This is very helpful. Thanks, Tricia!

I think its helpful too, and I don't really see who it would offend. Maybe someone who is going into foreclosure that doesn't want to be reminded of it, but in that case boy are they in the wrong forum!

I think it is great info!
Kathy G in MI

More boring terms/definitions, etc.:

POTENTIAL TAX CONSEQUENCES OF A FORECLOSURE FOR THE BORROWER:

When a lender forecloses on a home, the IRS treats it as a sale. If the borrower is not personally liable for the debt, such as would be the case for a nonrecourse loan, then the selling price is equal to the price of the cancelled debt. If the borrower is liable for the debt, then the sale price is equal to the canceled debt up to the fair market value (FMV) of the home. If the canceled debt is greater than the FMV, then the difference between the debt and the FMV is treated as ordinary income, for which the lender is required to send a Form 1099-C, Cancellation of Debt (COD), listing the amount of ordinary income. Any unpaid liabilities on the property, such as property taxes, will reduce the FMV of the home and increase the COD. However, if the liabilities are paid by the borrower, then this will increase the FMV and decrease the COD. The lender will also send a Form 1099-A, Acquisition or Abandonment of Secured Property, that will allow the borrower to determine the capital gain or loss from the foreclosure. Taxes must be paid on the capital gain in addition to any ordinary income from the canceled debt that exceeds the FMV of the home in a recourse loan. For a nonrecourse loan, any income is treated as a capital gain equal to the canceled debt minus the adjusted basis of the propertythere is no COD income. However, a capital loss from a foreclosure cannot be deducted.

With the recent decline of home prices, many homes are worth less than the amount of money owed on the property, especially for borrowers who took advantage of lax lending standards, and bought with no money down or used inflated home appraisals. Consequently, many homeowners whose homes were foreclosed by the lender may owe a significant amount of taxes.The IRS treats all forgiven debt as ordinary income, even though in the case of foreclosure, the homeowner doesnÂt get to keep the home.

If the taxes are not paid for the year the debt was canceled, then the IRS adds penalties and interest to the total tax bill, which can often be tens of thousands of dollars.

However, the tax is not owed:

...if the debt is discharged in bankruptcy;
...the debtor is insolvent, with debts greater than assets;
...the fair market value of the home is greater than the canceled debt;
...or the loan was from a friend or relative and the canceled debt is treated as a gift. Any debt canceled by a commercial lender is not considered a gift by the IRS.
...Because the lender has some discretion in valuing a home, it can sometimes be successfully argued that the fair market value of the home was greater than the debt, in which case, no tax on COD is due.

TITLE INSURANCE: An insurance policy used to ensure ownership where abstracts are not used. The borrower pays for the lender's policy. They are wise to also cough up another $50, or so, and purchase one for themselves; but the lender does not require it.

CLOUD: Doubt, a gap in the chain of ownership. Or, it could be a lien, unpaid taxes, or something else that affects ownership.

ENCUMBRANCE: Mortgage, lien, tax, or any restriction on the use of the land...could also be an easement.

ABSTRACT OF JUDGMENT: An abstract is a summary (see title abstract). An abstract of judgment is a summary of a judgment. A judgment is the end result of a lawsuit. It shows who won the lawsuit, who lost, how much is owed, what Court made the decisions, the date of the judgment, and the attorney for the winner of the lawsuit. Once the abstract of judgment is recorded (filed with the county clerk or county recorder), it creates a general lien on the judgment debtor's property, including the real estate. An abstract of judgment will be discovered by a title company whenever a landowner tries to sell the land. Most title companies will demand that it be paid off as a condition of insuring the resale.

/tricia

CERTIFICATE OF SALE: This is the document indicating that a property has been sold to a buyer at foreclosure, subject to a right of redemption for a set period after the foreclosure sale. If an IRS lien sale, the redemption period is 180 days. The redemption period is different in other types of foreclosures. Many foreclosures take place without any certificate sale. Instead, if the sale is final, or near final, the buyer gets a deed rather than a Certificate of Sale. At a property tax sale, the Certificate will be issued rather than a deed because tax sales are also subject to a redemption period.

FOREBEARANCE: This is when a lender voluntarily accepts payments that are lower than originally agreed in the loan documents for a limited period of time in order to allow the borrower to recover financially. The borrower must eventually repay the missing or reduced payments as well as all the other remaining payments on the loan. A Forebearance Agreement might be part of a short sale.

ALIENATION CLAUSE: (aka Due on Sale Clause). A clause in your mortgage that states if you sell the property your loan is immediately due and payable.

LENDER LIABILITY: Legal doctrine that holds lenders legally responsible to pay damages for legal misdeeds committed against borrowers in the course of making loans.

This was a big deal during the 80s real estate bust in New England. Lender liability concerns were a driving force in how I handled distressed loans.

AUTOMATIC STAY: A bankruptcy court order. When bankruptcy is filed, the Court will issue an order that prevents any creditor from attempting to collect any debt from the person who declared bankruptcy. Creditors may not foreclosure, repossess, evict, or seize, or even call or write the debtor demanding payment. Instead, they must all seek Relief from the Bankruptcy Court along with other creditors. The federal automatic stay is four months.

MOTION TO LIFT STAY: A formal request to a bankruptcy Court to dissolve an Automatic Stay (see above) that prevents a lender from foreclosing. Once the motion is granted, the lender may proceed to foreclose unless the borrower can keep up the payments.

BUYDOWN: Refers to paying money up front to reduce the interest rate of the loan over either the course of the loan or a certain time period.

Today, I'm seeing many buyers request their seller to provide a buydown. The most common I'm hearing is an arrantement where the seller of real estate pay some or all of the buyer's loan costs. These are measured by increments of 1 percent of the loan known as "points".

The seller pays enough points to the lender to allow the lender to offer the buyer a loan at a reduced interest rate, which reduces the monthly payment. The cost to the seller is small, but the reduction in payments to the buyer is often quite substantial. Buy down arrangements are often structured to focus the entire reduction in interest rate, and therefore monthly payments, in the early years of the loan.

In a 3-2-1 buy down, a seller will pay enough points to reduce the buyer's interest rate by 3 percent, such as from 7.5 percent to 4.5 percent, the first year, then by 2 percent the second year and by 1 percent the third year. In the fourth year the loan interest rate and the monthly payments would return to the normal market rate of interest as set when the loan was first obtained.

/t