Got Questions? Get Answers.. BB Wants To Know How To Handle A Second Mortgage

Hi my name is BB and I live in Nevada. I have owned my house for 10 years and Zillow gave its value as about $221,000. I have a first of $217,000 and a second of $224,000
I am thinking of either going into foreclosure or trying a short sale. In either case the first would get paid and the second would not. I also own two rental properties that are worth more then I owe.

My questions are any other suggestions to foreclosure of short sale?

In your situation, your primary concern should be about the consequences of foreclosure or short sale. You credit will be impacted negatively. A foreclosure and a short sale stays on your credit report for 7 years. The other issue is a deficiency. A deficiency is the difference between what you owe and what the lender collects. For example, if you sold your house for $200,000, this would leave a balance of $17,000 to the first lender and the entire balance of $224,000 to the second lender. Your total deficiency would be $241,000. A lender has two options when handling a deficiency. The lender can obtain a court ordered judgment for the balance and attempt to collect from you or the lender can forgive the $241,000. Once a debt is forgiven it is considered a taxable event. The reason is forgiven debt is considered income. The IRS and your state tax authority has rules regarding any amount of taxed owed. Please read this article so you understand what I just wrote: What Every One Should Know About Debt Forgiveness Obligations, and Deficiency.

You can also consider a deed in lieu of foreclosure. A deed in lieu is an agreement made with your lender wherein you agree to give the title (deed) to the property in exchange for the outstanding debt owed. Now in your situation, you can only give your deed to the first lender not the second. This can be a viable option if you are unable to get enough money to pay off the first lender. You can approach the second mortgage lender and offer a settlement. For example you can offer the second lender $20,000 to forgive the $224,000 loan. The goal is to get this in writing and to get the second lender to forgive the balance not seek a judgment for the balance.

If I quit paying the second would or could they foreclose on the house if the first is up to date and they would get little or no money out of the house?

Yes the second mortgage lender has the right to foreclosure even if the first is up to date. However it is not likely since the lender will evaluate the chances of collecting on its mortgage. It is more likely that they will sue you personally for the debt since it is not likely they can collect from the sale of the property. Once again read this article:

What Every One Should Know About Debt Forgiveness Obligations, and Deficiency

In Nevada can either lender come after me for the unpaid balance?

You are asking if Nevada is a non-recourse or a recourse state. State laws regulate the actions that creditors can take when trying to collect on a secured loan. In some cases, states prohibit the creditor from seeking more than the collateral used to secure the loan. This is called “non-recourse” or “anti-deficiency,” meaning that if the creditor cannot recoup its loan from the sale or seizure of the asset used for collateral, it has no further recourse. Other states, such as Nevada, are considered “recourse” states. This means a creditor can seek to collect more than the collateral used to secure the loan. Keep in mind Nevada is a “one action state”. This means your lender must choose foreclosure or a personal lawsuit. It cannot chose both.

Will I owe taxes on the unpaid balance?

See my prior answers and read this article --

Any other questions you think I should be asking?????

Here is a link to responses I gave to other readers. There are a list of questions you may find use full in these responses. Got Questions? Get Answers...

Thanks For Your Time

Not a problem. Feel free to contact me at anytime.