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Mortgage Debt Relief Act Extended for Another Year

Struggling homeowners who are considering a short sale or modification will be eligible for tax relief in 2013. 

The “fiscal cliff bill” passed by Congress on January 1 included a provision to exclude borrowers from paying taxes on debt forgiven through a short sale, foreclosure, or loan modification.

Known as the Mortgage Debt Relief Act of 2007, the act was scheduled to expire December 31, 2012, but received an extension for another year.

 

What You Need to Know about Cancellation of Mortgage Debt

Posted By susanne On March 11, 2012 @ 1:07 pm In Consumer News and Advice,Home Owner News,Real Estate Information,Today's Top Story,Today's Top Story - Consumer | No Comments

[1]This column is brought to you by the NAR Real Estate Services group.

A lender will, on occasion, forgive some portion of a borrower’s debt. The general tax rule that applies to any debt forgiveness is that the amount forgiven is treated as taxable income to the borrower. Some exceptions to this rule are available, but, until recently, the borrower was required to pay tax on the debt forgiven. A new law enacted in December 2007 provides relief to troubled borrowers when some portion of mortgage debt is forgiven. However, this relief expires on December 31, 2012 and NAR will be working to obtain an extension throughout the year.

Below is some general information you need to know about this law and cancellation of mortgage debt.

General Rule for Debt Forgiveness
If a lender forgives some or all of an individual’s debts, the general rule is that the forgiven amount is treated as ordinary income and the borrower must pay tax on the forgiven amount. Exceptions apply for bankruptcy, insolvency and certain other situations, including mortgage debt.

Current Law for Mortgage Debt
(Jan. 1, 2007 through Dec. 31, 2012): A borrower can be excused from paying tax on forgiven mortgage debt. The debt must be secured by a principal residence and the total amount of the outstanding obligation may not exceed the original mortgage amount plus the cost of any improvements.

Does the relief apply only to a sale?
No. The provision has broader application. Lenders might forgive some portion of mortgage debt in a short sale (when value at sale is less than the amount owed) or in a foreclosure where the debt is wiped out. In addition, if a borrower still living in the home is able to make an arrangement with a lender that reduces the principal balance of a mortgage, the amount forgiven in that workout will not be taxed.

Can the homeowners in a short sale or foreclosure claim a loss?
No. The loss is considered a personal loss and is, therefore, ineligible for either capital loss or ordinary loss treatment.

What happens to the seller when mortgage debt is forgiven?
Until January 1, 2013, the homeowner will pay no tax on any forgiven amount.

Does this provision apply to a refinanced mortgage?
Only in limited circumstances. The relief provision can apply to either an original or a refinanced mortgage. If the mortgage has been refinanced at any time, the relief is available only up to the amount of the original debt (plus the cost of any improvements). Tax relief is generally not available for second mortgages or home-equity lines of credit where the funds are not used for home improvement. Any amount that is not eligible for the relief provision will be taxed as ordinary income.

How does the homeowner get the correct information to the IRS?
The lender is required to provide the homeowner and the IRS with a Form 1099 reflecting the amount of the forgiven debt. The borrower/homeowner must file a Form 982 to reflect the amount forgiven and to show the reason why the forgiven amount is not taxable. Any taxable portion of forgiven debt will then be reported on the homeowner’s Form 1040 for the tax year in which the debt was forgiven.

What if a property declines in value but the owner stays in the house?
The provision would not apply. The provision applies only at the time of sale or other disposition or when there is a workout (reduction of existing debt) with the lender.

Do all lenders forgive mortgage debt when property values decline or the home is in foreclosure?
No. Some states have laws that allow a lender to require a repayment arrangement, particularly if the borrower has other assets. Forgiveness of debt is always at the lender’s discretion.

Linda Goold is the Tax Counsel for National Association of REALTORS®.

 


FORECLOSURE

Short Sale Information

If you Deed your house back to the bank it is still a foreclosure on your record.

