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Consequences for a Short Sale: Legal Issues and Judgments

January 17, 2010 By

What is a short sale?  When the sale price of the home is less than the loan amount and the lender accepts a lower payoff.

Nevada is a deficiency state.   During a foreclosure or short sale, if the lender does not receive a full payoff, they have the legal right to sue the borrower for the difference.   If successful in the lawsuit, they may be able to obtain a deficiency judgment.

The time frames in Nevada are as follows:

Foreclosure:       1st Mortgage:     6 months

2nd Mortgage:     6 years

Short Sale:          1st Mortgage  & 2nd mortgage:    6 years*

*A short sale the lender may agree to accept the proceeds as payment in full and release the homeowner from any future liability and/or judgments.  In this instance, I recommend you obtain something in writing from the lender. The lender should put specific language in the short sale approval letter.

I also recommend making the offer between Seller and Buyer contingent upon the short sale lender releasing the homeowner from liability.  Below is an example of language you may include in an offer:

“Offer is contingent upon short sale lender accepting short sale amount as payment in full with seller paying zero at close of escrow.  Lender agrees to release homeowner from future liability and not seek future deficiency judgments.”

I am also including language recommend by Darren Welsh, Esq. to be inserted into the Greater Las Vegas Association of Realtors Short Sale Addendum:

“The contingency of paragraph 1, page 1 shall not be met until all terms and conditions of Lender Approval are approved by the Seller, at Seller’s sole discretion, and shall include the Seller being released from any future liability from all parties with a vested interest in the forgiven debt.”

If you are facing foreclosure or considering a short sale, it is important to discuss the situation and consequences with an attorney familiar real estate law (in the same state as the property is located).

For other consequences of short sales, please see my blog on credit issues and tax consequences. These are two other separate issues related to short sales and foreclosures.

Please contact TEAM CARVER for all of your real estate needs.  We are Certified Short Sale Professionals.  We look forward to working with you!

TEAM CARVER;  www.TeamCarver.com; sold@TeamCarver.com ; (702) 436-3615

Filed Under: Short Sales Tagged With: ,

Consequences for a Short Sale: Tax Liability

December 17, 2009 By

What is a short sale?  When the sale price of the home is less than the loan amount and the lender accepts a lower payoff.

On a short sale the amount waived is considered income by the IRS and subject to taxes.  For example, if your loan amount is $300,000 and you complete a short sale for $200,000, the amount waived is $100,000.  The IRS considers this as income and the borrower will be taxed at his income level.  The lender will mail a 1099 and this must be reported to the IRS.  This also applies to properties that are foreclosed upon.

The good news is that many homeowners will be excluded from owing the tax.  The Mortgage Debt Relief Act, passed in December 2007 applies to debt forgiven through 2012.  It states that the debt can be excluded if the following applies:

  • The home must be primary residence (defined as the borrower has occupied the home at least 2 out of the last 5 years)
  • The loan amount must be less than $2,000,000 per couple ($1,000,000 for individual)
  • The amount waived must be less than $500,000 per couple ($250,000 for individual)
  • The debt must have been acquired to purchase the home or substantially improve the home

What if you don’t fall in the above categories, such as an investment property?  There some other options that may qualify the borrower to be exempt.  One option is to file insolvent.  Insolvency applies when the net worth is a negative (your debts exceed your net assets).   For example, if you owe $300,000 on the home, but it is only worth $200,000 and you don’t have an additional $100,000 in assets, your net worth is a negative for the year.  Another option may be to file bankruptcy.   If you file bankruptcy, it is likely you will be able to file Insolvency.  If you are considering a short sale or letting a home foreclose, I highly recommend you talk to an account about all of the consequences.  I am also including links to relative articles on the IRS website.

http://www.irs.gov/individuals/article/0,,id=179414,00.html

http://www.irs.gov/pub/irs-pdf/p4681.pdf

http://www.irs.gov/irs/article/0,,id=179073,00.html

For other consequences of short sales, please see my blog on deficiency judgments and credit consequences. These are two other separate issues related to short sales and foreclosures.

Please contact TEAM CARVER for all of your real estate needs.  We are Certified Short Sale Professionals.  We look forward to working with you!

TEAM CARVER;  www.TeamCarver.com; sold@TeamCarver.com ; (702) 436-3615

Filed Under: REO (Foreclosure), Short Sales Tagged With: , , ,

Alternatives to Foreclosure

October 10, 2009 By

Foreclosure is the legal process used by a lender to force the sale of real property used as security for a mortgage loan or deed of trust in the event of default.  During this process, the homeowner still has ownership and legal rights to the home.

  • —  Contact mortgage company
  • —  Loan modification
  • —  Contact HUD
  • —  Refinance the mortgage
  • —  Sell the home
  • —  Short Sale
  • —  Deed In Lieu of foreclosure
  • —  Bankruptcy
Filed Under: REO (Foreclosure), Sellers, Short Sales Tagged With: , , , , ,

Foreclosure- What is a foreclosure?

September 9, 2009 By

Foreclosure is the legal process used by a lender to force the sale of real property used as security for a mortgage loan or deed of trust in the event of default.

Most Common:

—  Judicial Foreclosure

—  Non-Judicial Foreclosure

Judicial foreclosure involves the lender filing a lawsuit in order to obtain a court order to foreclosure.  The court must approve the sale of the home.  This can be a lengthy process with additional time needed to process through the court system.  After Judicial Foreclosure, the borrower has up to one year to redeem the property (known as the Right of Redemption time frame).

Non-judicial foreclosure does not require court intervention or approval.  This is used when the Deed of Trust has a Power of Sale clause, in which the borrower agrees to the sale of the property, if in default. Time frames will depend upon the state statutes.  In Nevada, the times begin upon the Notice of Default being filed (typically filed after the 2nd or 3rd missed payment).  Once the Notice of Default (NOD) has been filed, the foreclosure process is approximately 120 days and there is no Right of Redemption. 

Although Nevada has both types of foreclosure, Non-judicial foreclosure or a Trustee Deed is most common due to the power of sale clause.  If you have questions on foreclosure and seller options, please contact Team Carver.

Filed Under: REO (Foreclosure), Sellers, Short Sales