After several months of struggling, you finally find yourself in a place where you must make a decision about your home. The state of Indianapolis real estate has made it so that a number of homeowners have found themselves in a position where they are underwater on their home, or they owe more to the lender than their home is worth in today’s market.
Relieving yourself of mortgage debt can be more involved and have more consequences than it appears. Such is the case with what people are encountering with short sale problems.
In a typical scenario, the lender will give permission to their borrower for a short sale. Unaware of potential short sale problems, you then place your home on the market with an Indianapolis REALTOR® to compete with other Indianapolis homes for sale, typically revealing on the listing information that your home is being sold as a possible short sale.
As an example, let’s say you live in a Noblesville neighborhood. Even though the Noblesville real estate market is fairly strong, you borrowed more for your new home than it is now showing in market value. You find yourself owing on a mortgage of $250,000 but your home will only bring in around $210,000.
Perhaps after your home sits on the market for several months, you get an offer for around the expected current market value. After several more months of waiting, your lender finally gives the okay to sell the house at the offered price. You are so encouraged at the possibility that you will be released of the difference of $40,000 and begin to take a sigh of relief thinking your closing will be just around the corner.
Not so fast. Lawyers and brokers from around the country have experienced that sellers were not actually dismissed from this debt as lenders were seemingly reluctant to release the sellers and instead they were instead giving these debts over to collection agencies.
Back to the example where you have a signed offer for $210,000 for your home. After signing the purchase contracts and the contingencies that are approved by the lender and waiting out their positive response, you move forward to final settlement where you receive a form from your lender declaring that the $40,000 difference will be canceled. This is called a 1099C form from the IRS that lenders send to you and back to the IRS for any debt that is canceled above $600.
Since your Noblesville home was your primary residence, you will not owe an income tax on the debt. But does that take care of everything?
It would make sense that this does take care of releasing you of your debt obligation. However, some borrowers have found this is not the case. It becomes a legal issue to be tried by the courts as the debate is over whether the statement made by the lender of debt cancellation, which is included on the 1099C, truly means that the owner is released from the debt repayment. Even though you would think it’s a no-brainer that the debt would be canceled, some have found the legal issues surrounding this debt release to be more grey and complicated.
Bottom line, educate yourself before entering into a short sale agreement by contacting an Indianapolis attorney who is aware of the laws in Indiana since these arrangements can be tricky, so tricky that perhaps even the professionals involved may not be aware of all the potential short sale problems. Also, make sure you exhaust other options of debt relief for your home before you make a final decision.