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Debt Relief Window Closing Soon

January 19, 2012 2 comments

A tax relief provision enacted by Congress to help financially strapped homeowners will soon be expiring. The 2007 law allows taxpayers to exclude from income the amount of debt that is forgiven or canceled and will expire Dec. 31 of this year.

The Chicago Tribune explains:

Under the tax code, borrowed money need not be reported as income because you have an obligation to repay. But if the lender subsequently cancels what you owe, the IRS requires that you report that debt as income because the duty to repay it no longer exists.

For example, if you owe $250,000 and your lender forgives $50,000 of that debt in a $200,000 refinancing, that $50,000 is considered income. If your combined federal and state marginal tax rate is 36 percent, you would owe $18,000 in taxes.

However, under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers are allowed to exclude from income the discharge of debt on their principal residence — at least until 2013.

So when your lender agrees to a short sale, there is no tax on the difference between the selling price and the amount you owe. When your lender forecloses, there is no tax on the canceled debt. Even when you refinance at a lower loan balance, there is no tax on the difference between what you owed on the old loan and what you now owe on the new one.

However, with the upcoming expiration of the Act, all residential mortgage debt relief that takes place on or after Jan. 1, 2013, will once again be considered taxable income.

Since the average time it takes to process a foreclosure – from the first missed payment to the final foreclosure auction – is about 674 days, as reported by PS Applied Analytics, some experts are sayin the tax absolution window may already be closed for foreclosures.

Short sales and refinancing are also long, drawn-out processes that can take anywhere from two to ten months which means that if finding debt relief was on your list of resolutions, this is one to begin working on sooner, rather than later.

Consult an experienced real estate attorney to determine your best and quickest options for debt relief. We also suggest speaking with a tax professional who can help you determine how your debt relief will affect your taxes.

Life after Bankruptcy

January 11, 2012 1 comment

It’s unfortunate that in today’s economy, many have found their credit suffering. Add a bankruptcy to the equation and credit scores can take a seemingly permanent nose dive. But in a time when people are staying clear of credit cards, how does one recover their credit after bankruptcy?

According to a recent column in the Orange County Register, there are a number of steps to take to help rebuild your credit after bankruptcy.

First, get a copy of all three credit reports (get it free from annualcreditreport.com) and make sure all the information is correct. A bankruptcy can remain on your credit report for up to 10 years. According to the Fair Credit Reporting Act, you can dispute inaccurate and incorrect information. If the creditors do not respond to the disputed item within 30 days, it will be removed from the credit report. This also includes public records that would have your bankruptcy listed.

Second, you need to have active revolving and installment credit being reported on your credit report. This DOES NOT mean you need to have debt to have credit. Instead of keeping balances on your credit cards, keep track of what you spend and pay them off every month.

If you don’t have a credit card, you may need to start with a secured credit card. A secured credit card is a card given by your bank with a credit limit of an amount you deposit into an account. Always make your payments on time and as your credit becomes stronger you can later apply for an unsecured Visa or Mastercard without having to secure it with a deposit.

5 Things You Should Know About Short Sales

December 22, 2011 3 comments

For many homeowners who are facing possible foreclosure a better option is often a short sale.

According to industry researcher RealityTrac, short sales are up 10 percent from the same period last year. While they are becoming increasingly popular for homeowners facing foreclosure, many homeowners still aren’t clear what a short sale is and whether it is the best solution for them.

With help from this article on Christian Science Monitor, we’ve compiled five things you need to know about short sales:

1.   What is a short sale?

A short sale is when a lender agrees to take less than what they’re owed and allows homeowners to sell their property because they are facing financial hardship. Typically, if the property is underwater, that is to say if there is a mortgage balance that is greater than the market value of the home, that property may qualify for a short sale. The homeowner sells the home and the bank marks down the value of the mortgage

However, not every property qualifies as a potential short sale in a bank’s eyes. Lenders will agree to do this if it makes most financial sense for them. According to recent statistics, homes offered as short sales are bought for roughly 20 percent below their market value as opposed to 39 percent under market value for foreclosed homes. Lenders also save on costly foreclosure and maintenance procedures. While short sales are sometimes a better option for the lender, but some investor guidelines make it more profitable for the bank to foreclose.

2.  How do short sales compare to foreclosures?

The biggest difference is how your credit is affected. A short sale, which is carried out similar to any other real estate transaction, does far less damage to your credit than a foreclosure. You may be eligible, under Fannie Mae Guidelines, to buy another home immediately instead of waiting the 5 to 7 years to get approved for another mortgage.

