If I refinance my home to cash out equity and end up foreclosing in the future, what can happen to me?

Question

I like many others am in financial trouble and am having problems paying my mortgage.
I'm thinking about refinancing my home (for no more than it's current market value) and taking my equity so I can pay off my car and a credit card.
If I do that, and still end up facing foreclosure in the future - what can happen to me besides having my credit ruined?
I live in Arizona - the law here states that - "A lender may not bring a deficiency suit against a person who lost a property that is 2.5 acres or less at a foreclosure provided the property is a single one-family or a single two-family dwelling."
I fall into that catagory. Basicly, I'm wondering about future pit-falls if the worst case scenerio happens and I do end up foreclosing after I do a cash-out refi.

Answer 1

That is not the law here in Texas but it sounds like you will be OK there except....if you do this and somehow they can tell you planned it all along...I bet that falls into the category of defrauding a bank (bank fraud).

If you innocently have hard times though, your credit is ruined, but it doesn't sound like you can have a deficiency filed against you.

The federal government is discussing passing a law that might protect you against the "phantom income" problem. "Phantom income" is when a mortgage company turns any shortfall into the IRS and you owe taxes on that amount of the mortgage you didn't pay back.

Answer 2

You are correct about Arizona NOT having to pay back any deficiency for letting your home go into foreclosure.

Basically the only thing that will happen to you is when the bank sells your home for less than is owed, you will get a 1099-S from the lender for the difference in what was owed and what the bank could get for the property.

If you can prove financial hardship, the I.R.S. will forgive the taxes owed.

Hope this helps.

Terry S.

Http://www.Welcome2Arizona.com

P.S. Be grateful you live in Arizona! Many states DO NOT allow the homeowner to walk away from their property without paying the bank back what they lost on the foreclosure sale.

Answer 3

If you are honest on your application for the re-finance, the company willing to loan you the money is going in with their eyes open and is assuming the risk associated with your level of income, other debts etc. So unless you know something you don't tell them, like you are in trouble at work and likely to lose your job, or something like that, you would have the normal protections you have cited in your state.

There is often a clause in mortgage applications and the promissory notes itself that require you to notify the lender of any condition that may tend to make repayment of the loan more difficult in the future, or words to that effect. So, the fact that you say you "are in financial trouble" and "having problems paying your mortgage" but you think you will be approved for the refinance loan, make me wonder if you are thinking of not disclosing material information to the lender.

Don't do that, instead, contact the lender and try to work out a better deal. You don't want fraud in your background, that will hamper you for a long long time.

Answer 4

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Answer 5

They can charge you with loan fraud and if you try to file for bankrupcy (b/c they WILL get a deficiency judgement against you), your bankruptcy WILL BE DENIED.

I seriously doubt that law exists in Arizona because if it did, banks would refuse to underwrite in a state that basically takes away all legal recourse.

Answer 6

"Cashing out equity" is another phrase for LOAN .

If you are having difficulty making the current loan ,
There is a snow balls chance in helll of them letting you have a Larger Loan .
So all of this is probably just fantasy on your part .

Maybe time to get a 2nd job for awhile to get your $$$$$ issues on track ?

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