Allowing a home to be sold at a foreclosure auction can result in serious and long-lasting legal and financial consequences.

If a Washington homeowner allows their property to go through the foreclosure process and be sold at a foreclosure auction, the homeowner faces numerous negative consequences including but not limited to:

      Civil lawsuit and judgment     Negative credit reporting
      Lost Equity    Higher interest rates    Tax liability    Eviction

 Lawsuit / Deficiency Judgment

Washington is a deed of trust state.

A deed of trust is similar to a mortgage in that it creates a security interest in favor of a lender whereby the lender can foreclose on the property if the borrower/homeowner fails to make loan payments.

A deed of trust involves three parties, the borrower, the lender and a third party (usually a title company or attorney) who serves as a trustee.

One major benefit of a deed of trust is that a foreclosing lender may not obtain a deficiency judgment against the borrower.

A deficiency judgment is a civil judgment that results from a lawsuit initiated by a lender who does not receive full value for monies loaned for the purchase of the home from the proceeds of the foreclosure auction.

However, the deed of trust does not protect the borrower/homeowner against a deficiency judgment if the homeowner has more than one mortgage on the property.

Therefore, a lawsuit may be filed against a homeowner whose property was sold at a foreclosure auction if the proceeds of the auction were less than the amount(s) owed against the home on a second mortgage.

For example, if a Washington homeowner owes $200,000 on a first mortgage to Bank of America and $100,000 was owed on a second mortgage to Wells Fargo and the home sells at foreclosure auction initiated by Bank of America for $250,000, the homeowner owes Wells Fargo $50,000 plus attorney's fees, and other fees and costs after the sale.

To recover this deficiency, Wells Fargo files a lawsuit against the homeowner. In most cases, the lawsuit will be served upon the homeowner by a process server and the homeowner has a certain number of days under Washington law to file a formal response to the lawsuit.

If the homeowner does not file the response, called an Answer, within the specified time period, Wells Fargo can obtain a default judgment against the homeowner for the deficiency.

Once a deficiency judgment is obtained, Wells Fargo may garnish wages, levy bank accounts, place a lien on other properties and take other collection efforts to recover the money owed from the homeowner. For more information on lawsuits/deficiency judgments, please visit www.attorneybankruptcy.net or www.fosterlawoffices.com.

 Lost Equity

If a homeowner allows his or her property to be sold at a foreclosure auction, the property will be sold for significantly less than the property's market value.

The sale of a property at foreclosure auction robs the Washington homeowner of the valuable equity he or she has earned in the property. This is due to a number of factors, including but not limited to:

  A foreclosure purchaser must purchase the property with cash

  The foreclosure trustee responsible for selling the property at auction is not required to make any disclosures regarding the condition of the property

  The foreclosure purchaser receives no warranties on the property

  The costs incurred by the lender to foreclose on the homeowner's property are paid out of the proceeds of the auction

  The foreclosure purchaser may be required to incur significant legal fees to evict the homeowner who fails to vacate after the foreclosure sale.

Therefore, a homeowner who maintains equity in a property facing foreclosure will likely lose thousands of dollars in the event the property is sold at a foreclosure auction.

By selling a property prior to a foreclosure auction, a homeowner is able to save the equity in his or her property.

 Negative Credit Reporting

After the sale of the property at a foreclosure auction, a report of the foreclosure will be filed by the foreclosing lender with the county where the property is located.

In turn, the foreclosure sale is reported to the three credit bureaus (currently Transunion, Equifax and Experian) and will remain on the homeowner's credit report for 7 years after the sale has been recorded.

Once the foreclosure sale is reported to the credit bureaus, the homeowner's credit score will be re-calculated to reflect the foreclosure causing the credit score to plummet.

In turn, future lenders, employers, insurance companies and others authorized to review a credit report may learn of the homeowner's foreclosure when the third party runs the homeowner's credit.

 Higher Interest Rates

As a result of the negative credit reporting, the homeowner who has gone through foreclosure may be unable to obtain future credit.

In the event credit is extended, the homeowner will likely be charged significantly higher interest rates on future loans and credit than a homeowner who avoids a foreclosure sale.

Because most lenders utilize credit reports and credit scores to calculate interest rates, the negative credit reporting resulting from a foreclosure can cause interest rates to skyrocket.

When defaulting on a mortgage loan, other credit accounts may be affected as well. Specifically, most consumer credit cards have a provision in the credit agreement called "universal default". Universal default occurs when a cardholder fails to pay other credit accounts.

When a universal default occurs, the credit card company is authorized to increase the interest rate on a credit card.

For example, if a homeowner has a credit card with a 6% interest rate but is late or defaults on a mortgage loan obligation, the credit card company may likely to increase the interest rate by 15-20%.

For more information on negative credit reporting and higher interest rates, please visit www.myfico.com.

 Tax Liability

If your home sells at foreclosure, you may face a significant tax liability.

Any taxes stemming from a foreclosure sale is calculated on the difference between the purchase price or tax basis of your home and the amount you owe on it at the time of the short sale or foreclosure. ("Tax basis" is the purchase price plus improvements you may have made to your home, less depreciation and any deferred gain on the sale of any previous home.)

Therefore, if you owe less than what you paid for the property, regardless of the property's current value, you may not face a tax liability if your home is foreclosed upon. However, if you owe more than your tax basis, you will likely owe taxes on the foreclosure sale for the debt relief received as a result of the foreclosure sale.

For example, suppose that after you bought your first home, you sold it at a gain of $150,000. You then rolled over that gain into your second home, which had a purchase price of $400,000 and a mortgage of $300,000. Because of this rollover, your tax basis is $250,000 ($400,000-$150,000), rather than the amount of the purchase price. A foreclosure by the lender constitutes a sale at the price of the current amount due on the loan, $300,000. The difference on which taxes would be due, then, is $50,000.

Another example would be where your home's value appreciates and you refinance. Say you buy the house for $300,000 and now owe $275,000 on the mortgage. You refinance for $350,000. You now owe $350,000, but you have $75,000 in cash from the refinancing. In the event of foreclosure, you would also owe taxes on whatever you realized from refinancing but have not yet repaid.

A similar result would occur if you took out a second mortgage or a home equity line of credit and later lost your home in foreclosure without having repaid the balance due on the new obligation.

For more information on the potential tax liability related to a home foreclosure, you must seek the advice of a Certified Public Accountant.

 Eviction

If a Washington homeowner fails to vacate a property within 20 days after the date of the foreclosure sale, the purchaser of the foreclosure property may initiate eviction proceedings against the homeowner.

The eviction is a legal action (also called unlawful detainer) where the foreclosure purchaser seeks a court order authorizing the sheriff to remove the homeowner from the foreclosure property.

In addition to evicting the homeowner, the foreclosure purchaser may seek a monetary judgment against the homeowner.

The judgment may include a sum for rent for the number of days the homeowner stays in the property, as well as attorney's fees, costs and other damages.

 More Information

For more information on the consequences resulting from a foreclosure sale of your home, please call us at: 206 903-1836 (Toll-free 1-800-206-6122).

To receive a free consultation regarding your (or your friend or family member’s) debt problems, please contact us today.