3.  How do short sales compare to bankruptcy?

When faced with foreclosure, some homeowners turn to bankruptcy. In some cases, filing for bankruptcy can be less damaging to your credit profile than having a foreclosure on your record. Filing for bankruptcy will consolidate your debt and can wipe out your liabilities. It will not, however, prevent an eventual foreclosure if the bank has already started the process. A bankruptcy only delays a foreclosure.

If your home is the only debt that is creating your financial hardship, a short sale is probably your best alternative to bankruptcy. Although you can conduct a short sale while in bankruptcy, it requires strategy and a plan. It is best to consult with a knowledgeable bankruptcy attorney and short sale real estate agent before making any decisions.

4.  Are you qualified for a short sale?

To qualify for a short sale, homeowners generally must show legitimate hardship. Common reasons include: death, divorce, loss of job, relocation, etc. Anytime a property is inevitably headed towards foreclosure, a borrower qualifies for a short sale. Also, you can’t be eligible for a loan modification.

The bank is going to want proof in writing that you meet all of these criteria. Getting approved for a short sale can be a long process in itself. If you should happen to find yourself meeting these requirements, find a proper real estate expert who is knowledgeable about short sales. They are different than the average transaction, and it is important that you do your own research.

5. Long Closing Time

Short sale” is sort of a misleading name. It doesn’t refer to the time involved, but to the seller coming up short on the loan payoff. This is part of why short sales can take four to nine months to close, and sometimes even longer. The bank doesn’t just come out and tell the seller how much it would accept for the house, so while the seller and buyer negotiate a price, the seller also has to get that price approved by the bank. Approval can take a long time, and if the bank rejects the first offer, it draws the process out even more.

Lastly, a few things to beware about short sales:

Short sales often involve fewer headaches than losing your home to foreclosure but that doesn’t mean there the process isn’t frustrating. Less than a quarter of short sales actually close and the back and forth between the buyer, the seller and the bank is a big part of the problem. Many frustrated buyers end up walking away from short sales because they get fed up with the process. Even with so many foreclosures on the market, it’s still tough to complete a short sale.

When it comes to short sales, the process can be tricky. If you’re the short seller, the bank can sue you for the loan balance on the home, so it’s important to protect yourself. So-called “deficiency judgments,” in which a borrower can’t pay back a loan, are legal in most states, but not all. Talk to an experienced real estate agent or attorney to find out what the laws are in your state. In many cases, you can require that the bank waive the right to come after you for the difference as part of the short sale agreement.

5 Tips for Underwater Borrowers

November 17, 2011 Leave a comment

Number of Underwater Mortgages on the Rise

Unfortunately, the Home Affordable Refinance Program hasn’t helped as many homeowners as planned – with nearly 29 percent of homeowners with mortgages owing more on their loans than their homes are worth. With that in mind, here some tips underwater borrows should consider now before their situation worsens.

1.)    Wait it out – If you can afford it, you’re not behind on payments and you want to stay in your house for the long run, waiting it out  until the market recovers is an obvious, yet, difficult options to consider, especially since you’ll be paying more in interests than you should be. According to a recent study by CoreLogic and the Associated Press, the average underwater homeowner is paying an interest rate that’s nearly 40 percent higher than they could get if they bought a home today. That translates to paying an extra $200 a
month on a home valued at $250,000, according to the report

2.)    Foreclosure is never the best or only answer – there are many ways to fight to keep your home. Underwater borrowers who don’t qualify for HARP should try to negotiate a loan modification with their mortgage lender. If restructuring the loan is not an option, ask about the possibility of a short sale — which means selling your house at market value, with the remaining loan balance forgiven by the lender.

3.)    Don’t stop making payments – some so-called experts would advise you to stop making payments until the bank forecloses on the property – also known as “strategic default.” The consequences of walking away from your home are severe. Your credit scores will plunge, your lender could sue you, and it may be up to seven years before you can get another home loan – or any other line of credit.

4.)    Declaring Bankruptcy – in extreme cases and as a last resort, bankruptcy is an option that shouldn’t be ruled out. There are two basic types of bankruptcy: chapter 7, where you simply declare you can no longer pay and your debts will be discharged, and chapter 13, where you will be able to pay off your debts over a period of time. However, being underwater on your mortgage by itself isn’t a reason to file bankruptcy. Before taking this drastic step, consult an attorney for the details and ramifications.

5.)    Renting your home – If you decide to put your house up for rent, you might make enough each month to cover your mortgage. That would free you up to live somewhere else. Keep in mind there will be expenses involved with managing your property. Also, many homeowners’ associations regulate or prohibit renting homes out.

Also remember you are not alone so feel no shame in asking for help from qualified experts.  Realtors are not always equipped to provide you with all your legal options. With very rare exceptions, real estate agents aren’t trained or licensed to give legal advice.