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Home >> Lending >> Home Mortgage
About an Upside Down Land Loan
I have a land loan that is upside down. What consequences are there to just not paying the loan anymore?
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 You would certainly risk your credit rating which will impact your borrowing ability in the future. It could restrict you from getting any loans from that lender or any other that uses a credit report to qualify you. If you do get a loan, the cost could be much higher because of your credit risk. Also, to qualify, you may be required to make a much larger down payment the next time. Credit reports hold information for loans for seven years.
The lender could sue you for the loss. That is, if they foreclose on the property, they will do their best to sell it. In a depressed market, and as a foreclosure, they will very likely get a lower price than you. Plus, they will first collect the fees you now owe them for the cost of foreclosing and selling the land. What is left goes against your debt. What is left is that for which they can sue you.
Eventually they may just write it off as a bad debt. At that point they may decide it isn't worth trying to collect and they'll report it to the IRS as income to you. You will then owe taxes on it.
Call the bank and explain your circumstances. They may allow you to sell it short and they may allow you to not repay the difference owed. Again, you'll get a better price than the lender in a foreclosure. They may also work out some repayment plan for any difference owed, or change the current terms in hopes that you can pay the loan until the market for your land is up.
Published on BankingQuestions.com 1/23/09
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