Deed-in-lieu or Foreclosure on a vacation second home is not a sure thing with a bank.
Q: I have applied for a deed-in-lieu of foreclosure on a vacation beach home I own, but can no longer make the payments. I’m 72 years old, semi-retired with a mortgage on my primary home. If the bank doesn’t grant the foreclosure and I discontinue payments, will they just issue a standard foreclosure?
A: A deed-in-lieu of foreclosure is a process that a bank and a borrower take that speeds up the foreclosure process.
Instead of the bank going to court, forcing you out of the home, obtaining a judgment against you, and then selling the home through a sheriff’s sale authorized by the court, you and the bank agree to transfer ownership of the home to the bank.
The process is relatively simple and avoids the costs and expenses involved through the court foreclosure process. A deed-in-lieu of foreclosure is a voluntary process undertaken between you and the lender and the lender is under no obligation to go that route. The bank can decide to proceed through normal channels to get money to satisfy the debt you owe the bank.
The short answer to your question is that if the bank is unwilling to work with you in a deed-in-lieu arrangement, and you fail to sell the home through a short sale, and then you stop paying your mortgage, the lender will and can proceed to foreclose the home through the court system in the state in which the vacation home is located.
The bank can (and probably will) go after you personally for any shortage in the amount that the bank gets through the foreclosure sale. That shortage is called a deficiency and the judgment a bank gets to collect the shortage is called a deficiency judgment.
In most states, lenders can get a deficiency judgment against a homeowner for investment properties and second homes. There are some states that limit deficiency judgments on primary residences, but in your case you are dealing with a vacation home and not your primary residence, so be prepared to face the reality that your lender may not let you off the hook for the amount you may still owe on the loan.
There is also an IRS situation you should be prepared for: If this happens with a primary residence, the deficiency will not be taxes as personal income to you by the IRS through 2013. But for a vacation home, rental property or a second home, that deficiency judgment would be treated as personal income and you will pay federal and possibly state taxes on it as well.)
During the process of negotiating your deed-in-lieu of foreclosure, you should work with your lender to determine if it would be willing to waive any deficiency judgment against you. That is to say, the lender would take the property and agree that they wouldn’t go after you for anything else later.
You should also know that your lender may remain quiet on the issue of whether their collection department would go after you for any you may still owe the lender arising from your loan.
And you should also know that your lender may decide to sell off the deficiency to a collection agency and you may find yourself facing calls from a collection agency for years to come.