Foreclosure FYI
There is really no “right way” to walk away from a home. You need to know the consequences, both for liability to the loan as well as federal taxes.
Making the decision to just walk away doesn’t just affect you and your credit today. In Florida, lenders have up to 20 years to collect a deficiency judgment.
Add to that the potential tax ramifications and it can really COST you to foreclose. While The Mortgage Debt Relief Act of 2007 (extended) temporarily provides some tax shelter of the 1099-C or 1099-S income owners will incur for the first mortgage on your homestead, it doesn’t cover the second mortgage or investment properties.
A foreclosure can ding your credit up to 300 points. It will stay on your report for seven years. It is important to really consider your options before you choose to “walk-away.” You do have options.
Deed-in-lieu: if you qualify, you can voluntarily turn the property back to the lender, saving them the cost of foreclosure. This will still ding your credit, but not as badly and potentially erases or significantly lowers your future liability.
Short Sale: it costs the lender less to avoid the foreclosure and they avoid holding costs. That makes short sales a favorite alternative for lenders. Even if you are on the brink of foreclosure, a good short sale agent can stop the foreclosure and get you a sale. They do take time and require documentation from the owner, but they hurt your credit less then foreclosure and deed-in-lieu and can reduce or eliminate your future liability. It is still very important to have an experienced short sale agent negotiating on your behalf. More and more lenders are adding deficiency judgements to short sale approval letters. Make sure your Realtor® is watching for it. In many cases the verbiage can be removed or reduced.
If you do have gone through a foreclosure, short sale or deed-in-lieu, you should have an accountant assist you with your taxes to make sure you handle the 1099s appropriately.