steelmaiden Try this. Check your sshd_config file:
sudo nano /etc/ssh/sshd_config
Then scroll down until you see this line:
Subsystem sftp /usr/lib/openssh/sftp-server
Comment out this line and add underneath it this one instead:
Subsystem sftp internal-sftp
Then reload sshd: sudo service sshd reload
And try again to see if it fixes the issue.