Information You Need: Frequently Asked Questions about Short Sales, Tax Liability, Effects of Foreclosure, and Options to Stop Foreclosure.
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What are the most used Options to stop foreclosure? (Presented in the order of selling property vs other options)
1. Submitting an offer for your property with correct hardship documentation, and then confirming receipt of the documentation by your servicer. prior to the Foreclosure Date, is another way to stop foreclosure. Please note: You can sell your property if the value is below the mortgage balance. While it is not recommended to wait until the last minute, sale of property can occur in a matter of days if the price is right. See 15 Steps to Short Sale: Selling Property Under the Mortgage Balance. Also see Servicer Required Documentation.
2. Ask for a Deed-in-lieu of foreclosure. This is a situation in which a borrower conveys ,or deeds, the property back to the Lender to satisfy a loan that is in default in order to avoid foreclosure. First of all, there is no guarantee that the Lender will accept a deed in lieu of foreclosure. Secondly, deed in lieu of foreclosure can be as damaging to credit scores as foreclosure is. Scores can drop 200 to 300 points, depending on overall condition of credit.
3. Request a Partial Payment Forebearance. This is a temporary solution which is generally offered for temporary financial losses associated with illness (time off work and medical bills), death in the family (time off work and funeral expenses), temporary cut in pay (i.e. mandatory leave of absence). Depending on the Servicer, the Borrower may be able to use reduction in income or loss of income, but that varies by Servicer. A Partial Payment forebearance allows lower payments (sometimes one-half the current payment) for a limited time but Borrower must posture to sell property, request a loan modification, or pay the past due debt as a permanent solution.
See Sample Forebearance Agreement.
4. Request a Loan Modification: This is a permanent restructuring of the current loan which places delinquent payments at the back end of the loan, extends the number of years, most of the time lowers the interest rate, and consequently lowers the monthly payment. Modifications bring your loan current. Eligibility for Modifications and Outcomes depend on the type of loan and your ability to posture your numbers to meet the formulas required for your loan type. See Eligibility and Outcomes. Learn your loan type first and prepare your numbers first.
See Example Fannie Mae/Freddie Mac modification.
See Sample FHA Modification
See Example HAMP Trial period
See Sample Traditional Modification
Note: Anything evaluated under HAMP will include a trial period. See individual lessons.
Options to stall foreclosure are as follows:
1. Bankruptcy. Filing bankruptcy up to a day before foreclosure gives the court jurisdiction over you. In other words, your creditors cannot contact you by phone, letter, or otherwise while you are bankruptcy. This is a temporary solution. See the versus bankruptcy tab on the website. Many bankruptcy attorneys will provide a free consultation. Please consider all options carefully.
» If you do not pay the mortgage as directed by Chapter 13 guidelines (Chapter 13 is a restructuring of your debt), the Servicer will file a motion for relief of stay which will allow the Servicer to foreclose on the house. After a certain period of time after a Borrower files a Chapter 7 bankruptcy, the Servicer will file for relief of stay in order to proceed with foreclosure.
» A Borrower, while under bankruptcy (under jurisdiction of the court), can 1) review workout (modification/forebearance) options with the Servicer's Bankruptcy Loss Mitigation area or 2) sell a property -- provided they receive consent from the bankruptcy attorney to speak with the Servicer regarding the mortgage ONLY. You can find a Sample Consent Form on the website. This has to be faxed by the Bankruptcy attorney directly to the Servicer's Bankruptcy area. For sale of property under Chapter 7, the Borrower must verbally request permission from the Servicer and then must go through their bankruptcy attorney to present contract and standard hardship documents to the court.. For sale of property under a Chapter 13, follow regular procedures under Sale of Property on the website, except documents have to be sent to the Liquidation Bankruptcy area of the Servicer.
2. Require the Mortgage servicer to "Produce the Note". When a homeowner is faced with a foreclosure suit, “Produce the Note” requires the lender to prove it has the actual authority to foreclose, by requiring it to officially produce the original promissory note in the lawsuit. This is an option for borrowers, but less dependable. One person’s experience is listed under Produce the Note. A "how-to" will be forthcoming.
