Question: I am default in payments for almost a yr. due to financial hardship I was not able to pay my mortgage. Now my house is on short sale approved by lender or investor. but before the short sale they want me to pay the promissory note of 12k. i told them i will not sign the contract, then they lowered it to 5k, still i told them that will not gonna happen. Is it illegal to give me a prom note before the short sale? they want that note to be paid in cash by escrow or the 12k will be pay for 60 months. I think this is very irrelevant to my situation. I have two daughters who will go to college, and they said that they don’t care if my children will not be sent to college. pls. help me

Mercie

Answer: Yes, the lender can legally go after the borrower for a deficiency judgment, but keep in mind that this has to be a mutually agreed upon document, and if it is something you simply cannot afford, than why agree on it?

Basically if it’s not affordable then why on earth would you request a short sale to begin with and furthermore, if they look carefully at the financial information it should clearly show that it’s not financially feasible.

Fight and let them know that its not feasible financially and if it goes through the forecloses process it will cost the lender twice a much with foreclosing fees and tax fees with a foreclosure process, not to mention the time the bank would have to maintain the asset.

Question: Hi i’m behind with the payments and i decide to put my house up for short sale. do i still have to pay the real estate tax bill this coming june and september? thanks thuy

Answer: If the short sale is going through, the taxes will be paid by the lender through the escrow and sale. Taxes are independent of the mortgage and can be called due at anytime during the process. The likeliness of that happening or very low, but it can happen.

It’s always best to speak with a qualified attorney when it comes down to these legal issues and especially taxes.

Question: If I do foreclosure or short sale on home,suppose my home is sold for $225000 when my original mortgage is 295,000, so the diffrence is 70000, Do I have to pay tax for that amount?

Answer: I will need a little bit more specifics in regards to your situation, if this is a primary residence, and your mortgage debt is partly or entirely forgiven during tax years 2007 – 2012, you may be able to claim special tax relief and exclude the debt forgiveness income.

I would definitely suggest contacting your tax accountant for more specifics.

Question: Does Florida allow deficiency judgments when the home you live is foreclosed on? We are at the point where we just can’t pay our mortgage any more, but are concerned about being sued by the mortgage company for a defiency judgement resulting in long term liability and additional problems from the lender after the foreclosure.

Answer: In Florida, a mortgage foreclosure does not automatically result in a deficiency judgment. Just because you lose a property at foreclosure does not mean you will remain personally liable for money owed to the lender.

During the recent real estate boom deficiency judgments were uncommon because increasing real estate values brought home values above note balances of defaulting mortgages. Up to this point in the real estate crash few mortgage service companies with conventional first mortgages have been pursuing deficiency judgments, especially mortgages on owner occupied homes. Second mortgage lenders and private lenders are more likely than first mortgage holders to go after the borrowers by suing for default on the underlying promissory note.

If a mortgage lender pursues a deficiency judgment you should hire an attorney to defend the deficiency. In many cases, an attorney can use procedural defenses and substantive lending law to defeat a deficiency claim, and the attorney can negotiate an acceptable settlement for much less than the total deficiency liability in most cases.

Question: What’s gonna happen in a short sale in California in 2009? Is there any extensions on the debt forgiveness for the state tax? We have a 750K loan and a buyer is offering 400K. How much will it cost us? Pls help

Answer: The “Mortgage Forgiveness Debt Relief Act of 2007,” was enacted to provide relief to families hit by the subprime mortgage market. Under California tax law, however, debt forgiven following mortgage foreclosure or renegotiation is considered income for tax purposes and may result in a tax liability for taxpayers on a short sale after Jan. 1, 2009.

I would definitely suggest contacting your tax accountant for more specifics.

Question: I am in the middle of short selling 4 of the 6 residential “investment” properties that I own. I have been told of the tax consequences that I may face regarding selling my properties for less then the mortgage. In all the 4 mortgages on the properties that I am shorting total about $700,000 but the offers I have total about $400,000. Will I be help liable for the $300,000 difference on my taxes?

Answer: You’ll likely be taxed on the amount that the lender wrote off or canceled. If you owed 700k on the houses and they were able to sell them (or they are valued at) 400k, and they cancel the rest of the debt, you would have 300k taxable as ordinary income. You’ll see this on your 1099.

Please keep in mind that if any of these were your primary residences, then any loss you had on that one would probably not be deductible. If all were investment properties you might be able to deduct it all (up to the max per year, and carryover the rest).

Check out the IRS web site where they will have information on the mortgage debt relief act. I would definitely suggest contacting your tax accountant for more specifics.

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If you are having trouble deciding whether your property qualifies for a short sale or you want to stay in your home and request a mortgage modification, you should consult your attorney or professional advisor first. This article will give you some information to help educate yourself on the different options so that you are knowledgeable no matter who you decide to consult with.

