Short Sales - What you need to know about mortgage debt forgiveness.
With the value of properties dropping over the last couple of years many people have been forced to sell their homes for less than they owe on the property. When this happens, the bank can require that the people who owe the mortgage still owe the outstanding balance or it can forgive the outstanding amount, called mortgage debt forgiveness. While having the bank forgive the outstanding mortgage balance sounds great, there are other considerations that you need to think about first.
Generally, any debt that has been forgiven is considered taxable income by the IRS. However, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007 which forgives taxes on the amount of mortgage forgiveness if a few conditions are met. First, the property sold on which mortgage forgiveness was given must have been the taxpayers primary residence. Second, if the debt forgiven was for a refinance, the income from the debt forgiveness can only be forgiven if the refinance was used to improve or repair the primary residence. Thus, if you refinanced and used the money to pay off credit cards or other debt, the debt forgiven would still be taxable as income for IRS purposes.
What is a short sale?
While the housing market and economy are gradually showing signs of improvement, there are still many people who are behind on their mortgage payments and unsure of how to proceed. One option is a short sale.
Short sales are when the owners sell the mortgaged property, with the banks approval, knowing that the house will likely sell for less than the outstanding mortgage amount. Some banks will then write off the difference between the outstanding mortgage amount and the selling price of the home. However, that is not a guarantee so you should talk with your mortgagor to understand exactly what they will allow and get their approval before listing your house for sale.
If you are facing the possibility of losing your home, talk to your bank and a local real estate agent about the options. Having a portion of your loan written off through a short sale will hurt your credit much less than going through a foreclosure.
Should I consider a short sale?
Today nearly 1/3 of all homeowners owe more on their homes then the homes are worth. If the homeowner can continue to make the mortgage payment and isn’t planning on moving anytime soon, that is not a problem. However, if the homeowner needs to sell the home being underwater on the house can be a huge problem.
In certain areas of the country, the real estate market is flooded with short sales and foreclosures. Home sales are picking up but buyers are still able to name the prices they are willing to pay for the properties. Increasingly, banks are holding the homeowners responsible for the balance left between a home’s selling price and the selling owner’s outstanding mortgage. Banks have taken a hit and now the stimulus money the got from the government keeps their top executives from earning the big bucks they want from salary and stock options so the banks are doing their best to repay the government and avoid needing any additional stimulus because the CEO wants his millions. That may sound a bit harsh, but the reality is, banks are not as willing to negotiate a short sale down and write off the balance now as they were a year ago.
Before starting a short sale, talk to your banker to see if you qualify for a loan modification or some other program that will let you stay in your home
Piercing the Corporate Veil
With so many people starting their own businesses now, it is essential that they get proper advice in setting up the companies to ensure that they don’t end up with issues later on in the life of the company.
Many people like to form corporations because of the limited liability for shareholders. Limited liability means that the shareholders are liable, meaning they can lose, only the amount of their investment. Thus, if the corporation owes $200,000 but only has $100,000 in assets, you as the sole shareholder will not be personally liable for the extra $100,000 owed to the creditors. That means that the creditors can only get the money that is actually in the corporation.
Small nonpublic corporations need to be careful when setting up the corporation to ensure that creditors can’t come back and pierce the corporate veil. This means that the creditor claims that the corporation is just a veil to protect the shareholder and would allow the corporation to be put aside and the creditor could then go after the shareholder to get payment for money owed.
To prevent a creditor piercing the corporate veil, corporations need to do the following:
1. Observe corporate formalities - hold shareholder meetings
2. Do not co-mingle corporate funds with the shareholders private funds - get a separate bank account for the corporation
3. Control of shareholders over the corporation - better to have more than 1 shareholder and vote for important decisions
4. Shareholder can’t borrow corporate funds without a contract to repay - don’t move funds between corporate and shareholder accounts without paperwork to show a business reason for moving the money
Behind on your mortgage?
Many people today are falling behind on their mortgages. Thanks to legislation the Obama administration passed this year there is hope.
