What Happens To The Mortgage After The Foreclosure?

August 14th, 2009 | Tags: Real Estate

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Remaining mortgage amount is paid back through sale or auction of the property

The mortgage amount that is outstanding has to be met somehow by the lender. This is a shortfall that all lenders and bankers will try to close. Once the house goes in for the foreclosure, in all probabilities, it will be auctioned off. The dollars that are generated from the auction or the sale of the property will be used to reimburse the lender for the outstanding mortgage amount.

In many cases the lenders may allow you to go for a short sale, this means that the value of sale is less than the outstanding amount on the mortgage. You can also hand over the “deed to the home” in lieu of the lender not starting foreclosure proceeds against you.

Specific laws enacted by the states

It can happen that sale proceeds may not be enough to cover the outstanding mortgage amount. In many states like Arizona and California, there are laws that specifically forbid the lenders to go after the previous homeowners for the outstanding amount on the mortgage amount. Get a lawyer and see whether it’s applicable to you or not. You must also get it in writing from the lender or the bank “that the deficiency has been waived”. One of the biggest challenges that the homeowners will face is finding someone at the bank who will help with the mortgage issues.

In all probabilities, you won’t be sued either for the remaining of the amount. Also you may not receive a huge tax bill either. In fact the homeowners may even qualify for a tax relief if they fill in and deposit a special form known as 1099-C. this form will also reflect the amount of mortgage amount that have been waived off by the lenders. The damage to your credit isn’t permanent but it will be substantial when you go for foreclosure. Short sale or ‘deed in lieu ’ can mar your credit report and it will take at least 5-7 years of good financial dealings to offset the bad credit report.