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| Frequently Asked Questions This information is provided for general reference only and is not to be construed as tax or legal advice. Consult your income tax preparer and/or attorney for specific details on your individual situation. We are not licensed or authorized to give tax or legal advice. All tax and legal information on this site could be completely wrong. THE BASICS What is a nonrecourse loan? A: Nonrecourse loans are very favorable because the lender's only recourse, in case of default, is the property itself. The lender cannot pursue the borrower for a deficiency judgment or attempt to collect money or any other asset from the borrower. Nonrecourse loans include: 1) Loans that have been discharged through Chapter 7 bankruptcy. 2) Purchase money loans (that have not been refinanced) on an owner-occupied 1-4 unit dwelling (except FHA and VA loans which are recourse). 3) Rate and terms (no cash out) refinances of purchase money loans. 4) Seller financed loans on any type of property. 5) Any loan that is itself foreclosed non-judicially via Trustee Sale (judicial foreclosures via the court system are extremely rare).
What is a recourse loan? A: Recourse loans are unfavorable because the lender can pursue any available remedy through the court system to collect from the borrower including garnishing wages and forcing the sale of other assets. Recourse loans include the following only if they have not been discharged via bankruptcy and they have not themselves been foreclosed non-judicially via Trustee Sale: 1) FHA and VA loans. 2) Refinanced loans, except for rate and terms (no cash out) refinances of purchase money loans. 3) Loans (except seller financing) on rental property.
(SCENARIO #1) What if my property has one nonrecourse loan only -OR- all loans have been discharged in Chapter 7 Bankruptcy? A: You do not have to pay anything to short sell your home unless there is a Home Owners Association, which should be kept current. You do not pay property taxes, commissions, closing costs, repairs, or the mortgage. The debt will be permanently eliminated. You may need to pay capital gain tax if there is a low cost basis and insufficient exemptions. No IRS ordinary income tax is due on the forgiven debt. Homeowners with one nonrecourse loan only -OR- all discharged loans should do a short sale without exception.
(SCENARIO #2) What if my property has more than one loan and a junior loan is nonrecourse? A: You do not have to pay anything to short sell your home unless there is a Home Owners Association, which should be kept current. You do not have to pay property taxes, commissions, closing costs, repairs, or the mortgage. After a foreclosure, the junior nonrecourse loan will be permanently eliminated. After a short sale, the junior nonrecourse loan will be permanently eliminated if and only if the lender provides written documentation to that effect. You may need to pay capital gain tax if there is a low cost basis and insufficient exemptions. No IRS ordinary income tax is due on the forgiven debt. Homeowners with a junior nonrecourse loan should always attempt a short sale and allow it to close escrow if and only if the junior lender provides clear written documentation that the debt has been paid in full with no future recourse.
(SCENARIO #3) What if my property has one recourse loan only? A: You do not have to pay anything to short sell your home unless there is a Home Owners Association, which should be kept current. Thanks to SB 931, the debt will be permanently eliminated. You do not have to pay property taxes, commissions, closing costs, repairs or the mortgage. You may need to pay capital gain tax if there is a low cost basis and insufficient exemptions. You will owe the IRS ordinary income tax on the forgiven debt unless you are 'insolvent' or declare bankruptcy. Homeowners with one recourse loan only should always do a short sale if their income tax preparer says they are 'insolvent' per the IRS definition and may want to do a short sale anyway even if they are solvent.
(SCENARIO #4) What if my property has more than one loan and a junior loan is recourse? A: If there is a Home Owners Association, the dues should be kept current. Here's a visual flowchart of your alternatives. Thanks to SB 931, the 1st loan will be permanently eliminated. You may need to pay capital gain tax if there is a low cost basis and insufficient exemptions. After a foreclosure or short sale, your recourse 2nd loan will convert to unsecured credit card type debt. You will still owe the full amount of the recourse 2nd loan; it will NOT be eliminated! This junior lender might pursue a deficiency judgment against you in court. If, in the face of a deficiency judgment for the full amount of the junior loan, you would realistically declare bankruptcy, consider doing this prior to the foreclosure to get a couple more months of rent-free living and increase the likelihood of short sale success. A short sale is an excellent test to find out if bankruptcy is needed or not. If the junior loan approves the short sale, bankruptcy may not be needed, but you will have to pay IRS ordinary income tax on the forgiven debt unless your income tax preparer says you are 'insolvent'. If the junior loan rejects the short sale, you could declare bankruptcy to live rent-free longer. All loans included in the bankruptcy convert to favorable nonrecourse status; see (SCENARIO #1) above.
What about the Mortgage Forgiveness Debt Relief Act of 2007? A: The Mortgage Forgiveness Debt Relief Act of 2007 may benefit an extremely small number of taxpayers in very unusual situations. However, the IRS webpage on the subject is extremely informative regarding cancellation of indebtedness income.