You actually have a foreclosure date in the Mortgage Servicer's system. (Please ask the Service for verification as letters from the Servicer or Attorney do not necessarily mean there is a date). First of all ASK the Servicer to look it up in the system. If you do have a foreclosure date in their system, do not panic. When your documents are sent to the Servicer, they will continue to push the foreclosure date FORWARD in their system to give themselves time to work the file, or they will take the date OUT. Make sure to call the Servicer, starting three (3) days before the foreclosure date, to verify that the foreclosure date has been moved or stopped. CRITICAL: THEN call the ATTORNEY and make sure the attorney has been notified. Also read Do Not Panic to see examples of letters and calls.
Your Servicer has your documentation, but you continue to get collection letters from the Servicer or Foreclosure attorney, or phone calls from the Servicer, or Solicitation letters from firms stating you may be at risk. Again, click here for Do Not Panic. Continue to follow up with the Servicer, using the Scripts on the listed in Steps 14 or 15 in the lessons on the website. Then you will always know the truth about your case. Disregard any letters or calls which are not consistent with what your Mortgage Servicer's loss mitigation or short sale area tells you. Collections areas (within the Servicer) do not communicate with other areas (within the Servicer) such as bankruptcy, home retention (loss mitigation), or short sales (liquidation/sale of property).
You received a collection letter from your servicer or your servicer's foreclosure attorney stating that you need to pay a lump sum payment or to contact them about payment terms. Does this mean you are in foreclosure? No, you may receive many letters and calls from different areas who are assigned to proceed with collection efforts.
You are tired and wonder if you should leave the house. No, we encourage you not to give up. Foreclosure on one's record is much worse than bankruptcy. Foreclosure can hurt one's chances of getting employment or alternative housing because employers and prospective landlords pull credit reports to screen. Consider all your options first, such as selling your property if other options are not feasible.
(Added since video). Your house is worth much less than your mortgage value. Should you contract with a company to help you walk away from the mortgage? In the opinion of this mission, it is not good practice to walk away from contractual obligations such as a mortgage, but rather it is better practice to contract with a realtor to sell your property (short sale). In addition, never sign over your mortgage to another entity while it is still in your name! You are legally responsible and you can sell your property with the help of a realtor, not with a Walk Away company that says they will "take care of it for you." Many foreclosures now occur because of these "walk away" companies who use fear techniques to gain your trust. Also, quit claim deeds do not take you off the mortgage. Beware of scams.
Can a foreclosure be stopped just before the foreclosure date? Yes, this can be done but waiting until the last minute is not recommended. The quickest solution is to call your Servicer to request a Partial Payment Forebearance, or file bankruptcy, or posture to sell the house quickly (which can be done).
Questions Relating to Short Sales, Tax Consequences and Credit Scores
How long does a short sale take from receiving a contract on the property until closing?
It varies. The Servicer will not work on your file unless all required documents are reported received. Also this depends on the backlog of your Mortgage Servicer. In general, a short sale takes 3-4 months and as long as 6 months.
Do you have to be behind or late on your mortgage payments to be approved for a short sale? No, this is not a requirement. In fact, to preserve credit, it is better to be up to date.
Is it possible that a Servicer will write off the short fall between the mortgage balance and what the property sold for? Yes, depending on the tolerances of the Investor (the one who owns your loan), it is possible that the Servicer will write off the short fall with "0 dollars owed" and wll report on the credit report "Paid in Full for less than agreed to".
The following tax-related questions/answers are provided directly from the IRS website. An easy-to-follow question and answer format from the IRS. It is is highly recommended that you consult with a tax professional and/or accountant who is knowledgeable about short sales and foreclosures.
What are the possible tax consequences relating to the short fall between the mortgage balance and what the property sold for? Borrowers typically receive a 1099-C for relief of debt, and under certain conditions the tax consequences of a 1099 is forgiveable under the Mortgage Relief Act of 2007.
What are the provisions of the Mortgage Relief Act of 2007? (Source: IRS provisions)
If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring (or sale), as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. 4 common situations when cancellation of debt income is not taxable are:
1. Qualified principal residence. Exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
2. Bankruptcy: Debts discharged through bankruptcy are not considered taxable income. 3. Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
4. Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.
What does exclusion of income mean?
Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
If the forgiven debt is excluded from income, do I have to report it on my tax return?
