Homeowners insurance is one of the peripheral issues that families facing foreclosure must deal with. While it is possible that the county can take the home through a different type of foreclosure for unpaid property taxes, and the mortgage company will be pursuing a lawsuit for the defaulted mortgage contract, there is little the homeowners insurance company will do upon nonpayment. However, this does not mean that property owners have nothing to worry about.

There are two most likely scenarios when homeowners begin missing their mortgage payments, and what happens with the insurance will relate to how the premiums are paid. The issue may be handled differently depending on if the owners pay the insurance on their own or if it is paid monthly through the escrow on the mortgage. Most homeowners, though, escrow their property taxes and homeowners insurance through their monthly mortgage payment.

Typically, when payments are missed on an insurance policy, the coverage will continue for a period of months. If something happens to the house, the owners will be covered by their policy, although the amount they have fallen behind will be deducted from total awarded to them for the accident. However, if numerous payments are missed for longer than just a few months, the policy will lapse and the owners will no longer have any coverage.

When the policy has lapsed, the owners will no longer be covered under any of the provisions. This means that, if anything happens to the house, the insurance company will have no responsibility to make a payout to the owners since the insurance was not kept up. A small but growing number of homeowners have actually burned down their homes in foreclosure to attempt to collect the insurance money, but this is not advisable if the premiums are not paid up and is fraudulent in any case.

What may happen at this point, though, is the mortgage company will buy its own homeowners insurance for the house, and they will add the monthly premiums to the amount owed on the loan. If the homeowners want to get back on track with the mortgage, they will have to pay back this extra amount for the forced insurance. Lenders will also not shop around for the best rates, so the monthly cost for the policy may be quite a bit more expensive than the owners were used to.

Simply missing payments on the insurance policy, though, will not create any other liability for the homeowners later on. The insurance company will discontinue coverage for any damage to the property, but there is no danger it will sue the owners for any deficiency judgment or other lawsuit related to the lapsed policy. Thankfully, in this instance, unlike the mortgage or property tax payments, homeowners do not have to worry about being sued again and having to deal with more liens or collection agencies.

Of course, this should not be an issue at all if the homeowners pay the insurance through their monthly payment to the lender. The bank will keep paying the taxes and insurance to make sure the policy does not lapse, while adding the amount of these missed payments to the total needed to reinstate the loan. Any insurance payments the lender makes will be included in the payoff and foreclosure judgment.

Thus, homeowners facing foreclosure should keep in mind that their property insurance will still need to be paid if they wish to keep coverage in case of fire, natural disaster, or other accident. While their bank may place forced insurance in the case of a policy lapse, the rates are often very high, but the owners will have to pay back any premiums made on this policy to the lender to stop foreclosure. Keeping the insurance policy current on a house, while it is somewhat less important than saving the home to begin with, is one more issue homeowners in foreclosure need to keep in mind.

There seems to be some confusion about the income tax implications of foreclosure. Because a gain on the sale of a property can trigger income tax liabilities, unless the gains are invested in another piece of real estate within certain time limits, homeowners assume that any sale of their home, in foreclosure or otherwise, will cause them to owe the IRS money. However, only in certain instances will there be any liability; and there will most likely be no income tax to be paid if the house is sold at a sheriff sale for a loss.

For purposes of illustration, we will provide an example of possible numbers of a foreclosure case.

-Balance of mortgage is $400,000.
-Property sold at sheriff sale for $366,000.
-No short sale was accepted by the bank.
-Fair market value of house at time of sale was $381,000.

The first question that homeowners have is if they will have to claim the difference between what the house sold for at auction and how much the balance owed on the mortgage was at the time of sale. The answer is that no, they will not have to claim that as income. The forced sale of the property at county auction and the fact that it sold for less than what was owed at the time of sale indicates that homeowners received no proceeds from this sale. They owed $400k and the house was purchased by the winning bidder for $366k. In fact, the homeowners probably did not see a single penny of proceeds from the sale, because it is a loss. Therefore, no tax is due in this scenario.

However, if the homeowners and the lender had worked out a short sale before the foreclosure, and the bank had accepted $366k when they were owed $400k, then the foreclosure victims would have income to show. The difference between what they owed and what the bank accepts is counted by the IRS as "forgiven debt" and is taxable income. It is as if the lender gave the homeowners the $34,000, which was then used to pay down the mortgage. But this is only if there is an agreement between the homeowners and the lender to proceed with a short sale. If this does not exist, the homeowners do not receive the "forgiven debt."

In the case of a foreclosure, where the house is ordered to be sold to satisfy the mortgage debt, the bank probably had a judgment against the homeowners for the full $400k owed on the mortgage (or more, with fees and court costs). Just because the house sold for a loss at the sheriff sale does not mean they forgave any of that debt. The house simply sold for less than what was owed, no portion of the amount owed was forgiven. Thus, with no forgiven debt, there is no taxable income.

