D
E
F
I
C
I
E
N
C
Y | - Legal Process
- Non-negotiable by Borrower
- Based on state law and how lien holder exercises their right(s) under the law
- Recourse by lien holder is generally present if equity was taken out of the property (cash out refinance; Home Equity Line after the purchase of home... NON Purchase Money Loan)
- Non-recourse loans have qualifiers (2.5 acres or less, single family or duplex residence, original purchase money loan)
- Bankruptcy filing might be a course of action prior to the foreclosure event
- Other legal rights may be present for borrower and creditor as the law allows
- Get legal and financial counsel prior to foreclosure to understand your rights under AZ law
| - Private Workout Solution
- Negotiable by Borrower
- Based on borrower and ALL lien holders agreement
- Recourse loans generally require some deficiency payment (cash at close or a promissory note)
- Mortgage Insurance (even if premium is not paid by borrower) generally triggers a demand for a deficiency payment by the PMI company
- Lien holder has option to release the lien but not required to forgive the debt owed (negotiable)
- Deficiency payment by lien holder is often linked to the hardship and borrower's ability to recover
- If a deficiency demand is required to approve the short sale, some lien holders will settle for a smaller amount of cash at close rather than a larger amount on a promissory note (negotiable)
- When a promisor note is present, it often is no interest or a very low rate (negotiable)
- Some lien holders will not settle. Rather, they agree to release the lien, sell the property and discharge debt to collection for future recovery
- Get legal and financial counsel and any agreement for debt forgiveness by lien holder in writing
|
T
A
X
E
S | - Cancelled/Forgiven debt is often a taxable event
- 1099 is often issued for cancellation of debt and treated as earned and taxable income
- Loss in foreclosure is often greater (recovery is less) and therefore the cancellation of debt is greater - triggering a higher 1099
- Mortgage Debt Relief Act of 2007 may grant relief, but it has qualifiers of Primary Residence and Original Purchase Money Loan
- If equity (cash) was taken out of the property the tax liability may be minimized if the funds were used to substantially improve the property
- Filing bankruptcy prior to foreclosure may prevent tax liability
- Other tax consequences or benefits may be present
- Get tax counsel prior to foreclosure to understand your exposure under IRS and AZ Tax Code
| - Cancelled/Forgiven debt is often a taxable event
- 1099 is often issued for cancellation of debt and treated as earned and taxable income
- Loss in short sale is often less (recovery is greater) and therefore the cancellation of debt is less - triggering a lower 1099
- Mortgage Debt Relief Act of 2007 may grant relief, but it has qualifiers of Primary Residence and Original Purchase Money Loan
- If equity (cash) was taken out of the property the tax liability may be minimized if the funds were used to substantially improve the property
- Filing bankruptcy prior to foreclosure may prevent tax liability
- Other tax consequences or benefits may be present
- Get tax counsel prior to short sale to understand your exposure under IRS and AZ Tax Code
|
C
R
E
D
I
T | - Missed payment is obvious in foreclosure
- Credit score goes down severely due to missed payments during the pre-foreclosure timeframe
- Derogatory reporting of a foreclosure stays on credit history for several years
- Derogatory reporting keeps credit score weighed down and causes long recovery
- Lending guidelines for future home purchase currently penalizes borrowers with a foreclosure in their history (5 year wait on FannieMae Loans)
- Other credit consequences may be present, especially with current or future employers
- Get credit counsel prior to a foreclosure
| - Missed payment is presumed in short sale
- Credit score goes down severely due to missed payments during the pre-foreclosure timeframe
- Derogatory reporting of a short sale may stay on credit history for several years
- Derogatory reporting may keep credit score weighed down and cause long recovery
- Lending guidelines for future home purchase currently penalizes borrowers with a short sale in their history (2 year wait on FannieMae Loans)
- Other credit consequences may be present, especially with current or future employers
- Get credit counsel prior to a short sale
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