If you are foreclosed, presently it will take about 4 years before you will be able to get back in the housing market.

If you sell your house as a short sale, you could be back in the housing market in two years.

A short sale does not go on your credit as a foreclosure. You can still have your credit cards and purchase an automobile.

Before the bank will approve a short sale you must have a written offer for the property. This means that the house should be listed which I will do, and our office handles short sales.

Some banks are really streamlining the process. Do not skip payments to try and qualify for a short sale.

If you have your house listed for sale or are looking at selling at a price that is at market level or above you should consider the chances of it becoming a short sale. This is particularly important if you are relocating that you have an understandable plan for what may happen as time goes on.

There is no charge to meet with you and evaluate your situation.

 

 

 

How to Avoid Foreclosure


 

 

The guidance below (and in the "How to Avoid Foreclosure" pamphlet) is applicable to homeowners with FHA Insured loans. While a good deal of this information may apply to all homeowners in danger of losing their homes, not all of the foreclosure avoidance tools mentioned may be available to you if you have a VA or conventional loan. Additionally, HUD/FHA does not have any Loss Mitigation oversight over VA or conventional loans. Please contact your lender or a housing counseling agency.

Q: What Happens When I Miss My Mortgage Payments?

Foreclosure may occur. This is the legal means that your lender can use to repossess (take over) your home. When this happens, you must move out of your house. If your property is worth less than the total amount you owe on your mortgage loan, a deficiency judgment could be pursued. If that happens, you not only lose your home, you also would owe HUD an additional amount.

Both foreclosures and deficiency judgments could seriously affect your ability to qualify for credit in the future. So you should avoid foreclosure if possible.

Q: What Should I Do?

  1. DO NOT IGNORE THE LETTERS FROM YOUR LENDER. If you are having problems making your payments, call or write to your lender's Loss Mitigation Department without delay. Explain your situation. Be prepared to provide them with financial information, such as your monthly income and expenses. Without this information, they may not be able to help.
  2. Stay in your home for now. You may not qualify for assistance if you abandon your property.
  3. Contact a HUD-approved housing counseling agency. Call (800) 569-4287 or TDD (800) 877-8339 for the housing counseling agency nearest you. These agencies are valuable resources. They frequently have information on services and programs offered by Government agencies as well as private and community organizations that could help you. The housing counseling agency may also offer credit counseling. These services are usually free of charge.

Q: What Are My Alternatives?

You may be considered for the following:

Special Forbearance. Your lender may be able to arrange a repayment plan based on your financial situation and may even provide for a temporary reduction or suspension of your payments. You may qualify for this if you have recently experienced a reduction in income or an increase in living expenses. You must furnish information to your lender to show that you would be able to meet the requirements of the new payment plan.

Mortgage Modification. You may be able to refinance the debt and/or extend the term of your mortgage loan. This may help you catch up by reducing the monthly payments to a more affordable level. You may qualify if you have recovered from a financial problem and can afford the new payment amount.

Partial Claim. Your lender may be able to work with you to obtain a one-time payment from the FHA-Insurance fund to bring your mortgage current.

You may qualify if:
  1. your loan is at least 4 months delinquent but no more than 12 months delinquent;
  2. you are able to begin making full mortgage payments.

 

When your lender files a Partial Claim, the U.S. Department of Housing and Urban Development will pay your lender the amount necessary to bring your mortgage current. You must execute a Promissory Note, and a Lien will be placed on your property until the Promissory Note is paid in full.

The Promissory Note is interest-free and is due when you pay off the first mortgage or when you sell the property.

Pre-foreclosure sale. This will allow you to avoid foreclosure by selling your property for an amount less than the amount necessary to pay off your mortgage loan.

You may qualify if:
  1. the loan is at least 2 months delinquent;
  2. you are able to sell your house within 3 to 5 months; and
  3. a new appraisal (that your lender will obtain) shows that the value of your home meets HUD program guidelines.

