Q: I am in the process of closing on a short sale on my primary residence. I owed the bank 135k and the bank has agreed to let me sell the house for 42k. The bank says it will not pursue the deficiency (which I think is great) and will report the debt as “settled for less than the amount owed.”
I was paying mortgage insurance and recently received a call from a contractor doing a review for the mortgage insurance company. This person asked me several questions; one of them was whether I felt that something was wrong in the origination process. I responded that it was expensive. The reviewer also said the bank would file a claim after the closing for the deficiency. If the bank gets paid for its loss by the mortgage insurance company, shouldn’t the debt be reported as “settled” or “paid” instead?
Your advice will be greatly appreciated.
A: Thanks for your question. It sounds like you may be confusing two separate issues here. The first issue is the issue of the settlement and how it will be reported. That’s between you and the lender. Since you are settling the debt with them for less than you owe, it sounds like they will be reporting it accurately to the credit reporting agencies if they list it as “settled for less than the amount owed.” Check your credit reports about 60 days after this is finalized to confirm that the loan shows a zero balance remaining.
The second issue is the involvement of the mortgage insurance company. It sounds like it is getting involved because it may have to pay a claim to the mortgage lender. Anne Weintraub, a Florida real estate attorney and partner in the firm of Band Weintraub, P.L. in Sarasota, Florida warns that “homeowners may have mortgage insurance or their lenders may have insured the loan. This means the mortgage insurance company must approve the short sale, can demand a contribution from the homeowner, and can stop a short sale from happening. This is because the mortgage insurance company will likely be responsible to cover some of the bank’s losses.” Hopefully you are working with a real estate attorney to handle your short sale. If not, you should get in touch with one right away and discuss this call from the mortgage insurance company.
And don’t forget to check with a tax advisor ASAP to find out if you may have to pay taxes on the forgiven debt.
Image: Daniel Borman, via Flickr