It’s the first week into the new year, and many financial changes have already occurred that will affect many households. However, one change did not take affect that could have devastated struggling homeowners. The Mortgage Forgiveness Debt Relief Act was extended for another year.
Before the end of 2012, we had discussed in previous blog postings, the negative implications this could have caused for many struggling homeowners. This Mortgage Forgiveness Debt Relief Act waived forgiveness of mortgage debt from being counted as taxable income from homeowners who had a short sale or mortgage loan modification. The Mortgage Forgiveness Debt Relief Act was implemented in 2007 and was set to expire Dec. 31, 2012. It was recently reported to be extended to the end of 2013.
How does this Mortgage Forgiveness Debt Relief work? Well as a simple example, many homeowners are struggling with having an “underwater mortgage.” This meaning, they owe more on their home that what it is currently worth in today’s market. In many instances, homeowners are agreeing to short sell their home which gets a bank to agree that they can sell their home for less than what they owe on it.
Example: A homeowner owes $250,000 on their mortgage. They bank agrees they can short sell their home for $200,000. This Mortgage Forgiveness Debt Relief waives them from having to pay taxes on the $50,000 difference.
If this act didn’t pass, many homeowners would be paying taxes on debt that would not have been considered forgiven. Thankfully, for the year 2013, homeowners do not need to worry about this tax affecting them because the Mortgage Forgiveness Debt Relief Act was extended.
We are quickly closing out the fourth quarter of the year with only 14 days left. With that being said, we are seeing short sales on the rise as this year comes to a close.
According to a recent article published on CNN Money, the number for short sales that have occurred this year have drastically jumped in comparison to last year’s numbers. CNN article states, “During the three months ended Sept. 30, short sales in which homeowners had fallen behind on mortgage payments soared 22% over last year, according to a report released Thursday by online marketing company RealtyTrac. By comparison, short sales by people current on their payments went up 17%.”
Why is there such a drastic increase in the amount of short sales that are closing?
Well the main reason is due to a tax break for homeowners that could possibly be expiring come the end of this year. The tax break that has the potential of expiring, currently helps homeowners who have unpaid mortgage debt not get taxed on the money. This tax break is called the Mortgage Debt Forgiveness Act. However, this act expires Dec 31.
What will happen if the act is not extended?
Homeowners that have unpaid mortgage debt will have to begin getting taxed on the debt. According to Blomquist, the average amount of forgiven debt in a short sale is approximately $95,000.
Because this can really affect homeowners who are experiencing a short sale, many real estate agents are pushing to close as many short sales as possible by the end of the year, to help their clients avoid this tax. As a result, we will most likely see a large jump in the amount of short sales that will occur in this fourth quarter.
However, those that will not be affected are California, Arizona and 10 other states. According to CNN Money, “ One group left out of the benefits of the tax break are homeowners in California, Arizona and 10 other states in which the IRS does not tax forgiven debt because of those states’ laws.”
With the election over, and President Obama serving another four years, there is discussion now about whether a certain tax break will be extended in order to help homeowners who have experienced a short sale or foreclosure.
In 2007, the Mortgage Forgiveness Debt Relief Act was implemented to forgive the debt of tax payers who experience foreclosures, short sales, or principal reduction. As stated by the IRS, “The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.”
When is this act expiring? The Mortgage Forgiveness Debt Relief Act is set to expire at the end of this year. If this should happen, there will be many homeowners who will be paying a tax on their unforgiven debt. For example, if you short sale your home for $100,000 and you owe $200,000, you would be required to pay a tax on the $100,000 difference of what you owe.
According to CNNMoney, there are about half a million short sales occurring each year, and 50,000 foreclosures each month. This is a great deal of borrowers that will be affected if this relief act is not extended after 2012.
Now, what would it cost to extend this relief act through the end of 2013? According to the office of Sen. Max Baucus, the estimated cost is $1.3 billion. The original bill was $25 billion in order for banks to forgive homeowners mortgage debt.
However, back in August 2012, the bill made it through the senate finance committee, as a bipartisan bill was passed to extend the act through the end of 2013. Now we just have to wait and see if it continues to pass through government.
