What happens if you foreclose on a house with negative equity?

[Mark R]

Say you foreclose on a $250k debt - but the house can only sell for $200k.

What can the bank do about it in the US?

In the UK, your options are
1) Declare bankruptcy - and wipe out the debt, at the cost of losing all your assets (car, stocks/shares/investments, insurance policies, pension, etc.) + become a social outcast (no bank account, ATM/debit/credit cards, no cell phone, coin operated electricity/gas meters, etc.)

2) The bank can chase you for the debt (including getting a court order for payment / deduction from wages) for the next 12 years.

 

[jlbenedict]

I'm sure its the same way with a car, being upside down on: the bank would try to collect the deficiency balance.

*Edit*

I'm just assuming this since I've never owned a home.

 

[altonb1]

I believe you would still be responsible for the debt--up to you to determine how to satisfy that debt, whether through paying it back, declaring bankruptcy, etc.

 

[kranky]

The homeowner still owes the bank the balance of the loan. You can either pay it back, or sometimes the bank will write off the difference. If that happens, you have to pay income tax on the amount you didn't have to pay back.

 

[giantpinkbunnyhead]

Originally posted by: kranky
The homeowner still owes the bank the balance of the loan. You can either pay it back, or sometimes the bank will write off the difference. If that happens, you have to pay income tax on the amount you didn't have to pay back.

Generally, yes... but in some cases you won't have to pay tax on forgiven debts if you can show insolvency. Obviously, consult a real tax professional for a more accurate answer. I don't know all the details by any means.

 

[mugs]

Originally posted by: kranky
The homeowner still owes the bank the balance of the loan. You can either pay it back, or sometimes the bank will write off the difference. If that happens, you have to pay income tax on the amount you didn't have to pay back.

Unfortunately most Americans have the attitude that "I don't have the house anymore, why should I have to keep paying for it?"

 

[SpecialEd]

Originally posted by: mugs

Originally posted by: kranky
The homeowner still owes the bank the balance of the loan. You can either pay it back, or sometimes the bank will write off the difference. If that happens, you have to pay income tax on the amount you didn't have to pay back.

Unfortunately most Americans have the attitude that "I don't have the house anymore, why should I have to keep paying for it?"

heh...

Person1: can i borrow 250,000 dollars?
Person2: okay
Person1:"buys house for 250,000, and then sells for 200,000"
Person2:you owe me 250,000 dollars...
Person1:no I don't. I sold the house for only 200,000.

 

[KB]

In the US your options are the same; except if you declare bankruptcy, you keep many assets. Depending on the state you may be able to keep your 40 million dollar vacation home. From then on you have bad credit but you will get credit card offers within 2 months.

 

[dullard]

In the US, the standard policy is that anytime you borrow more than 80% of the house value, the bank forces you to also buy insurance that will cover any problem such as you are talking about. This insurance is commonly called PMI (private mortgage insurance).

The borrower pays the PMI premiums each month, and if the borrower doesn't pay the mortgage, then the bank gets the PMI payout to cover the missing money.

Unfortunately, in the last few years there has been a boom of methods to get around paying PMI (because for the buyer, PMI is a lose-lose situation, they pay the insurance premiums and can never get the insurance payout). The most common way around PMI is to get a mortgage for 80% of the house value. Then get a seperate loan for the remaining 20% of the house value (sometimes even a bit less or a bit more than 20%). In this case, the bank with the 80% mortgage takes the hit but they have 20% of the house paid for anyways so the hit will be small if it exists at all. I don't know what happens to that second 20% loan.

My GF is currently in this issue. She made a great offer on a house and that offer was accepted in legal paperwork. The spent roughly $700 in getting the house inspected, getting the mortgage paperwork going, etc. Then just as the deal was about to close, it was reveiled that the seller accepted the offer below what the seller owed (two mortgages). The deal has been delayed by nearly half a year now, foreclosure was started but that too is now delayed. My GF is negotiating with both the mortgage banks and the PMI insurance company to find a deal that is acceptable to all 4 groups. It looks like it'll go through if she pays a couple thousand more for the house (still a good deal). The sellers credit is trashed, but it looks like they'll get away with no cash in any bank account but other than that, they'll come away with clean hands.