First you need to assess why you are falling behind on your mortgage. Did you or your spouse lose your job, did you have some unexpected medical expenses, were you or your spouse injured and unable to work? Any of these excuses is very sympathetic and bankers will be interested in working with you to find a way for you to keep the house and make payments more manageable. However, you have to tell the banker what is going on before they can help you.
Bankers are most willing to work with clients who have a previous good record of paying their mortgage on time. This helps to show that you are responsible with your credit and really do want to live up to your agreements but due to circumstances beyond your control, at the moment, you just can’t make the payments.
Don’t think of the bank as the enemy. They want you to keep paying for the house. If they had to foreclose, it would cost them an average of $50,000 per house to foreclose. In addition, many houses that are currently in trouble were purchased within the last three to eight years and the values have fallen since then so the bank would not be able to get as much for it as they are owed on the loan. Thus, the banks have just as much incentive as you to work out a plan to ensure that you can continue to make payments, either at a lower interest rate or for an extended period of time, as you have for wanting to keep your home.
If you are behind on your mortgage give your banker a call, you might be surprised.
Housing, is this a good price, will it fall further, how do I know?
Florida was hit hard during the housing bubble. Prices escalated like crazy. Now they are falling like a rock. I have been researching some potential rental purchases for a client and the asking price for the houses are currently $200,000 less than they sold for in 2005/2006. That may seem like a lot, it may not, however, you don’t have all the stats yet. In 2005, one house was purchased for $360,000, today it is selling for $159,000! That is a huge difference. So what went wrong and how do I know that $159,000 is a good price or will it continue to drop even further?
There is no absolute way to know whether you are getting a great price on real estate or if the value will fall further, however, by looking at certain factors about the area, you can determine whether the price asked is realistic for the area. Sound confusing, let me explain.
During the housing bubble, many times the housing values were much higher than the average incomes in the area (City, County, etc.) could support. In Jacksonville, FL during that time, the average salary was around $30,000 per person but the average house was over $200,000. How can a person making $30,000 afford a $200,000 house? They can’t, that ’s why we are in the mess we are in. So when purchasing a house, you want to look at the average salary/income for people in that area. Not only is this important to determine whether the house is overvalued but also when considering your ability to resell the property later. If most people in the area don’t make enough to afford the house it could take a long time to sell.
Another factor that you should look at when determining whether the house is overpriced is to look at how many homes are for sale in the area. More houses available for sale drives down the price. It is the basic economic concept of supply and demand. If there is more supply than demand, the price goes down.
When looking for how many homes are for sale, you will also want to know how long the homes have been on the market. If 5 houses in the neighborhood just went on the market last month, the price of the house has likely not been adjusted yet to reflect the excess houses on the market. If the house has been on the market for a year, it is likely that the house has been adjusted down from the original listing price, but it may still be a bit high since it is still on the market after such a long time.
The bottom line is there is no absolute way to know what the best price is, you need to go with what you think the house is worth and if the seller accepts it, yeah you got it, if not move on there are plenty of other properties available.
Need to Sell Quick to Avoid Foreclosure? Check out these tips to sell your house.
Many homes today are being sold in short sales. Short sales are when the bank agrees to allow the homeowner to sell the house for less than the outstanding balance of the mortgage. This can be a great option for banks as it saves them the cost of going through a foreclosure proceeding and if the house sells, it keeps the bank from having to sell the house. This can also be a better option for homeowners as a short sale looks better on a credit report than a foreclosure.
Before proceeding to offer your house for sale under a short sale agreement, you should first talk to your bank about your situation and see what they would advise and the amount that they would be willing to agree for you to sell the house for. It would also be a good idea to consult a real estate lawyer as some districts require the homeowner to still be liable for the difference between the selling price of the house and the outstanding mortgage.
Once you have decided that a short sale is a viable option for you, contact a realtor to list the property and take a good look at your house. To you it is a home and all the nicks and stratches on the walls may have memories, however, to potential buyers these only represent extra expense that they will have to sink into the home to bring it up to their standards.