Differences

Let’s briefly discuss the differences between a short sale and a mortgage modification. A short sale is when you owe more on your mortgage than your property is worth in today’s market. In a short sale situation, you decide to sell your home and the lender agrees to take less money than you owe on the loan. In a short sale transaction, normally you hire a Realtor to try and sell your home, negotiate with your lender and find your buyer. Of course, the lender must approve the offer and closing costs, which are usually presented on a HUD 1 closing statement.

A mortgage modification is similar to a refinance except that it is not a new loan. You are asking the lender to change the terms of your existing loan by modifying the interest rate, reducing your payments and/or extending the term of the loan. In a refinance, you are paying off the old loan with the new loan and you must have equity in your property. Mortgage modifications are not based upon your credit score like a refinance.

Most of the time to qualify for a mortgage modification you must be in default or behind in your payments and show a financial hardship such as loss of income, loss of job, death, divorce, etc. Mortgage modifications work best if you have a variable interest rate loan. Mortgage modifications can be negotiated by mortgage brokers and attorneys and some other types of businesses such as certified HUD home counselors. There are a lot of unscrupulous people trying to take advantage of distressed homeowners right now so check the credentials of the person who is helping you. If they ask for a large upfront payment (other than an attorney), they could be crooks so watch out. You can also try and negotiate with your lender on your own. Although I recommend hiring a professional to help you.

Similarities

Both short sales and mortgage modifications are ways to save your home from going to foreclosure. If the short sale, you are selling your home and walking away not owing the lender any money on the loan. In a mortgage modification, you are keeping your home and attempting to lower your interest rate and monthly payments so that you can afford them and keep your home.

Both take some time to get approved, and there is no guarantee that your lender will approve them. The processes are frustrating and can take anywhere from 30 to 90 days or longer.

The paperwork that the lender requests is also similar. In a short sale, the difference would be you have an offer to purchase your home and probably a listing with a Realtor which would need to be submitted and approved by the lender. Some of the other similar documentation that you will need to provide the lender in both a short sale and a mortgage modification are as follows:

1. Authorization letter if you are using a third party such as a Realtor, mortgage broker or attorney to negotiate for you. The letter should authorize your lender to release your loan balance information to the third party and/or their employees.
2. Hardship letter explaining the reason for your request.
3. Last two paycheck stubs verifying income.
4. Last two year’s tax returns.
5. Last two years 1099 or W2 forms.
6. Borrowers Financial Statement.

Both are options to consider if you are facing foreclosure. Other options may include a forbearance, deed in lieu of foreclosure, repayment plan and as a last resort a bankruptcy. If you are in default on your mortgage, your credit will have an impact but depending on which option you choose, it may be a lesser impact. Again, I recommend discussing these options with a qualified and reputable home counselor, Realtor, attorney or mortgage broker first before you make any decisions for your particular financial situation.

The Federal Trade Commission brought lawsuits last year against five companies representing 20,000 customers, and state and local prosecutors have brought dozens more who are victimizing homeowners in distressed situations by taking upfront fees and offering to help them with pre-foreclosures, mortgage modifications and other foreclosure defense options. What happens is the homeowner loses their valuable opportunity to defend themselves and save their home, and they lose their money at the same time.

In Florida, Attorney General Bill McCollum recently sued a company that had more than 600 victims. Mr. McCollum said: “There’s no way for the consumer to sort out the legitimate companies,…” California authorities have had more than 300 complaints made last year against fraudulent companies. The problem is nationwide so consumers who are especially in financial distressed situations need to be very careful who they choose to help them and how they spend their money. According to authorities many of these companies either do nothing but take the consumer’s money or they negotiate a modification or repayment plan that is unsuited to the borrower’s ability to pay.

Red Flag

Watch out for companies that charge an upfront fee of up to $3,000 [excluding law firms which are legitimate foreclosure defense attorneys that can help the consumer defend a court action and help with other foreclosure defenses to save the consumer’s home.] stating they can help you save your home with a foreclosure modification or other options. They do nothing but take your money. Prosecutors warn that many of these are local companies in your area are run by former mortgage brokers or even real estate agents so they may be knowledgeable, but they are not doing what they say they are going to do or there are others that are just plain crooks. Some have official looking websites that give consumers the impression that they are endorsed or approved by the government.

How to Recognize a Reputable Company

There are many legitimate modification companies and mortgage brokers that can help consumers as well as real estate agents who can help you sell your home in a short sale transaction. It’s just a matter of taking some extra time and checking them out and checking the laws in your area. Keep in mind though that legally real estate agents cannot charge a fee for doing mortgage modifications in the capacity as a real estate agent. Only attorneys can defend borrowers in foreclosure litigation actions. You can use a non-profit foreclosure counselor certified by HUD whose services are free to the consumer.

