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.”
Why are mortgage refinances on the rise?
Many homeowners want to take advantage of the historically low interest rates and reduce their monthly payment. When rates drop, it does not necessarily increase home purchases, but rather increases mortgage refinances.
The demand for refinancing has gone up since rates have dropped below four percent. Homeowners are reducing their monthly payments a great deal, and some even paying off their mortgage early by reducing the length of their term.
According to the Mortgage Bankers Association, nearly 30 percent of refinances are for the HARP 2.0. With the HARP 2.0 program, borrowers are able to refinance their mortgage regardless of equity as long as they are current on their payments. It is estimated that HARP 2.0 refinances are lowering borrowers’ payments by as much as 26 percent according to the economists at the Federal Reserve Bank of New York.
What other programs are homeowners refinancing under?
The other popular program that has just recently been launched is the Federal Housing Agency’s version of HARP. Changes have been made to the FHA Streamline that will benefit FHA borrowers who have a mortgage owned prior to June 1, 2009. The FHA Streamline is an extremely easy refinance that can be completed in 30 days or less when done correctly. The biggest benefit of this program is that there are no costs involved. The borrower will pay nothing to refinance, and no costs will be added to the loan balance. It is just to lower the borrower’s interest rate and monthly payment.
If you are interested in refinancing your current mortgage to the historically low interest rates you can get started here.
Did you know that you do not have to go to a major bank in order to refinance using HARP 2.0?
It’s true! Many consumers believe they either have to contact a major bank or their previous lender in order to refinance. You can actually contact any mortgage lender in your area, which is beneficial to those experiencing the “waiting game”.
For example, Bank of America is one of the major banks that if placing customers on a waiting list due to mass amounts of refinance applications. If you are currently not a customer of Bank of America then some over the phone applications will be placed on a 60 to 90 day hold.
However, with our company, Stateline Funding Corporation, we are able to take refinance applications over the phone and online without making you experience the “waiting game”. One of the benefits of working with a private mortgage company is the one-on-one interaction with the broker themselves. There is no waiting list for those that qualify now under HARP 2.0, so you can take advantage of the low interest rates right away.
After speaking with Fannie Mae, they are still expecting their underwriting systems to be updated by March in order to start servicing homeowners with LTV (Loan-To-Value) ratios over 125%. They already removed the LTV maximums; we are just waiting on the systems to be updated. Once the systems are running, we will definitely provide information for the homeowners who fit that category.
Right now, HARP 2.0 is still accepting applications for LTV ratios up to 125%. If that is your scenario, then you can click here for a free pre-qualification.
Did you look up your mortgage loan using the Fannie Mae or Freddie Mac look up tool?
We have had clients that used the tool and are positive that Fannie Mae or Freddie Mac own their loan, but it shows that it cannot be found. Don’t give up! If you are certain, Fannie Mae is suggesting for all borrowers to contact their servicer to find out. The reason being, Fannie Mae’s look up tool only represents 87% of their loans on file, so yours may not show up due to inaccurate information, or other miscellaneous reasons. Give your servicer a call to find out if you can benefit from HARP 2.0.
You can always contact Stateline Funding Corporation if you have further questions about HARP 2.0.