Foreclosure on a home is a devastating process for the homeowner. They often feel that all their life-long dreams of home ownership are going down the drain. For whatever reason, they are no longer able to make the payments on their home so the home is in foreclosure. When a home is in foreclosure, the lender is selling the home at public auction where the highest bidder gets the home. Sometimes as an alternative to the actual foreclosure, short sale may take place.
A foreclosure short sale may take place if the lender agrees to sell the home for less than what is owed to the bank. The bank accepts a discounted payoff and releases the mortgage. However, many times the bank will list the home as a foreclosure short sale, but they may not accept the offer given by the new buyer. A home may not actually be in foreclosure for a lender to offer a short sale. If the value of the home has fallen way below what is owed on the mortgage, the lender may consider a short sale as an attempt to bring the price of the home in line with market value.
Although to avoid a foreclosure, short sales are often accepted, there are circumstances where the lender may not want to accept a short sale. In some circumstances, the lender will come out ahead if they go through with the foreclosure. This may be the case when the value of the home is much higher than what is owed on the mortgage. In a situation such as this, the lender may be able to sell the home for less than it's worth but still be over what is owed on the mortgage.
If you are a buyer looking for a cheap home to buy, be aware of the negatives involved in a pre-foreclosure short sale. You may see a home on the market that seems to be too good to be true. Check with a real estate agency to see if the home is a short sale. The lender may not accept your offer and short sales are seldom simple to complete, often taking months to complete.
A foreclosure short sale may seem like the answer to the homeowner facing the loss of their home. They will have the opportunity to be out of debt, but there are also consequences to a short sale. The largest consequence is the tax liability that may fall on the seller (homeowner). The lender has to notify the IRS of any taxable sales and they may give you a 1099 for the amount they were shorted. Although the Mortgage Forgiveness Debt Relief Act of 2007 forgives many debts in foreclosures, some of the dollar amounts are exempt from this act.
Before you get too excited about a short sale, contact a lawyer to find out your possible tax liability. Another negative about a pre-foreclosure short sale is what it does to your credit rating. It will show up even more negatively on your credit report than a foreclosure. So consider all options when your home is facing foreclosure.
Most young people, as well as old people, have a mortgage on their home. With the prices of homes at an all-time high, very few people can pay cash for their home like they did many years ago. Some people even have a second mortgage on their home. A second mortgage is not a lot different from a first mortgage, but a foreclosure of second mortgage can be slightly different from a first mortgage foreclosure. The results, however, are the same-homeowner losing part of their home- with a foreclosure second mortgage or first mortgage.
Some people have not even heard of a second mortgage or don’t understand why a person would have two mortgages on their home. There are a few good reasons. With economy as it is today, many people have difficult time saving money. This makes it difficult if an unexpected expense comes up that requires cash. Or perhaps you want to take the family on that long awaited vacation, but don’t have the cash. Most people have equity on their home above and beyond what they owe on their mortgage so they borrow money against their home. For instance, if their home is appraised at $100,000 but only owe $50,000 on their mortgage loan, they have around $50,000 of clear equity. Many people take out a second mortgage using the equity on their home as collateral.
While this helps them at the time, it may cause problems later if they can’t make their payments and the home goes into foreclosure. The first mortgage always takes precedence over the second in a foreclosure. Second mortgage will get what’s left after the first mortgage is satisfied. Many people understand the concept of what is meant by “first mortgage taking precedence over second mortgage”. If they have financial difficulties, they feel they can let their second mortgage fall behind as long as they keep up their first mortgage.
What they don’t realize is they can still lose their home through foreclosure. Second mortgage loans have the same legal rights as first mortgage. If you fall behind on your second mortgage, they can sell foreclose your home and sell it. The only difference is that the first mortgage company will get their money first and then the second mortgage will get what’s left. Often is a situation like this the first mortgage company will offer to buy out the second mortgage or vice versa so there is only one mortgage. Whichever company buys out the loan comes out ahead because they now have only one mortgage.
You now understand the importance of paying both mortgages on time. A foreclosure of second mortgage can have the same ramifications as a first mortgage. You lose your home and good credit.
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