Question: At the end of 2006 we voluntarily gave our house back to the mortgage company. We had our house on the market for three months, received one offer but it was lower than what we could accept.

A year earlier we refinanced our of home to a 3/1 ARM. The payment was almost $3,000 a month -- it was killing us so we decided to sell. However, we faced a prepayment penalty equal to six month's interest or $18,000.

I worked with the mortgage company to forgive the penalty but they would not budge. We had to decline the sale offer because we couldn't pay the penalty.

At this point we are current on our mortgage, but have had some late fees for not paying the flood insurance that was included on our loan. We decided to do a deed of lieu and it was agreed between us and the loan company that we had to first miss a mortgage payment, vacate the property and show a picture of the vacant house. So in December of 2006 we missed the mortgage payment and vacated the property. The house we left was on the market for a year through the loan company name and no buyers. They just recently put it up for auction and it sold for $262,000. We organically owed $353,000 on the home. The market value of the property was $419,000. When we first bought the property new we paid $212,455.

Will we have to pay a tax on the unpaid loan balance?

Answer: This is a complex matter, but let's try to figure out where you stand.

First, the property does not have a market value of $419,000 today. It may have at one point, but not currently. If $419,000 was a fair market value at this time then a buyer would have purchased the property at that price. It didn't happen.

Second, you owed $353,000 but the property only sold for $262,000. Considering that there are various fees and charges, it's possible that you have as much as a $100,000 short-fall.

The $100,000 may or may not be "imputed" and taxable income, depending on whether or not you have a recourse loan (where the lender can go after you for any unpaid loan balance) or a nonrecourse loan (where the sale of the property satisfies the debt, even if the sale value is less than the principal balance).

If your unpaid balance is considered taxable, then you need to watch two bills on Capitol Hill. In the House, HR 3648 would make unpaid mortgage debt non-taxable. This bill passed the House on October 4th. In the Senate, S 1394 , similar legislation, awaits consideration.

Since we don't have final language for the measures we can't say what relief they will actually provide. You will next the assistance of a CPA, enrolled agent or a tax attorney for specific advice.

In particular, if a relief bill becomes law you need to see when it takes effect. The House bill only applies to unpaid mortgage debt generated after January 1, 2007. The Senate bill does not show a specific start date. The final language, if a bill becomes law, needs to be reviewed with care to see whether you qualify for relief.

Question: Is it wise for a husband and wife to refinance a mortgage if the wife's name is taken off due to infidelity.

Answer: Off the deed, off the mortgage, or both? This is a situation with far bigger problems than who has a claim to what. It's wise to do absolutely nothing until you have met with an attorney because the answer will depend on whether or not you are staying together, getting divorced, forgiving one another or going to war, the jurisdiction where you live, etc.

Question: Is there a website that I can log into to find information for a short sale?

Answer: There's a ton of information online regarding short sales at RealtyTimes.com as well as other sites. In particular, Moe Bedard has an always-interesting site at LoanWorkOut.org .

There's no harm in looking at websites for general information and ideas -- indeed, much good information is online. That said, a short sale is a complex event which involves modifying a mortgage, negotiating with a loan servicer, transferring title, possibly owing big taxes on unpaid mortgage debt, etc. A lot of money is at stake, as is your credit standing. This is not a task for homeowners, get a local real estate attorney to assist.

Question: We had a contract from a purchaser who wanted to buy our home, but the purchase was contingent on the sale of her home. We agreed upon a closing date and a possession date at the end of September. The closing date passed, so we (and our agent, apparently) thought that the contract was void -- this was because a major term of the contract had not been fulfilled, and the buyer had not made any effort to extend.

We accepted an offer from a second party, and they are scheduled to close at the end of October. Now party one has returned: her house sold and she wants to go ahead with ours, but there is no new closing date, etc. Does she have a claim on our house? What can we do to work this out in a timely fashion? Thanks!!

Answer: How, exactly, was the contingency written? For instance, did it provide that the first buyer had so many hours, say 72, to either remove the contingency and buy the property or to get back the deposit and not buy the property if you notified him of a back-up offer? Did the first buyer provide a release of any kind in exchange for a return of the deposit? Was the deposit from the first buyer returned at all?

If the contingency with the first buyer was unclear and the deposit not returned then you may well be in the position of having "sold" one house to two buyers. This is the kind of dispute which has sent the children of many lawyers through college.

Question: We are thinking about building a duplex and then selling one side and living on the other side. What type of paperwork do you have to do to sell the other side? It wouldn't be considered a condo because there wouldn't be any fees. What would we draw up in case the roof needs to be replaced in 25 years, etc?

Answer: A "condominium" may not require fees. A condominium is basically an arrangement where there are common areas with joint ownership as well as private areas with separate title and individual ownership.

You do not want to buy a duplex and then divide the property in two. Relative to the cost of the property, the paperwork is likely to be profoundly expensive, you will have to refinance (because part of the security for the loan used to acquire the property would be gone), there will potentially be multiple transfer taxes and closings (in effect, you will be re-selling the property with half to you and half to someone else), etc.

An alternative idea works like this: Buy a property with two to four units. Live in one, rent the rest and you'll qualify for owner-occupant financing. After a few years buy another property and rent your unit in the first property. Much simpler.

Question: I have a client who owns a home. He lived in the home for years, later he refinanced and also open a line a credit. Now he is underwater; the value of his home is lower of his debt.

He wants to short sale the property and the first lender is willing to work the short sale but the lender that extended the line of credit will not. The second lender says that if they accept the short sale then they will lose the right to sue the owner for the deficiency on the loan. If the property is foreclosed by the first lender and the second gets wiped out at the time of the sale, can they still sue the owner?

Answer: You may have a borrower who has been foreclosed -- but perhaps not a borrower who is bankrupt. Since the borrower may still have assets it's possible that a lender who stands to lose on a loan will seek a judicial foreclosure and sue for any loss. However, what a lender can do or not do depends on the jurisdiction where the property is located and other factors. For specifics, please speak with a local real estate attorney.

Question: After our house was inspected, the buyer asked for money to repair some problems. Because it's so close to closing, they asked that it not be included in the official contract. What would be the problem or liabilities to me if this is done?

Answer: I have a very boring view of such matters. You are being asked to give money to a buyer for repairs. Fine. The lender should know about it. It should be reflected in the closing papers. Otherwise this arrangement has the scent of undisclosed cash back to the buyer and that's not a good idea.

Settlement providers prepare paperwork with computers. It takes seconds to change forms to reflect any amendment to the sale agreement.

If not declared and the lender finds out, the lender may wonder if the payment is a discount on the sale price -- meaning the loan amount should be reduced and cash from the buyer should be increased.

Is all the money actually needed for repairs? Perhaps set up an escrow account at closing to hold a specified amount of cash for repairs -- and any money not used for construction within a certain timeframe will then be returned to you.

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