There is just a loss on the forced sale of the property. The homeowners will not be responsible for paying the difference between the $400k that was owed and the $366k that the property was sold for at sheriff sale. And, unless the bank tries to sue the homeowners for a deficiency judgment after foreclosure (quite rare), all parties are simply done with the property. It is usually best for the homeowners to take the loss, start repairing their credit, and move on with their lives. It is a good opportunity to do so now that the foreclosure has ended.

When homes go into foreclosure, the owners are often far more worried about the mortgage payment than anything else. There are numerous costs involved with owning a house, though, and all of these need to be paid before and during the foreclosure. If they are not paid, and the homeowners are able to stop foreclosure before losing the home, they can quickly find themselves back in the same situation, in danger of being sued again for delinquent property taxes, homeowners association fees, or find themselves owning an uninsured home. Even worse, the lender may impose an escrow account or forced insurance on the property. Thus, it is important for foreclosure victims to keep on top of as many of the payments relating to the house as they can.

The county and city property taxes work slightly differently from the other charges mentioned above, due to their higher priority in the foreclosure proceedings, but they, along with any other liens on the property, will be wiped off after the sheriff sale of the house. When the sheriff sale is conducted, the house will be sold for whatever the highest bid amount is. These proceeds will be used to pay off everything that is affecting the house. First to be paid is any delinquent or currently due property taxes. The county gets paid first if the homeowners do not postpone the sheriff sale or work out a solution to prevent foreclosure.

If the foreclosure victims can not save their house, there may be a possibility of delinquent taxes being added as a lien on the property before the foreclosure. The lender will try to prevent this, as they will want as much of their money as possible without a tax lien, which will include the costs for obtaining the lien, as well as the taxes themselves. However, this possibility depends on how the property tax is being paid, whether through escrow with the mortgage company, or if the homeowners are paying it on their own.

If property taxes are paid through the escrow account, then the lender will pay the property taxes as they come due. Of course, the amounts paid for taxes will be added to the total payoff needed to sell the house or refinance to stop foreclosure, but the taxes will be paid to the county on time. The bank will not let the house go into a property tax foreclosure while they are pursuing their own foreclosure, and this gives them the opportunity to add more interest and charges to the total payoff, as they can stack up more junk fees on a negative escrow balance.

If the homeowners are paying the taxes on their own, though, and they get behind, then the proceeds from the sheriff sale will be used to pay off the property taxes. When the sheriff sale is conducted, the sale price will be used to pay the taxes first, then the mortgage, then any second mortgage and other liens. But the property taxes will be paid, in order to prevent the county from taking possession of the house. The possibility of the county obtaining a lien on the house may be small, but it is usually enough for the bank to impose an escrow account on the homeowners. They simply pay the delinquent taxes and add that amount to the total payoff, along with related charges and interest, which drives up the amount needed to reinstate the loan or avoid foreclosure completely. The homeowners may not even know they are now paying extra every month to keep up a new escrow balance, until they have saved the home and are now making regular payments again -- it is just that the payments may be much higher than they originally were due to the imposed escrow payment.

After the property taxes are paid off through the sheriff sale, the first mortgage will be paid off with as much of the proceeds as are left. If there is not enough to pay the first mortgage completely, then the Homeowners Association (HOA) and other lienholders will simply get nothing.

Now, the HOA could try to sue the homeowners after the foreclosure for the amount of fees that were owed up to the date that they were no longer the owner of the house. It may not be worth the time or effort for them to try to sue and obtain a judgment, though, especially as it is commonly known that most foreclosure victims do not have the extra resources to pay a deficiency judgment and little motivation to work out a payment plan or other arrangements. It is more likely the HOA will simply give up on collecting the fees, as they will not be able to cover the costs of the lawsuit.

Hazard insurance, the last of the costs most commonly associated with the mortgage payment, is usually paid with the mortgage in the escrow or monthly payment. If that is not being paid, or the owners are responsible for paying the insurance on their own, there will be no lien placed on the property for it; the house simply does not have hazard insurance. If anything happens to the house while the insurance is not paid, the insurance will not cover it, obviously. This is another charge that the bank can impose on the property, if they know that the foreclosure victims are not taking care of it. Mortgage companies certainly do not want to loan money on a house that, if it is destroyed, will be a complete loss to them; insurance is most often mandatory for obtaining a loan in the first place.

