FAQ

Preforeclosure can be a scary time but we aim to make it easier by answering your questions. If you need more help, or are ready to inquire about a short sale, contact us today!

What is a Short Sale?

A sale of property which includes some forgiveness of debt by the mortgage lien holder.
In case of an economic or financial hardship, the bank or mortgage lender agrees to discount (short) the balance of a loan. This sort of agreement is usually executed in order to prevent the foreclosure of a home.

What happens to my credit after a short sale?

Your credit will be affected negatively but not nearly as negatively as the effects of a foreclosure. A message will be posted next to your mortgage that will read something like "Account settled for less than full balance". Typically any missed payments leading up to the short sale will remain on your credit report for 7 years.

How long will a short sale take?

Once we've recieved a complete submission package, the short sale can take as little as 45 days but often 90 days or longer. Much of this will depend upon how fast your lender can process everything.

Why is a low offer better than none at all?

A low offer is better than none at all because without one, your home will certainly fall into foreclosure. After the lender appraises the property and learns that it's worth less than the payoff, they will determine if its worth further legal action and expense, then make a business decision to either hold onto the property and foreclose or accept the short sale offer and get a non-performing loan off of their books.

How much is this going to cost?

This is at no cost to you. Any fee's will be agreed to and paid by your bank on the day of closing.

Will I be receiving any money after the short sale?

In most cases, lenders will not allow a borrower to get money back after the short sale of their home.

Why would my lender want a Short Sale as opposed to Foreclosing?

No lender wants to foreclose on anyone. It's a lot of work and nobody wins. The short sale often has a better return on investment to the lender than a foreclosure. The average savings a lender realizes is $15,000 in addition to settling the loan 6 months earlier. This allows them to collect and cash-out earlier. Plus, lenders end up spending a great deal of money on attorneys to complete the foreclosure process. Lenders created the short sale process as an alternative to foreclosure for these reasons. The incentives to perform a short sale are in place to motivate you to participate.

What is a Deficiency Judgement?

The amount the borrower is personally liable for on a note and mortgage if the foreclosure or short sale in not enough to cover the debt. The lender may be allowed to take further legal action to pursue collection based on the laws of your state. However the deficiency balance is negotiable; the lender may agree to cancel the entire deficiency balance as part of the short sale negotiation.

Are deficiency judgments permitted in Indiana?

Yes, a deficiency judgment may be obtained when a property in foreclosure is sold for less than the loan amount that the underlying mortgage secures. This means that the borrower still owes the lender for the difference between what the property sold for and the amount of the original loan. But remember, in reality the lender may be unable or unwilling to take any further action against you, even in a state that allows deficiency judgments; the lender may agree to cancel the entire deficiency balance as part of the short sale negotiation. Another way of looking at it is that the lenders legal team could decide that the cost of pursuing a deficiency would not result in a favorable return.

What statutes govern Indiana foreclosures?
Also: What is the legal timeline for the lender to foreclose?

The laws that govern Indiana foreclosures are found in Indiana Code, Article 29 (Mortgages), Chapter 7 (Foreclosure, Redemption, Sale, Right to Retain Possession). To view the 2010 amended statute on the Web, you can visit: www.in.gov, House Enrolled Act 1122 for "IC 32-29-7 Chapter 7. Foreclosure . Redemption, Sale, Right to Retain Possession".

What are my tax liabilities if I walk away from my home and mortgage?

(excerpt from IR-2008-17): Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec. 20, 2007, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was $2 million or less. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions, available now on the IRS.gov web site.

“The new law contains important provisions for struggling homeowners,” said Acting IRS Commissioner Linda Stiff. “We urge people with mortgage problems to take full advantage of the valuable tax relief available.”

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 doesn’t 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.

The amount excluded reduces the taxpayer’s cost basis in the home. Further information, including detailed examples, can also be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

What is Cancellation of Debt?

(excerpt from www.IRS.gov)

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. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. 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.

Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

Is Cancellation of Debt income always taxable?

(excerpt from www.IRS.gov)

Not always, there are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

1. Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
2. 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.Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.
3. Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income. The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.
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, as discussed below.

I lost my home through foreclosure. Are there tax consequences?

(excerpt from www.IRS.gov)

There are two possible consequences you must consider: (Further information, including detailed examples, can also be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.)

1. Taxable cancellation of debt income.(Note: As stated above, cancellation of debt income is not taxable in the case of non-recourse loans.)
2. A reportable gain from the disposition of the home (because foreclosures are treated like sales for tax purposes).(Note: Often some or all of the gain from the sale of a personal residence qualifies for exclusion from income.)

Use the following steps to compute the income to be reported from a foreclosure:

Step 1 - Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section. You have no income from cancellation of debt.)

1. Enter the total amount of the debt immediately prior to the foreclosure.___________
2. Enter the fair market value of the property from Form 1099-C, box 7. ___________
3. Subtract line 2 from line 1.If less than zero, enter zero.___________

The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C. This amount is taxable unless you meet one of the exceptions in question 2. Enter it on line 21, Other Income, of your Form 1040.

Step 2 – Figuring Gain from Foreclosure

4. Enter the fair market value of the property foreclosed.For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure ________
5. Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.) ____________
6. Subtract line 5 from line 4. If less than zero, enter zero.

The amount on line 6 is your gain from the foreclosure of your home. If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income. If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.

I lost money on the foreclosure of my home. Can I claim a loss on my tax return?

(excerpt from www.IRS.gov)

No. Losses from the sale or foreclosure of personal property are not deductible.

How is a short sale a win/win/win situation?

Generally, the lender is happy because they have avoided bigger losses and stopped the continuation of a bad loan. Buyers are getting the home for a great price. The realtor earns a commission sooner, and the seller can rescue his/her credit rating in a shorter time. Lastly the community benefits through not having empty homes falling into disrepair and going uncared for.

How do I qualify for a short sale?

1. You are upside down - This means the home's market value has dropped below the value of the loan.
2. You are near or in default status on your loan.
3. You are in financial or economic hardship.
4. You have requested to be considered for a Home Affordable Modification Program (HAMP) modification and other retention programs.

What are my alternatives?

There are alternatives to the Short Sale of your home. These are listed below in order of practicality:

• Reinstatement
• Forbearance
• Mortgage Modification
• Short Sale
• Deed In Lieu Of Foreclosure
• Foreclosure
• Bankruptcy

How long does a bankruptcy or foreclosure stay on my credit?

• Foreclosure could stay on your credit report for seven years.
  
• Chapter 13 Bankruptcy could stay on your credit report for seven years.
  
• Chapter 7 Bankruptcy could stay on your credit report for ten years.

Why does a home go into foreclosure?

Foreclosure occurs when a borrower has missed three mortgage payments. The mortgage will go into default status. If the debt is not satisfied the banker or mortgage lender will foreclose on the mortgage and proceed to attempt to sell your home.

How long before I can qualify for another mortgage?

This depends upon the solution you choose...

• Short Sale: FannieMae and FreddieMac state that in as little as two years with re-established credit, 10% down payment, and a minimum credit score of 680. The FHA (Federal Housing Administration) currently has not posted any guidelines regarding post short-sale qualification.
• Foreclosure or Deed in Lieu of Foreclosure: You will have to wait a minimum of 5 years to qualify for a Fannie Mae or Freddie Mac backed mortgage, along with re-established credit and down-payment funds.