Forgiven debt can send IRS calling

I felt that this is important to write about because so many people don’t realize that forgiven debt is taxable income.  So what is forgiven debt and how does it relate to real estate?  Let’s say that you short sale your home in order because you have to move and the house isn’t worth as much as it used to be and you can’t get for it what you still owe on the loan.  Say you owe $250,000 and you do a short sale for $200,000.  That $50,000 difference is forgiven debt.  You don’t owe it anymore and the bank has taken the loss for you.  Well, in walks the IRS.  They believe that forgiven debt is taxable income.  Whoa!  You lost money, you’re out of your house, and now you owe the IRS?

Yes.  It’s that simple.  However, in 2007, Congress created legislation to avoid this in some circumstances.  As long as the loan was used to purchase or improve the home owner’s primary residence, the IRS had to exclude up to $2 million of that forgiven debt from taxes.  So that’s the good news.  But beware: This legislation is currently set to expire in 2012.  So if now begins the time that you’re starting to fall behind on payments, unless the legislation is renewed, you could owe on it in 2012 or further into the future.  And if the bank sends you a tax form 1099-C because of forgiven debt, it’s crucial that you inform the IRS that you’re eligible for this Congress-enacted exclusion.  Otherwise, they can tax you for it.

It’s also important to realize what else is considered taxable debt and IS NOT included in the exclusion.  This debt will be taxable:

1. Credit card debt.  If you negotiate with your card company to reduce the amount you owe, any amount that gets forgiven is taxable.

2. Mortgage debt from a second home.  The exclusion only applies to your primary residence.  If you lose a vacation house, income property, or second home because of foreclosure, the difference is taxable.

If you’re really in a bind, you can choose to file for bankruptcy.  Any debt that’s forgiven that stems from a bankruptcy is not taxable.  If you have further questions, please contact a CPA to guide you through that and any other tax process.  I can be reached via my Web site.

The next problem with the housing market

I read another fascinating article in the Chicago Tribune again this weekend.  Fascinating.  I was telling family, neighbors, and friends about it.  Fascinating.  As if the housing market isn’t in enough trouble as it is.

So the article discusses the ethics of being a homeowner in this time, during the recession, in this housing market.  Foreclosures are all over.  Short sales are overwhelming the banks.  So what’s the problem now?  Homeowners who have no trouble paying their mortgage, those who can afford to, are walking away from their homes.  They call it “strategic default.”  This is what it’s come down to.  With home values at an all-time low and days on the market going up with increasing numbers, people are sadly walking away from their homes.  They can’t sell.  They can’t rent.  What they’d get for their home if they sell is half, or a quarter, or three-quarters of what their home is actually worth and what they still owe on their mortgage.  So what do they do?

The article talks about a man who lives in Florida who has two properties, both with Bank of America.  He told them he’s going to stop making payments because he can’t sell or rent at a price that would cover his payments and he wants to move out of state.  Since the bank refuses to work with him on a modification or a refinance or adjust the terms of his loan, he’s walking away.  Again, what’s a guy to do?  He said he felt guilty at the beginning.  He’s quoted as saying, “It [the guilt] all stopped when I saw them take $90 million in executive bonuses.  They take bailout money and do nothing for the little guy. They wouldn’t do anything for me.”

I can’t agree more with this homeowner.  I’ve talked about clients who couldn’t refinance or those whose modification wouldn’t go through.  And here the banks are accepting bailout money left and right, upping their salaries, and they won’t work with clients to help them stay in their homes?

So this is going to be a huge disaster.  We already have lenders taking months to respond to buyers interested in a short sale.  They’re just going to have a whopping increase in their inventory now.  Response time will be on the rise, inventory will too, and people who do this won’t get back into the market to buy something new because their credit will be ruined from walking away.  So it’s going to be harder for people to sell or for values to get back to where they should be.

As I said, I feel for these people.  They’re in a tight spot.  But at the same time, it’s going to make the housing crisis an even bigger crisis.  How do we get out of it?  The only remedy I see is more lenders willing to work with their clients and modify existing loans.  It will keep more people in their homes and help the entire market.  Readers, what do you think?  I’d love to hear your thoughts.  Please leave me a comment or visit me online.

The recession is over? Try again.

I’m sure a lot of you have either received information or heard that a group of economists determined that the recession actually ended over a year ago, in June 2009.  I received a CNN Breaking News report in my e-mail, opened it up, read it, and my jaw dropped.  I’m thinking, “Are you kidding?”  If that’s the case, why is unemployment rates still on the rise, foreclosure signs up everywhere, and people struggling to make ends meet?

So after the reports that the recession was over (ha!), even stocks jumped up.  The Dow closed up 122 points yesterday.  Anybody else notice short sale and foreclosure signs popping up everywhere in neighborhoods?  Me, too.  People are abandoning ship because of an inability to cover monthly expenses, whether related to a job loss, debt to cover basic living expenses, or other reasons.  I know one family that’s unsure of what to do because they applied for a loan modification with their lender, were denied, and now owe $8000 plus in unpaid principal to be current on their loan.

