Although the foreclosure crisis that swept the nation during the late 2000s has begun to abate, millions of homeowners remain unable to afford the payments on their mortgages. These hard-working individuals must either refinance their home loans or accept the possibility that their lenders will initiate foreclosure proceedings against them. Since there are currently hundreds of thousands of homes in foreclosure across the United States, there is a considerable backlog of "pending foreclosures" in certain areas. These distressed properties are especially common in states that were hit hard by the housing crisis, including Florida and Arizona. As such, there may be a lag of six months to two years between a delinquent homeowner's last mortgage payment and the date of the foreclosure auction.
The foreclosure rules that govern investment properties are similar to those that govern primary residences. However, banks tend to expedite foreclosure proceedings on high-value multi-unit residential structures. If you own a rental property with multiple units, your foreclosure may proceed at a faster pace than you expect. This could make it difficult for you to catch up on your delinquent mortgage payments or secure another source of financing for your loan.
Fortunately, your mortgage lender probably won't be able to seize your primary residence for the purposes of satisfying your delinquent mortgage. Although there are several exceptions to this general rule, mortgage lenders typically may only seize the property to which the delinquent mortgage is tied. If the proceeds from the pending foreclosure sale won't be enough to satisfy the mortgage debt in full, lenders may also seize any collateral put up by the delinquent homeowner.
If the loan on your rental property was particularly large, it's possible that your mortgage lender asked you to provide some collateral as a condition of its issuance. Such collateral typically takes the form of cars, artwork, jewelry and other homes. If you chose to use it as collateral for your rental property's mortgage loan, you may lose your primary residence to foreclosure.
For this reason, most financial professionals recommend insulating your commercial real estate holdings from your private holdings. In order to do this more effectively, you may wish to create a taxable business entity like an LLC or S-corporation. If you become unable to shoulder the burdens of your commercial mortgages, you can shield your personal finances using these business entities. However, you may still be forced to take a tax write-down that could significantly impact your tax liability for the year in which the foreclosure occurred.