An investment property is a property that is not your primary residence and is purchased or used in order to generate income, profit from appreciation, or for a tax benefit. The first thing to know about your investment property being foreclosed on is that your primary residence is safe from the bank. Even if the loans from your primary residence and investment property come from the same bank, your primary residence will not be foreclosed on as a result of an investment property foreclosure unless your primary residence is somehow tied to the investment property. One thing to note, is that the banks can expedite the foreclosure process on valuable, multi-unit investment properties. Just like in the foreclosure of your primary residence, you can contact your loan servicer to see if they have any loss mitigation strategies available for you.
What if you have a tenant living in your investment property?
Under the federal Protecting Tenants at Foreclosure Act of 2009, tenants cannot have their lease terminated due to foreclosure. Tenants can remain on the property for the duration of the lease period, and gives month-to-month tenants 90 days notice to leave the property. If you do decide to terminate your tenant's lease prematurely due to foreclosure, your tenant has the right to sue you for the costs of moving and for the cost of the rent.
How does it affect your future?
A foreclosure on an investment property diminish your credit dramatically. Fannie Mae and Freddie Mac prohibit a homeowner with a foreclosed investment property on their credit within the past 7 years from acquiring a loan that they back. The FHA will grant you the mortgage, but will make you wait 3 years before they will finance your mortgage. Also, if the bank takes possession of your investment property they can and likely will come after you for the deficiency balance unless you live in a nonrecourse state.
Will Bankruptcy Solve my Problem?
If you file for bankruptcy, you may be able to surrender the investment property to the creditor and discharge any deficiency balance as part of your bankruptcy plan. However, you may risk losing that property as well, depending on your state’s property exemptions in bankruptcy. Bankruptcy is a complicated legal process that has huge consequences for your credit profile. You must also meet certain eligibility requirements before you are allowed to file. Before deciding to file, it's important to speak to a foreclosure defense attorney to discuss all of your options.
Loan Modification
The best case scenario for someone with an investment property in foreclosure will be to get a loan modification. To qualify for a loan modification you must be delinquent on your payments, must demonstrate financial hardship, and must meet the income requirements for each type of property. It is often cheaper for the lender to modify the loan than it is to foreclose.