Dan North, chief U.S. economist with Euler Hermes, a leading credit insurer in Owings Mills, Md., said, “The economy and housing market may have bottomed out but that doesn’t mean things are good.  Foreclosures and underwater mortgages are still a big problem because of the absence of meaningful price appreciation.”

Home values are still way down compared to a few years ago.  Inventory is up, with a lot of it being bank-owned homes with decreased values, thereby pushing the rest of the home values down.  And in an almost Catch 22, why is inventory up?  Because banks are reluctant to loan money to borrowers unless they have a high down payment and excellent credit scores.  Just because you qualified for a loan 2 years ago doesn’t mean you will in today’s market.  And even if you have the money and the credit score to go with it, if you’re focused on other debts to tackle, do you want to take on a huge additional expense like a house?

I just picture a lot of unhappy people throwing things at the TV when they heard this news.  They’re thinking the same thing I was.  “Are you kidding?  I’m still unemployed with thousands upon thousands in debt about to lose my house and you think the recession is over?”  And not JUST over.  Over a year ago over.

I think Americans could use some positive news.  Some good news: mortgage interest rates are down.  The amount of home sales went up in July.  (We’ll hear how August fared later this week.)  However, I think we still have a while to go before the majority of people believe the recession’s over, especially in the housing market.

What do you think?  Am I totally off base?  Leave me a comment or visit me online.

Obama’s new plan to prevent foreclosures

As I had written about previously, President Obama is trying to do whatever he can to keep homeowners in their homes.  He’s unveiled a new plan to prevent and lower the amount of foreclosures across the country.  The new plan requires lenders to reduce the mortgage payments for their unemployed borrowers for three to six months.  For those having trouble paying but aren’t unemployed, he’s trying to encourage the same lenders to reduce principal payments if you pay your loan on time each month and are current and stay current.

By beginning this plan, if it could prevent a whole bunch of foreclosures at once, it could delay the dramatic decrease in prices and help to stabilize the housing market a little bit.  This way the lower prices will hit over time.  Some in opposition to this plan use that to say this will just delay the inevitable, that these homes will still go into foreclosure, it’ll just take longer.

But it is a benefit to those who lose their job and don’t want to lose their home.  To qualify, you need to live in the home, have a mortgage of less than $729,750, and receive unemployment benefits.  They’ll have to spend no more than 31% of their monthly income on their mortgage.  This plan will be available over the coming months.

What if you owe more than what your house is worth?  For many, this is when they list the house as a short sale.  Meaning, the lender will agree to sell the house for less than is currently owed on the mortgage.  Obama is trying to help people in this situation keep their homes.  It’s possible they can refinance with FHA-backed loans.

In order to qualify for one of these, you need to have a mortgage payment of $729,750 or less, show that you’re in financial trouble, and spend at least 31% of your pretax income on your monthly mortgage payment.  Lenders then can reduce the mortgage payment by about 10%.  You can’t be in default at all.  You must be current on all of your payments to qualify.   However, this plan is a completely voluntary one.  The lenders do not have to agree to do this. 

Do you think that this is a good idea or that it will just delay the inevitable?  I’d love to hear your thoughts.  Please leave me a comment below or visit me online.  More information on the program can be found here.

Government proposal to help with short sales

If you’ve been a buyer looking to purchase a home and put an offer in on a short sale, you know that the paperwork and the wait times can be excruciating.  I’ve seen cases where buyers have had to wait months – as many as 6 – to hear from the lender about whether the short sale has been approved.  The Obama administration is working on a new proposal that would help streamline the short sale process and hopes to roll it out over the next few months.

As a reminder, a short sale is when the lender is willing to accept a less amount of money for the property than what is currently owed.  The lender needs to determine if they will make more money this way than if the home went into foreclosure by the homeowner no longer making payments and then being able to resell it.  This is what can lead to extremely long wait times. 

So what the government is proposing is quicker turnaround times.  They haven’t named a figure yet, but hopefully it will be a maximum of X number of days to get a response from the lender.  They’re also proposing uniform documents required by everyone.  No more specific paperwork for each lender that makes each short sale request different.  They’re proposing to pre-approved short sale terms.  This has the potential to mean that it will be accepted no matter what if it meets a certain percentage back to the lender or if the buyer has a certain amount of financing covered.  That’s still up in the air.

The proposal also includes financial incentives for everyone who takes part.  This includes $1,500 back to the homeowners to help out with relocation costs and having to move.  So a benefit to having to short sale your house will help a lot of people out.  Especially if they need to rent right away and don’t have any money at their fingertips.

Mortgage servicers would earn $1,000.  Investors purchasing the home would get $1,000.  That can help with a lot of remodeling costs, if they’re needed.  Even real estate agents wouldn’t be forced to cut their commission if the bank asked them to.  We’re still waiting to see all the details related to the plan, but the news seems positive thus far.  A streamlined process and money for all involved … what’s the negative?

I’d love to hear your thoughts on this.  Please leave me a comment or visit me online.  More info can be found here.