State Laws that Protect Consumers

Laws in California and 20 other states, including New York, have been enacted to protect consumers from these fraudulent practices. Illinois is also one of the states that prohibit upfront payments to foreclosure rescue companies. Companies in those states are prohibited from collecting payment until they have completed their services. However, many consumers are not familiar or aware of the laws in their state. So my suggestion is to check the laws in your state first before you hand over any money to anyone claiming to be able to help you prevent your home from going to foreclosure.

Desperate Borrowers Seeking a Resolution

A consensus among consumer advocates is the reason distressed homeowners fall prey to these unscrupulous businesses is that most of these borrowers are desperate to seek a quick resolution to their financial problems. They are anxious to obtain loan modifications or get their short sales approved and become frustrated with the process of reaching the lender or the right person at the lender’s offices. Borrowers are even more frustrated after the long process that the lender then insists on a repayment plan that they cannot afford. This leaves borrowers vulnerable because they are feeling so desperate that the crooks who come out of the woodworks can take advantage of them more easily. Borrowers feeling they have no other options suddenly turn to these phony ads or letters and contact these “swindlers”.

Even smart people know deep down they may be getting ripped off, just like most borrowers knew they were getting in too deep with bad mortgages, but experts or people that appear to be experts tell them it’s okay so they go along with the ideas. A lot of people even after they are told they were swindled don’t want to believe it’s true. It’s a shame because distressed homeowners cannot afford to lose any more money and some of those funds could have legitimately gone towards saving their home had they hired a reputable company in the first place.

The government can only put so many limits and restrictions in a free enterprise society so it is up to the consumer to also watch out and protect themselves. If you are in a distressed situation, talk to a trusted professional whose credentials you can verify, check your state laws, and watch out for any red flags such as large upfront fees.

Forgiven Debt on Short Sales

Forgiven debt is when a borrower escapes some of the debt they owe on their mortgage through a short sale process or a foreclosure sale. Borrowers may incur income tax liability for this forgiven debt which is referred to as “phantom” income.

In some states, a lender can obtain a deficiency judgment against the borrower for the difference in the amount owed on their mortgage and the amount the home sells for at auction sale.  Since this may cause a further hardship on the borrower that is already losing his or her home and receiving no cash from the transaction, and put the former homeowner so far into insolvency that he or she may never recover enough to buy another home, the government has enacted new federal legislation which is a temporary (3-year) moratorium on taxation of debt forgiveness that does not exceed the owner’s basis in the home.

Foreclosure and Deficiency Judgments

A lender who loses money from the sale of a foreclosed home must report the loss to the IRS. So let’s say a home sold for $600,000 at an auction, but the mortgage was $650,000. The forced sale of the property at an 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. Since the homeowner did not receive any proceeds from the sale because it was a loss, no tax is due in this scenario.

There is just a loss on the forced sale of the property. The homeowners will not be responsible for paying the difference between the $650k that was owed and the $600k that the property was sold for at the foreclosure sale. Unless the bank tries to sue the homeowner for a deficiency judgment after foreclosure (which is quite rare these days), all parties are done with the property. Not all states allow deficiency judgments so you should the laws in your state first. In any event, the homeowners take the loss of the property, start repairing their credit, and moves on with their lives.

Property Taxes

Foreclosure or Deed in Lieu

If you plan to walk away from a house and let your mortgage lender foreclose, do you continue to pay property taxes? This is a common question often asked by homeowners who own property worth less than the mortgage balance. Most homeowners are concerned that they will remain personally liable for unpaid property taxes after the bank foreclosure.

It is best to consult with our tax advisor or attorney first in these situations. However, the general rule is that taxes on real property are assessed only against the property itself and not the owner. The way it actually works is if a property owner does not pay their real estate taxes, the county tax assessor will put a lien on the property and sell the tax certificate at public auction. The purchaser of the tax certificate at the tax auction then is responsible for paying the unpaid property taxes to purchase the certificate so that there is no longer any liability owed to the county tax assessor. If a lender takes back the property at foreclosure sale its title is subject to real estate tax liability. When the mortgage lender subsequently sells REO (bank owned) property, the new purchaser must pay all outstanding tax liability in order to get clear title unless the lender is willing to pay the tax liability.

However, a lender offering a deed in lieu of foreclosure could demand that all taxes be paid as part of the negotiation.

Short Sale

Generally in a short sale transaction the lender will ask to see estimated closing costs on a HUD-1 which includes the taxes, any real estate commissions, homeowner dues, title insurance costs, and other related closing costs. The lender approval of the HUD-1 is required before the transaction closes. So for the most part, the lender will pay the outstanding taxes out of the agreed upon purchase price and write off the difference between what is owed on the mortgage and the agreed sale price less closing costs.