 

Deed-in-lieu of foreclosure. As a last resort, you may be able to voluntarily "give back" your property to the lender. This won't save your house, but it is not as damaging to your credit rating as a foreclosure.

You may qualify if:

 

  1. you are in default and don't qualify for any of the other options;
  2. your attempts at selling the house before foreclosure were unsuccessful; and
  3. you don't have another FHA mortgage in default.

Q: How Do I Know if I Qualify for Any of These Alternatives?

Your lender will determine if you qualify for any of the alternatives. A housing counseling agency can also help you determine which, if any, of these options may meet your needs and also assist you in interacting with your lender. Call (800) 569-4287 or TDD (800) 877-8339.

Q: Should I Be Aware of Anything Else?

Yes. Beware of scams! Solutions that sound too simple or too good to be true usually are. If you're selling your home without professional guidance, beware of buyers who try to rush you through the process. Unfortunately, there are people who may try to take advantage of your financial difficulty. Be especially alert to the following:

Equity skimming. In this type of scam, a "buyer" approaches you, offering to get you out of financial trouble by promising to pay off your mortgage or give you a sum of money when the property is sold. The "buyer" may suggest that you move out quickly and deed the property to him or her. The "buyer" then collects rent for a time, does not make any mortgage payments, and allows the lender to foreclose. Remember, signing over your deed to someone else does not necessarily relieve you of your obligation on your loan.

Phony counseling agencies. Some groups calling themselves "counseling agencies" may approach you and offer to perform certain services for a fee. These could well be services you could do for yourself for free, such as negotiating a new payment plan with your lender, or pursuing a pre-foreclosure sale. If you have any doubt about paying for such services, call a HUD-approved housing counseling agency at (800) 569-4287 or TDD (800) 877-8339. Do this before you pay anyone or sign anything.

Q: Are There Any Precautions I Can Take?

Here are several precautions that should help you avoid being "taken" by a scam artist:

  1. Don't sign any papers you don't fully understand.
  2. Make sure you get all "promises" in writing.
  3. Beware of any contract of sale of loan assumption where you are not formally released from liability for your mortgage debt.
  4. Check with a lawyer or your mortgage company before entering into any deal involving your home.
  5. If you're selling the house yourself to avoid foreclosure, check to see if there are any complaints against the prospective buyer. You can contact your state's Attorney General, the State Real Estate Commission, or the local District Attorney's Consumer Fraud Unit for this type of information.

Q: What Are the Main Points I Should Remember?

  1. Don't lose your home and damage your credit history.
  2. Call or write your mortgage lender immediately and be honest about your financial situation.
  3. Stay in your home to make sure you qualify for assistance.
  4. Arrange an appointment with a HUD-approved housing counselor to explore your options at (800) 569-4287 or TDD (800) 877-8339.
  5. Cooperate with the counselor or lender trying to help you.
  6. Explore every alternative to keep your home.
  7. Beware of scams.
  8. Do not sign anything you don't understand. And remember that signing over the deed to someone else does not necessarily relieve you of your loan obligation.

Act now. Delaying can't help. If you do nothing, YOU WILL LOSE YOUR HOME and your good credit rating.


 
Content updated April 28, 2006
 
U.S. Department of Housing and Urban Development
451 7th Street, S.W., Washington, DC 20410
Telephone: (202) 708-1112

 

 

Short Sales

Do not allow your house to be foreclosed on.

Your lender will normally require your house to be listed. 

The following documents will be needed.

 

  • Last Two Paycheck Stubs for each borrower
  • Last Filed Tax Return for each borrower
  • Last Two Bank Statements
  • Hardship Letter - an informal letter explaining why you are unable to make your payments and why you must sell your home
    (Examples: Divorce, Lost Job, Job Transferred, Family Grew)
  • Statements from any non-retirement savings / investment accounts
  • Personal Financial Statement (ask us for this form)
  • Short Sale Authorization - form that allows us to try to procure a short sale approval on your behalf (ask us for this form)

 

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