Short sales, foreclosures, REOs … what’s the difference?

Whether you’re a buyer looking to purchase a property, or a seller who may be behind in their mortgage payment, you’re constantly seeing news articles and reports on how many foreclosures there are because of the housing market.  You may have also come across the terms short sale, bank-owned property, REO… and you wonder, “What is the difference?”  Hopefully, this will help you determine the difference as an investor looking to purchase or a homeowner deciding what to do with the home they can no longer afford.

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Short sales: Because of the housing market, it’s very possible that the home you paid $100,00o for 2 years ago is now only worth $75,000 (just an example).  When you bought the home for $100,000 you put down 5% ($5,000) and got a loan for $95,000.  Well, seeing as how the home is only worth $75,000, you owe more on this home than it’s worth.  This is a short sale.  Now you can no longer afford your mortgage payment and you need to sell.  You will work out a deal with the lender for them to take less than what is owed on the loan. 

The homeowner will list their home with a Realtor.  They will be involved in the pricing, marketing, and need to sign off on any offers as if they were selling the house and getting the money themselves.  Then the offer has to be approved by the bank.  This process can be very time consuming, and it’s not guaranteed that the bank will accept the offer.  As a homeowner, you need to provide the bank or creditor information as to why you want a short sale.  This often includes tax returns, pay stubs, bank statements, and a hardship letter (written by you explaining why you can’t make the payments).  Buyers can wait up to 6 months to get a short sale approved by the bank.

Foreclosures: Once the lender takes possession of the property, it is in foreclosure.  This means that the homeowner stopped making payments on the home and was evicted.  This process can take a year to go through and proceedings are legal matters.  Foreclosures are often auctioned off and must be paid for at the time of purchase in full by cashier’s check.  If you see a home listed in the MLS that says “Foreclosure,” that means it is often in pre-foreclosure. It hasn’t been taken over by the lender at this point, but they’ve begun proceedings to have it auctioned off.  There’s still a chance to purchase it through your Realtor before the final step.  If you’re purchasing a true foreclosure, you will not get to go through the regular process of a home inspection, attorney review, etc.  This is probably not a good idea if you’re a first time buyer.

REOs: REO stands for “Real Estate Owned.”  An REO happens when the bank was unsuccessful in auctioning off the property after the foreclosure, and now they own the property.  They will list it with a Realtor.  Prior to it being listed, the home might need to be cleaned out to remove all the trash left behind and have some repair work done.  The seller is no longer involved at this point since they’re out of the home.  The bank will still have to approve any offers like a regular seller, but the process is much quicker.  You should hear back in less than a week. 

This should help you further understand the difference between these terms.  If you have any more questions, or need real estate advice relating to them, please visit me online.

How to get a great deal on a short sale

If you’re in the market to buy a home, chances are you’ve come across many short sales.  In short, a short sale is where the amount owed on the home is more than what the sellers are asking for it.  According to CNN Money, 14% of homeowners nationwide are behind in their mortgage payments.  There are some advantages to these short sale deals.  First of all, many times the owners still live in the homes, so they’re not distressed or destroyed like some foreclosures might be. 

Here are some tips to get a great deal on your purchase of a short sale:

1. Be aware of what you’re getting into.  Unlike the term short sale, most often these deals aren’t “short.”  It can take the bank upwards of 6 months to approve a deal.  You also don’t want to low-ball the lender.  You can wait 6 months to find out they didn’t even accept your offer.  The owner of the home does have to approve the contract first, before it’s submitted to the lender. 

2. Find a Realtor willing to stick with you.  Since these deals take a long time, you’ll want to find someone that is persistent and can walk you through each step of the process.  Some Realtors don’t want to deal with them at all, because of the amount of time and the amount of work.  But don’t do it on your own.  There is a lot involved that you need to know.

3. Pick and choose carefully.  header-1You don’t want to bid on a home that already has several offers.  Oftentimes the Realtor won’t submit yours until the first one or several have been rejected.  And be sure to pass on homes that have more than one lien against them.  It’s hard enough waiting to hear from one lender, let alone two. 

4. Settle on the right price.  As I said earlier, you don’t want to low-ball the bank.  Make sure your Realtor determines fair market value for the home, before presenting your offer to the seller.  The seller’s Realtor could very well have offered the home at way below market value, just to get some offers on the home.  If the fair market value is lower than the list price, come in 10% lower.  And make sure you have proof of funds or a pre-approval letter before submitting your offer.  Most banks won’t even look at an offer without that.

5. Protect yourself.  Make sure there’s a clause in the sales contract that you won’t have to do a home inspection or appraisal until after the lender approves the deal.  This way you won’t be out hundreds of dollars if the lender never accepts your offer. 

6. Be persistent.  These banks receive hundreds of offers on short sale homes a week.  The paperwork continues to pile up.  Make sure the seller’s Realtor is in touch on at least a weekly basis with the lender. 

With continuous support and a Realtor knowledgeable in the short sale market, you will be able to save money and get a great new home.  Please visit me online for any questions or help with a short sale purchase.