Flat Fee MLS Blog

                                                    The Mortgage Forgiveness Debt Relief Act prohibits the IRS from demanding income tax payments from home sellers whose lenders write-off a percentage of the outstanding debt balance owed on their loan. The act rocketed through the Senate and the House in the final 10 days of the Congressional session. President Bush signed the bill into American law on December 20, 2007.

It’s biggest advantage is for investors and realtors. The legislation, which is in effect now, should calm the fears among home owners who are financially stressed, that participating in a short-sale will leave them exposed to heavy taxes the following year. Delinquent home owners steering for foreclosure had to factor a federal tax code into their decisions on whether to participate in a short sale or other type of debt forgiveness.

For now, the tax burden has been removed from the table until 2010. Investors and realtors should encounter one less objection by home sellers wanting to participate in a short-sale, creating a win-win outcome for all involved. Investors can now acquire, renovate, rent-out or resell houses at deeply discounted prices.

This should take some pressure off home owners with pre-foreclosure opportunities as they get a helping hand from big brother.

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 Short Sale: An alternative to foreclosure for down-on-their luck homeowners. It’s a sale for less than the owner owes on their home, and is never easy. 

A short sale is not a simple process and it requires the lender’s approval at every stage. If an offer is made, the bank needs to decide if it is within the range they will accept. If they do accept it, the owners need to find out for sure if their remaining debt will be absolved. Some lenders will do this but others may force the seller to pay their remaining debt by selling off their other assets.

Foreclosures mark one’s credit rating for seven years and the impacts of foreclosure are far reaching and negative. The chance of being absolved of debt is very appealing to down-on-their-luck home-owners, considering the alternative is to foreclose. However, even though a short sale shows up differently on your credit report it can still have a negative impact. 

Most banks prefer to accept a short sale than to foreclose, as they must pay taxes on every property in their possession. Taking a small cut in the sale of the home may still save them the money and hassle involved in foreclosing. So short sales are a better option, but they can end up taking months longer than conventional home sales.

A short sale is a serious thing, and won’t be accepted by the lender without proof that the market drop has created a situation wherein the homeowner will absolutely not be able to sell the home for what they owe. Also, a short sale usually can’t happen until the homeowner is in default, or is about to go into default. The homeowner will probably be expected to show, in writing, why they are unable to make further payments or pay the remainder of their debt. Suitable reasons include a death or critical illness in the family, divorce, loss of a job or bankruptcy. Homeowners will also need to show the lender that they have little or no assets. Ultimately, it’s in the lenders hands whether or not a short sale is accepted.

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