Ongoing List of Mortgage Lenders that do NOT forgive the balance of the debt in MOST of their Short Sales

TD BANK

When most mortgage lenders approve a short sale the tone of their written approval letter is congratulatory. For example “Congratulations your short Sale is approved” or “We are pleased to inform you that your request for assistance is approved.” However TD Bank approval letters strike a different chord. They state “we appprove your request for a ‘so-called’ short sale.” Can you believe that? Sadly for homeowners it only gets worse. The approval contains an agreement requiring the homeowner to pay the deficiency back after settlement. 

If you try to contact TD Bank to ascertain how much of the deficiency they’ll require or what kind of payment terms they are looking for you will not have much luck. In other words both the homeowner and TD Bank proceed to closing with no agreement whatsoever on how and when the balance would be paid. This puts the homeowner in a precarious position and is just a bad business decision for TD Bank. Wouldn’t you think TD Bank would make you agree to repayment terms before the short sale closes? This is when the homeowner is in the most vulnerable position because they are hoping for short sale approval. This is when TD Bank could get them to agree to whatever ridiculous payment terms they’ll require. However TD Bank just stays silent in the topic. 

Unless the homeowner is protected from a prior Bankruptcy they should be prepared for the above on any TD Bank short sale. 

USDA LOANS

If you are doing a short sale on a USDA loan you may have to pay the deficiency after closing. Their short sale approval letter affirmatively states that the seller is responsible for the remaining balance. When the approval letter is issued the USDA will send a debt settlement package for the homeowner to complete. Once this package is reviewed the USDA will advise terms of repayment, if any. These terms will likely not be received until after closing. Therefore the homeowner will be proceeding to settlement without knowing how much of the balance they’ll owe or when it needs to be paid.  

Tax Consequences of Short Sales, Deed In Lieu of Foreclosure and Traditional Foreclosure (UPDATED FOR 2018)

Whenever debt is forgiven (short sale, foreclosure, credit card settlement, etc.) the debtor is issued a 1099C for the cancelled debt. The debtor or borrower on the note is responsible for reporting this as income and paying any applicable taxes. Therefore a successful short sale, where the deficiency balance is forgiven, will result in the seller receiving a 1099C. Even a foreclosure may result in the receipt of a 1099C (assuming the bank doesn’t sue the homeowner for the balance when the foreclosure is finalized).

Here are the exemptions to paying tax on forgiven debt-

The Mortgage Forgiveness Debt Relief Act:

Under this exemption a homeowner can avoid paying the tax on a 1099C if:

It was their principal residence; and

The mortgages that are the subject of the short sale and cancelled debt were used to purchase, refinance or improve the home.

NOTE: This law was recently updated to include tax year 2017 and may include some transactions from 2018 provided the arrangement to cancel the debt was entered some time in 2017.

Bankruptcy:

The homeowner must file Bankruptcy before a short sale or foreclosure and must include the mortgage in the Bankruptcy thereby discharging the obligation to pay. Thus anyone who does a short sale or foreclosure after filing Bankruptcy and including the mortgage will be exempt from this tax. The liability to pay for the mortgage must have been extinguished as part of the Bankruptcy.

Insolvency:

This is currently the most important exemption and the one most of my clients will rely on. An individual can avoid paying taxes on forgiven debt to the extent they are insolvent at the time of the transfer. In other words an individual can avoid paying taxes on forgiven debt to the extent their debts exceed their assets.

Example One:

John Doe does a short sale (or foreclosure) and the forgiven debt is $50,000.

John Doe will receive a 1099C for $50,000 from the mortgage company for the forgiven debt.

John Doe examines all of his assets and all of his debts from the time of the sale. He determines that his total debts are $75,000 higher than his total assets.

John Doe is therefore insolvent to the extent of $75,000. Because this number is higher than the amount on the 1099C for the forgiven debt ($50,000) John Doe is entitled to a 100% exemption from paying this tax.

Example Two:

Same as above except that John Doe’s total debts are $25,000 higher than his total assets.

Because in this case the 1099C for the forgiven debt is higher John Doe must pay taxes on the difference.

1099C Amount = $50,000

Insolvency Amount =$25,000

John Doe must pay tax on $25,000.

What is a Short Sale?

A short sale is a real estate transaction where the value of the property is insufficient to cover all of the property liens at settlement. In a successful short sale the lien holders accept less than full balance so that closing can take place and clear title can be passed. In most cases the lien holders will also cancel any remaining indebtedness allowing the seller to have a clean break from the property.

Example 1: Jim Smith has a mortgage with Wells Fargo. The payoff amount is $250,000. However his house is only worth $200,000. Jim contacts a competent Realtor and experienced attorney to assist in short selling his home. The Realtor finds a buyer willing to pay $200,000 and they sign a contract of sale contingent on Wells Fargo’s approval. The attorney presents this offer to Wells Fargo with a request to forgive any deficiencies in writing. Once Wells Fargo issues a written approval for a short payoff the parties can schedule settlement. Wells Fargo will also cover the Realtor commission and other standard closing costs. If Wells Fargo agrees to cancel the remaining debt then the seller will have no further liability for the mortgage after closing takes place.
Example 2: Jane Smith has two mortgages on her property totaling $300,000 (a primary mortgage with Wells Fargo for $250,000 and a secondary mortgage with Bank of America for $50,000.) However her House is only worth $225,000. Jane contacts a competent Realtor and experienced attorney to assist in short selling her home. The Realtor finds a buyer willing to pay $225,000 and they sign a contract of sale contingent on Wells Fargo AND Bank of America’s approval. First the attorney presents this offer to Wells Fargo with a request to forgive any deficiencies in writing. The attorney must also request money from Wells Fargo to settle the Bank of America Debt. In this example Wells Fargo offers the attorney $6,000 to settle the debt with Bank of America. The attorney then presents the $6,000 offer to Bank of America with a request to forgive any remaining deficiencies. If Bank of America accepts the offer they will issue a written approval for a short payoff. The attorney reports this success back to Wells Fargo who has either already issued a written short approval or is hopefully about to do so. Once both mortgage companies issue a written approval for a short payoff the parties can schedule settlement. Wells Fargo will also cover the Realtor commission and other standard closing costs. If Wells Fargo and Bank of America agree to cancel the remaining debt then the seller will have no further liability for the mortgages after closing takes place.

Example 2 would also be relevant if the second mortgage were a home equity line, judgement or condo lien. The procedure would be similar.

If your home is located in New Jersey or Pennsylvania and you think you might need to do a short sale please contact The Sokol Firm through our website for more information http://www.thesokolfirm.com.