Short Sale for Insolvency
When a person is unable to pay a mortgage, a lender usually has the legal right to begin procedures for a foreclosure. A rental home short sale will only be approved if a person is deemed insolvent. Proof of annual income, the original sale price of the investment property, all current debts and additional expenses are usually required for review by a mortgage lender. This helps the lender prove that a person is no longer able to pay for the property and could expedite the short sale approval.
Bank Approval is Needed
A person who has financed a home that is used as an investment property most often has a mortgage on the property. The type of loan that was originated will likely determine the type of approval that is needed by a lender before a short sale. Some real estate investment loans are non-recourse types that are guaranteed by financial institutions.
This loan type means that even during a short sale a property owner has less of a chance of being sued for the loss that is undertaken during a foreclosure. There are many lenders that only offer loans with a recourse clause to ensure that their investment is not lost when someone cannot pay off the mortgage.
Tax Consequences are Common
While a person might be approved for a rental home short sale, there can be payable taxes that are due during the tax year when the sale to a lender took place. An IRS form 1099-C is a debt forgiveness form that is not always sent automatically by a lender. It is up to a person going through a short sale to keep track of what forms must be filed at tax time and if all tax payments are made. A 1099-C would also apply to a vacation home used for rentals throughout the course of a year.