I am often asked by people who cannot afford to stay in their home what options are available. Some property owners are paying their mortgages, while others have stopped. Property owners recognize that others are freeing themselves from large house payments. They ask themselves, “Why am I paying more than my neighbor?” Undoubtedly, this conundrum causes people to reconsider making their payment. Knowing that many people are in this quandary, I will give some insight into these difficult questions.
Should I pay my mortgage or not? Paying your mortgage ensures your ability to continue residing in your property. By not paying, you may lose your home through foreclosure. During a foreclosure, a lender sells the property to itself or to the highest bidder. In Arizona, this process is called a “trustee sale”. When a property sells for less than the amount owed, the difference is called a “deficiency.” In Arizona, a property owner is not liable for any deficiency after a trustee sale, if the following applies: the loan must have been secured to pay part of the balance of the purchase price; the property is a one or two family dwelling on two and one-half acres or less; and is occasionally occupied.
After a foreclosure, a property owner is not entirely free from obligations. The lender will send the property owner a “Form 1099-C: Cancellation of Debt” for that year, and the deficiency is taxable as ordinary income. Fortunately, under the Mortgage Forgiveness Debt Relief Act of 2007, property owners who purchased their homes after January 1, 2007, and before January 1, 2010, will not be subject to taxable income if their property is foreclosed on or before the end of 2012.
The stigma of having a foreclosure or the damage to one’s credit has caused many distressed property owners to consider alternatives. Such alternatives include a short sale or deed in lieu of foreclosure. In a short sale, a property owner lists their property for sale at a marketable price, far below the loan’s pay off balance. A deed in lieu of foreclosure is where the property owner simply hands over the keys to the lender. For both alternatives, the lender’s approval is required.
A short sale allows a property owner to sell their own property for less than the amount owed. However, by its very nature, there will be a deficiency after the short sale. Arizona’s anti-deficiency statute does not apply to short sales or a deed in lieu of foreclosure because it is limited to foreclosures. As a result, the short sale is conditioned on the property owner’s ability to resolve the deficiency. A property owner will have to negotiate payment terms for the deficiency. If the lender forgives any of the deficiency, the property owner will receive a Form-1099C. The Mortgage Relief Act of 2007 applies to short sales and a deed lieu of foreclosure if the deficiency is forgiven by the lender.
A deed in lieu of foreclosure allows that property owner to give the property to the lender. This process is much simpler than a short sale or foreclosure. The downfall is that if the lender does not consider the loan as paid in full, it may ask the property owner to pay the deficiency between the value of the property and the loan balance. If the lender forgives any of the deficiency, the property owner will receive a Form-1099C.
So who wins? There are many factors that may change one’s ability to receive relief from a distressed property that I did not touch upon in this article. There is no specific answer to “who wins” in the mortgage crisis. This article was intended to provide an overview, and each property owner’s situation is unique and different. Anyone considering a short sale or deed in lieu of a foreclosure, or who is in foreclosure proceedings, should consult a realtor, an attorney and a tax professional.
Owning a home is part of the American Dream as the economy has changed since 2008 many Americans have found it hard to hold on to their part of the American Dream. If you need assistance or have questions about the foreclosure or short sale process, call us at 928-774-5400.