If you’ve done a short sale, your credit may have already taken a hit, but now your bank account may be in for another one! In an effort to increase revenues, some banks are going back to consumers who completed short sale transactions – even a couple of years ago – and asking for the shortfall.
They may say that you’re now expected to pay the “forgiven” amount, but out of kindness, they’ll settle for half.
In some states, State laws have made it impossible for lenders to come back on you for a shortage, but in others they can – even if you were verbally assured that your entire debt would be cleared. As they say in real estate: “If it isn’t in writing, it didn’t happen.”
It’s too late to correct the situation if you’ve already done a short sale, but if you’re in the process of one right now, be sure to get the assurance in writing. What you need is a “Waiver of Deficiency.”
If you do find yourself in this situation, try to negotiate a little more. If they ask for half, offer a third. Be sure to mention that you were given deceptive information when you entered into the short-sale agreement.
If a great deal of money is at stake, you may be wise to consult with an attorney before responding to them at all.
How the short sale will affect your credit rating will depend upon how it was reported to the credit bureaus. Again, if it’s all finished, you have to live with the way it was reported, but if you are negotiating with your lender right now, you may be able to lessen the impact on your credit report.
They can simply report the debt as paid, or they can report that it was paid for less than the full amount. You can’t force them to report in your favor, but you can certainly ask, and you may get good results.
If you are going through the short sale process, you may have heard that you’ll owe income taxes on the forgiven debt. This used to be the truth. However, the Mortgage Forgiveness Debt Relief Act of 2007 removed that liability for homeowners who have debt forgiven between January 1, 2007 and December 31, 2012.
Taxpayers who were not aware of this Act and mistakenly reported the “Phantom income” on their 2007 or 2008 taxes can now file Form 1040X to amend their returns and reclaim the overpaid taxes. Be sure to clearly explain why you are filing the amendment.
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