Mortgages have become problems for millions of people in America. The housing bubble and concordant debt explosion from 2003 to 2007 resulted in many people taking on more mortgage debt than they could afford. Now that home prices have fallen dramatically from their peak, close to 30 million people have negative equity. Their mortgage balance is greater than the value of their homes. This dreadful circumstance has resulted in record numbers of short sales as homeowners attempt to escape their mortgage contracts. Short sales are unpleasant experiences, but given the current dire straits of the economy, people must understand how they work.
A major problem with short sales in the past has been the fact that under IRS law, people may owe taxes on the "income" gained from discharging debt on their principal residence. The Mortgage Debt Relief Act of 2007 allows taxpayers to exclude such income from their taxable income. This law is only in effect from 2007 to 2012. This makes short sales far less painful for debtors.
When a homeowner finds that he cannot pay his mortgage, or he has negative equity, he can ask the lender to accept a short sale. A homeowner that is not in such circumstances can also request the sale if he can demonstrate that the house cannot be sold for the amount owed. If the lender agrees, the lender will accept an offer on the house for less than the value of the mortgage balance. This type of sale is not a sale below market value. For instance, a homeowner who has paid off his mortgage and sells a house worth $100,000 for $75,000 is not undertaking a short sale. They specifically refer to the lender taking at least a partial loss on the remaining mortgage balance.
Short sales are unfortunately burdensome legal processes. The homeowner will be well served by hiring legal assistance to handle the technical details. They involve a lot of back-and-forth banter about small things involved in the process. The bad news is the lender will require the seller to pay the deficiency, or the difference between the short sale price and the mortgage balance. The lender often does this by classifying the deficiency as 1099 income on the part of the seller. This is why short sellers can be taxed on income they do not owe, and what the Mortgage Debt Relief Act of 2007 was meant to rectify.
Far worse is for the lender to pursue debt collection actions against the short seller. If this leads to wage garnishment, the seller's only hope is to file for Chapter 7 bankruptcy protection. Never assume a debt is gone unless written confirmation is received, otherwise the seller may still be liable.
Joann Carlisle is a writer who looks forward to sharing her knowledge and advice with readers. For more on real estate, Five Stars Mortgage offers readers tips for buying a short sale home.
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