What about California state income tax? A: The California Franchise Tax Board Mortgage Forgiveness Debt Relief webpage or the California Association of Realtors article "Taxation of Foreclosures and Short Sales" may help. Taxation is the same regardless whether the home is foreclosed or sold as a short sale. There is never a tax incentive to let a home get foreclosed.
REALTOR LIMITATIONS Can you help me if a Trustee Sale foreclosure date has already been scheduled? A: If a Trustee Sale foreclosure date has already been set we may or may not be able to help you depending on the details of your particular case. We need time to find the best buyer for your home and negotiate with your lender. Sometimes we cannot accomplish these tasks when a Trustee Sale foreclosure date is 2-3 weeks away.
What geographies do you cover? A: We can help homeowners in San Diego County, California only.
Can I do a short sale without missing any payments to minimize the damage to my credit? A: Yes, theoretically it can be done, but it's extremely rare. As such, this is not an effort we are willing to attempt. We only work with homeowners who are delinquent and facing foreclosure.
HOMEOWNER EXPECTATIONS What do I need to do? A: We'll help you write a short hardship letter, complete a monthly budget, and fill out the Realtor mandated disclosure forms. You'll need to give us permission to communicate with your lenders. You'll need to provide us with 2 recent months bank statements and pay stubs plus last years IRS form 1040 from your income tax return. You'll need to allow buyers to enter your home, sometimes on short notice. You do NOT need to clean or organize your home for these buyers; just live your life as normal. When your lender's appraiser visits, you'll need the home to be as unattractive as possible. After short sale approval, you'll need to sign a Grant Deed in front of a notary transferring ownership to the new buyer.
Do I have to have a sign in my yard? A: No. We prefer you do, though, in case the best buyer for your home happens to drive by.
Do I have to have a lockbox on my door? A: No. We prefer you do, though, to make showings fast and convenient for today's demanding buyers.
Once I start a short sale, am I obligated to complete the process? A: If you find a way to save your house, you can cancel the short sale up until we provide the short sale approval letter to the buyer. This occurs at the very tail end of the long and arduous short sale process, giving you plenty of opportunity to find a way to save your house. Once the buyer has possesion of the short sale approval letter, you are then obligated to close escrow, usually within 45 days.
MORE DETAILS What if I've declared bankruptcy? A: You'll still want to keep foreclosure off your credit. You may want to ask your bankruptcy attorney's permission to do a short sale.
Is my personal property insured?A: If your homeowner’s insurance premiums are paid by your lender thru an ‘escrow’ or ‘impound’ account, check with your insurance company at the annual renewal to ensure your lender has not converted the policy to a ‘fire’ policy which would not cover the stuff inside your home. A: When a homeowner can afford the monthly payment, but chooses not to pay it because they feel not making the payment is in their long term best financial interest.
A: We'll attempt to convince our best buyer to move into the home. This will protect the home from being vandalized and will ensure our best buyer remains motivated to close escrow no matter how long the process takes (losing good buyers is a common short sale challenge). The buyer will pay some rent to cover the Home Owner Association fee, if there is an HOA. There's no risk to you because the buyer will have given a large earnest money security deposit to the escrow company.
What if I have a purchase-money, owner-occupant loan, but I never moved in?
A: Your lender will probably treat the debt as nonrecourse if they do not find out that you never moved in. Assume that the IRS will consider the debt as recourse, meaning that you will have to pay ordinary income tax on the forgiven debt unless your income tax preparer says you're 'insolvent'. If you don't know whether you got an owner-occupant loan or not, contact us. Your publicly recorded Trust Deed has the answer.
Can I have a relative or friend purchase my short sale home and rent it back to me so I don't have to move? A: Yes, if you have the good fortune to know someone willing to put their credit on the line for you, and they can qualify for a loan. In some cases a lender will require the buyer and seller to sign a document at closing affirming that the sale is an arms-length transaction where the buyer and seller do not know each other. If you or the buyer would be unwilling to sign such a document, you may not want to pursue this strategy.
Is it legal for me to collect rent from a tenant if I'm not making the mortgage payment? A: Yes, if you've owned the home for more than 12 months. If you've owned the home for less than 12 months, collecting rent without paying the underlying mortgage is rent-skimming, a misdemeanor.
AFTERWARD Will I have trouble finding a rental with a short sale or foreclosure on my credit? A: No. In today's market, any landlord or property manager that refuses to rent to tenants with a foreclosure or short sale on their credit will have great difficulty keeping their homes occupied.
How can I tell if a rental has a 'toxic' loan that could 'explode' on my landlord, causing me to move before my lease is up? A: Contact us with the address of the home you want to rent, and we'll check the home's public Trust Deed for toxic loan terms.
When should I purchase another home? A: San Diego prices probably won't experience significant price appreciation for several years. It may be financially prudent to rent in the meantime. Contact us to sign up for our San Diego market update email which comes out the last Tuesday every month. With the valuable insights and information in this monthly update, you'll know when it's time to start buying property to take advantage of San Diego's next real estate boom. | |
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