, the credit agencies and “gov’mit” programs. Those people are usually called “Americans.” and some of them are even lawyers.