Foreclosures

Letter to “Ask Leon”

Recently I had a conversation with a friend about bankruptcies and foreclosures. It appeared that neither of us really understands how foreclosures work. Here are my questions: 1. After you foreclose on a property, does that mean you no longer owe anything on it? Example: The mortgage is for $140k and the Mortgage Company sells the property for $130k. Will you owe the difference of $10k or is it similar to a bankruptcy in that you become free of the debt but now have a significant blemish on your credit? 2. How long exactly do foreclosures stay on your credit report? I never fully understood how foreclosures work and so any help would be most appreciated. Thanks!

Leon Says…

It will stay on your record anywhere from 7 to 10 years, depending on the type of foreclosure process that the lender uses. The answer to both of your questions generally revolves around state law, (we have 50 different ones). Depending on the state where the foreclosure occurs AND the type of loan, the borrower might lose the property but walk away with the bad credit as the only repercussion. Or, depending on the state AND the type of loan, the borrower might owe the $10K. As you can see, it’s best to get advice about this from a good local attorney. If this is a real situation, do it now before your options disappear. Most states have “anti-deficiency” laws that prevent the borrower from being liable on the remainder if the loan was a “purchase money loan,” (that is a loan obtained to purchase the property, as opposed to refinancing the property after you already own it.)