What Happens With A Loan Modification Or Short Sale?

Myth – Your mortgage servicing company or bank must help you modify your mortgage so you can keep your house and your good credit.

Fact – The bank or mortgage company is obligated to maximize profits and/or minimize losses on behalf of its shareholders and regulators. The bank has no obligation to modify your mortgage and if it does, your credit report will likely reflect that you violated a mortgage credit contract. Per this publication it appears, your modified mortgage may prevent you from being able to refinance.  I am now fully researching this topic and will address this in a near future blog.

Myth – The government and my mortgage servicer or bank are here to help you keep your house with theMHA, HOPE, HAMP, HARP, HAFA, etc., programs.

Fact – The government is no more your friend than the bank or mortgage company. The government is doing all that can be done to help the banks remain solvent for the benefit of the economy. The bottom line is that if you get helped in the process, so much the better.

Myth – My real estate agent told me a short sale of my house and mortgage(s) will save my credit.

Fact – A short sale does not protect your credit.  This is simply a settlement of debt for less than the amount owed. The mortgage servicer or bank reports this as a short sale. This is a violated mortgage credit contract and reflects not unlike a foreclosure on your credit.

Myth – A short sale will have no IRS consequences.

Fact – Yes, a short sale will have adverse income tax consequences. Your former lender must issue a 1099 to you regarding the amount of their loss which translates into new income for you. Are you liable to pay the taxes on the 1099? This is a question for a tax or bankruptcy attorney. Hint many if not most tax preparers and accountants have no clue as how to treat 1099(s) from a short sale for one that is insolvent at the time of the short sale. You truly need professional help with this as seasonal tax preparers are simply not trained to understand how to treat a 1099C in the situation of a short sale, bankruptcy or foreclosure.

As always do not hesitate to write back with comments or questions.  I read everything that comes back, even though I don’t always get a chance to respond as quickly as I would like.

Financially Speaking – James Spray, CCMB, CNE – November 21, 2010

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