Q:

What happens if my house is repossessed?

A:

Quick Answer

If a house is repossessed by the mortgage company, it is usually sold through an auction or a real estate agent. Depending on both the mortgage company and the state, the former owner may have the opportunity to redeem the property. If the home sells for less value than the outstanding mortgage, the former owner may be sued by the lender for the difference or have the debt forgiven.

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What happens if my house is repossessed?
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Full Answer

The sale of the house varies by state and by mortgage company. Some companies may set a reserve price on auctions for the house while others don't. If the home does not sell via auction, the company next turns to a real estate agency to help sell it. After it is sold, the new owner may move in immediately, though there may be a period of days or even months where the former owner can redeem the property by paying the remaining mortgage as well as any accumulated interest and other associated fees.

If the property is not redeemed and sells for less than the outstanding mortgage, it is up to the lender to either sue the former owner for the money or to forgive the debt. Forgiven debt counts as income to the IRS unless this was the former owner's first mortgage, or the debt involved an equity loan to improve the home. If the former owner meets these criteria or proves insolvency to the IRS, he does not have to pay taxes on this forgiven debt "income."

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