Now, if the act is not extended there are certain homeowners that may be protected from paying the tax such as Californians. According to CNNMoney, California borrowers would be protected from paying the tax due to how California handles foreclosures.
Hopefully we will know more about the Mortgage Forgiveness Debt Relief Act as the year comes to a close.
Own a FHA Loan? This may be the perfect time for you to refinance if you are stuck with a high interest rate. Rates are still at historic lows, and are providing great opportunities for homeowners to refinance and save a great deal of money.
We have many clients in line to benefit from this program. There are borrowers saving anywhere from $100-$600. The savings is amazing, and truly beneficial to homeowners.
There are many benefits to refinancing your FHA loan to the low interest rates. If you are comfortable with your monthly payment then consider refinancing to lower your rate, but continue making the same payments and pay off your mortgage early!
If you are not comfortable with your payment and want to lower it, then you can do that as well.
If your current loan is a FHA loan, the refinance transaction is one of the most simple and hassle free processes. There is good news to those who owe more on their home than what it is worth– no equity is required. If you have lost equity in your home due to the housing down turn that has taken place, the FHA Streamline is still a possibility to save you money. With a FHA Streamline Refinance, no appraisal is required. The purpose of the FHA Streamline is to reduce your interest rate.
The process is even simple in regards to income verification — there is none. With a FHA Streamline Refinance, we actually leave the income section blank on the application because it is not required to refinance your loan.
Even better, this refinance program is no cost. A true FHA Streamline should be no cost to the borrower.
Right now is a great time to refinance. The word needs to spread to borrowers who feel stuck with a high interest rate and a high monthly payment. There are opportunities to refinance, and you should take advantage of them today.
If you are interested in a FHA Streamline you can contact our mortgage office, Stateline Funding Corp., to get started right away.
Have you recently experience a short sale and wondering when you will be able to purchase a home again?
There are different regulations for different loan types. We will provide the requirements for Fannie Mae, FHA and VA loans for a purchase after experiencing a short sale.
Fannie Mae Loan
With Fannie Mae, one can purchase a home in as little as 2 years after a short sale has been recorded if the buyer is putting 20% down on the home.
There is a 4 year waiting period if the buyer is putting 10% down on the home purchase.
Anything less than 10% will require a 7 year waiting period before being able to purchase a home through Fannie Mae.
With an FHA loan there are varying circumstances that affect one’s ability to purchase a home. The following information is provided by Hud.gov
Borrowers are not eligible for a new FHA- insured mortgage if they pursued a short sale agreement on his or her principal residence simply to
- Take advantage of declining market conditions
- Purchase at a reduced price a similar or superior property within a reasonable commuting distance.
Borrowers current at the time of Short Sale
Borrowers are considered eligible for a new FHA-insured mortgage if, from the date of loan application for the new mortgage
- All mortgage payments due on the prior mortgage were made within the month due for the 12 month period preceding the short sale, and
- All installment debt payments for the same time period were also made within the month due.
Borrowers in Default at the time of Short Sale
Borrowers in default on their mortgage at the time of the short sale (or pre-foreclosure sale) are not eligible for a new FHA-insured mortgage for 3 years from the date of the pre-foreclosure sale.
There are exceptions to the following requirements; however, they require extenuating circumstances that are beyond the borrowers control. Hud.gov explains exceptions stating:
Exception: A lender may make an exception to this rule for a borrower in default on his/her mortgage at the time of the short sale if the
- Default was due to circumstances beyond the borrower’s control, such as death of primary wage earner or long-term uninsured illness, and
- A review of the credit report indicates satisfactory credit prior to the circumstances beyond the borrower’s control that caused the default
These circumstances would need to be discussed with a mortgage lender prior to pursuing a mortgage loan.
The general waiting period for a VA loan after a short sale is 2 years. However, like the other two loan programs, there are different regulations depending on the veteran’s circumstance for a short sale.
According to VALoans.com, a borrower may get approved for a VA loan after short sale, “if the buyer has a qualifying credit score plus a record of dependable payments during the waiting period, sometimes called a “seasoning period” following the short sale.
Anything less than a 2 year waiting period would be determined on the borrowers credit history, circumstance and the lender’s guidelines.
If the short sale was on a VA loan, the applicant may not have full entitlement available for the new loan.