Yes. The amount of debt forgiven should be reported on Form 982 and this form must be attached to your tax return.
Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?
No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing separately.
Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified.
If part of the forgiven debt doesn't qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?
Yes. The forgiven debt may qualify under the insolvency exclusion. Insolvency means that your total liabilities exceed your total assets. .
If I sold my home at a loss and the remaining loan is forgiven, does this constitute a cancellation of debt?
Yes. To the extent that a loan from a lender is not fully satisfied and a lender cancels the unsatisfied debt, you have cancellation of indebtedness income. If the amount forgiven or canceled is $600 or more, the lender must generally issue Form 1099-C, Cancellation of Debt, showing the amount of debt canceled. However, you may be able to exclude part or all of this income if the debt was qualified principal residence indebtedness, you were insolvent immediately before the discharge, or if the debt was canceled in a title 11 bankruptcy case. An exclusion is also available for the cancellation of certain nonbusiness debts of a qualified individual as a result of a disaster in a Midwestern disaster area. See Form 982 for details.
I lost money on the foreclosure of my home. Can I claim a loss on my tax return?
No. Losses from foreclosure are not tax deductible.
Can a lender try to recover the deficiency? Yes, we have seen this more with Equity lines and Lenders who actually still own the loan, for example Wells Fargo Equity. This means that the Servicer does not intend to forgive the debt. Expect this to be treated as unsecured debt. The Servicer will most likely have a Recovery Department call the Borrower to settle the amount owed (much like settling a credit card debt through negotiation). We recommend attempting to settle this amount up front before signing off on a short sale and not waiting until later. Also this amount may be eliminated later through bankruptcy - look for a tab Deficiencies for further explanation about this.
Can you do short sales on second properties? Yes, these can be approved but consult your tax professional regarding tax consequences regarding second properties. While the Mortgage Relief Act of 2007 covers exclusions pertaining to primary residences, investment properties and second residences are treated differently under IRS code.
What happens to your credit score if you have a short sale?
A short sale shows your payments as being paid or negotiated and could lower your score as little as 50 points as long as other payments are being made. A short sale can affect scores for as long as 12-18 months.
Will a short sale affect your credit history? A short sale is not reported on credit history, unlike what happens with a foreclosure.
Will short sale affect employment (current or future)? Since a short sale is not reported on a credit report, it will not be a challenge to employment.
How does a short sale affect your ability to get a future mortgage? Fannie Mae or Freddie Mac (government sponsored) loans allow a mortgage after 2 years. Currently, for applications for other loans, there are no questions on applications regarding short sales. Please consult a Mortgage professional.
What happens to your credit score if you foreclose?
Your credit score can be lowered from 250 to 300 points and your credit can be affected for up to 3 years.
Will a foreclosure affect your credit history? Yes, it is on public record for 10 years or more.
Will foreclosure affect employment (current or future)? Employers have the right to check credit regularly for all employees who have sensitive positions or security clearances. Foreclosure can be a cause of immediate reassignment or termination. Many employers are also requiring credit checks on all job applications. Foreclosure is the most detrimental credit item an applicant can have.
How does a foreclosure affect your ability to get a mortgage? Fannie Mae or Freddie Mac (government sponsored) loans allow a mortgage after 5 years. Other mortgage types could be much longer and it will also cause higher interest rates?
If you foreclose, is it possible that the Servicer will pursue a deficiency judgment? Yes, it is possible.
You are considering a deed in lieu of foreclosure. What should you know? First of all, there is no guarantee that your bank will accept a deed in lieu of foreclosure. This is a situation in which a borrower conveys (deeds) the property back to the Lender to satisfy a loan that is in default in order to avoid foreclosure. The Lender may consider it beneficial because it is easier, faster, and less expensive than going through the foreclosure process. But, the Borrower should know that credit scores are affected the same as foreclosure. Scores can drop 200 to 300 points, depending on overall condition of credit.
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Consult the website for videos and easy to follow instructions: 15 Steps to Loan Modifications using Making Home Affordable (HAMP), 15 Steps to Loan Modifications using Traditional Guidelines, 15 Steps to Short Sale: Selling property under the Mortgage Balance, How to review workout options with your Servicer while under bankruptcy, Produce the Note, and more.
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