The longer the foreclosure goes on, the higher costs will climb and the more difficult it will be for homeowners to solve the crisis and prevent foreclosure. Various expenses will still have to be kept on time, including the property taxes, homeowners association fees, and hazard insurance, or else the danger of future foreclosures will be present, or the lender may impose a forced, expensive escrow account to make sure they are paid. Extra liens may be placed on the title, and the homeowners may be sued after foreclosure or find that their insurance has lapsed and will not cover any damages that occur to the property. Thus, homeowners may find that they are fighting foreclosure on numerous fronts at once, but they need to be aware of all of the possibilities of letting their housing payments go into default. Foreclosure is obviously the most pressing concern, but it may be all the little charges that cause them to lose their homes, unless they gain enough foreclosure information to understand the entire process and what is truly at stake.

Depending on what certain homeowners do to save their homes from foreclosure, there may be a large tax liability or none at all. This post looks at some of the scenarios in which homeowners may have to pay extra taxes at the end of the year, and other scenarios in which there would be no extra liability at all.

When a house is completely foreclosed and sold at sheriff sale, the property generally sells for less than what the homeowners originally owed on the loan, including fees, courts costs, and interest. In this instance, there would be no tax liability because the homeowners realize no gain from the sheriff sale. In fact, they lose money, and they can not pay taxes on money that they have lost.

In short sale situations, though, where the mortgage company takes a lower payoff amount in order to allow the homeowners to sell the house and stop foreclosure, there will be a tax liability. The bank is considered to have forgiven a portion the original debt, and the IRS treats this as income to the homeowners. They will have to pay taxes on the difference between what they owed on the loan and the actual amount that the mortgage company agreed to take.

So, whatever their yearly tax rate is, they will have to add the additional amount to their income and be taxed at that rate. Of course, the actual tax rate the foreclosure victims pay depends on how much money they make, so it is important for them to contact the IRS or a tax professional to determine their actual marginal tax rate. At low incomes, they may pay only 10% of their income as taxes, but at higher rates, nearly 30% can be owed as taxes. The amount forgiven in the short sale may be taxed at the lower rates or the highest rates, but this will depend on how much overall income the homeowners receive.

Again, though, any tax liability comes into play only if the homeowners complete a short sale on the property, with the bank forgiving a portion of the original debt owed. In cases where the house sells for less that the amount owed, such as at a sheriff sale in many cases, there is no income to the foreclosure victims, and no tax liability. The property is merely foreclosed and sold to the highest bidder with the foreclosure victims realizing no gain from the situation.

A more uncommon situation with homeowners may arise if they own a condominium. In addition to the normal mortgage payment and real estate taxes, condo owners also have to pay fees to their Homeowners Association (HOA). But if these fees are not paid, the HOA can and will place a lien on the property and attempt to foreclose on condo, in nearly the exact same way as a bank would. This presents condo owners with one more challenge, as they struggle to keep on top of the fees. But for the owners who are now facing foreclosure of their condos, there are not many options to prevent from losing the home.

There are really only a few viable options to prevent the foreclosure process, but the condo owners would have to come up with some way to pay back the lien on the property caused by the unpaid HOA fees. The HOA is planning to sell the home at sheriff sale so that the lien is paid off. Once they have their amount due, then there is no longer any reason for them to try selling the property. Paying the HOA fees back would immediately stop foreclosure on the condominium.

If the owners can not pay back the entire amount, another option they can try would be putting together a repayment plan with the HOA to slowly pay back the amount of the fees. That might not be a bad idea, depending on the circumstances, if the owner's income can handle paying extra, because they would be paying the regular mortgage payments and fees, but also getting back on top of the missed payments. The condo owners could even try negotiating with Homeowners Association for a lower payoff amount, if possible. They may not take much less than the original amount that they are owed, but they may be willing to decrease the interest charges, late fees, or foreclosure and legal costs.

If a repayment plan doesn't work out, the condominium owners can try to qualify for a foreclosure loan. If they have been paying their regular mortgage payment, and have established a decent payment history, then a bank may be willing to refinance the entire loan and pay off the HOA lien, as well. That would get the Association fees all paid back, and the condo owners would just make the new mortgage payments. Refinancing to stop foreclosure is one of the best options, although it is usually more difficult to qualify for, if the owners are behind in other bill payments.

Besides these few options, though, the condo owners could try selling the home to pay the lien, or filing bankruptcy to prevent the foreclosure, but, either way, the HOA will want their money. It is unfortunate when a Homeowners Association has to initiate foreclosure proceedings on a property because of unpaid fees, but the owners of these condos have a number of viable options available to help them stop foreclosure. Because the lien is not a loan, though, condo owners are somewhat limited in their ability to have any of the terms modified, and the lien decreases the total amount of equity they have in the property. This is why it is important for homeowners to make sure they are able to affor their mortgage, real estate taxes, and Homeowners Association fees, and not face foreclosure for any unpaid bills that can push them into foreclosure.