It might be worthwhile to hire a person to come in and stage your house for potential buyers. Staging is when a person comes in and makes some changes to the house to make it more appealing to potential buyers. This can include things from decluttering rooms to make them appear more spacious, rearranging furniture, and adding homey touches like fresh flowers.
There are plenty of homes on the market right now so you need to differentiate your house from the others through staging or making a few changes to update the house. At the moment there are plenty of out of work homebuilders willing to work for excellent rates so if you were considering getting rid of that 1970s shag carpet and outdated wallpaper this is a great time to do it. You don’t need to replace it with top of the line products, but making a few simple changes like that will definitely make your house more competitive.
Exploring Individual Retirement Accounts
1. Who can contribute?
IRAs are a great way to save towards retirement. Taxpayers younger than 70 1/2 on December 31st are eligible to contribute to an IRA.
2. How much can I contribute?
If you do not have a retirement plan with your employer, you can put $5,000 a year in an IRA ($6,000 if you are 50 or older) into a traditional IRA as long as you make at least that amount of taxable income during the year. Contributions can be made for a taxable year any time from January 1st of that year to April 15th of the following year when taxes are due.
3. What’s the benefit to having an IRA?
IRAs are a great way to save towards retirement. Traditional IRAs allow people to save money with pretax dollars. Roth IRAs allow people to put money into an account with after tax dollars and the money grows tax free. That means that you won’t have to pay taxes on the interest that accrues on your investment. Another great benefit of an IRA is because it is a way to save for retirement the money in your IRA will be protected from bankruptcy.
4. When can I get my money out of the IRA?
Money put into an IRA generally can’t be taken out before you reach 59 1/2 years old without a penalty. However, there are a few instances where the IRS will kindly give you a pass to use the funds before reaching before reaching 59 1/2 without a penalty, these include:
* distributions for the cost of medical insurance while unemployed,
* distributions to buy a home for first time home buyers (this is limited to a distribution of $10,000),
*distributions to pay for a qualified higher education for your education, your children’s education, or your grandchildren’s education.
5. How do I get an IRA?
Talk to someone at your local bank or check out opening an account online through a trading company like Scottrade or Sharebuilder. The process is very simple and only takes a few minutes. Once you set up your IRA you can use the money deposited in the account to invest in stocks, bond, mutual funds or just leave it in your money market account to accrue interest.
Discharge of Debt - Cutting my Credit Card Bills
There are many companies out there offering ways to reduce credit card debt. While this sounds like a great idea, you need to get more details. After all, if it sounds too good to be true, it probably is.
What these companies are not likely to tell you is that they usually reduce your income by getting the credit card companies to discharge some of your debt. Which may sound great but will have a very negative effect on your credit score. Thus, while it may help you in the short term, in the long term doing this will result in higher interest rates the next time you try to get a card, vehicle, or house.
In the past, many people dealt with credit card debt by taking out second mortgages on their house to pay off the debt. Now, however, it is difficult if not impossible to do that in many states due to the declining home values and reluctance of banks to lend money.
The best way to get rid of debt without negatively affecting your credit score is to not accumulate debt in the first place. However, if you do have the debt, you need to come up with a plan to get rid of it. Start budgeting to pay a certain amount of the credit card each month and don’t put anything extra on the card. It is nearly impossible to pay off a large credit card debt if you keep putting more debt on the card. While that can be very tempting this time of year, to get ahead you have to say no.
One way to keep from spending on your cards is to keep them in a safe or drawer rather than your purse. If the credit card isn’t always right there tempting you to use it, you will be more likely to just buy spend wisely because you know the money is coming directly out of your account rather than thinking about a bill that will have to be paid someday in the future.
Once you get out of the habit of reaching for the card for impulse purchases, you will be amazed to realize that you don’t really need the credit card as much as you thought. Try living without a credit card for 3 months. At the end of that time, you will likely realize that you haven’t even missed it and that your finances are in a better position because you are watching your spending more carefully.
The best way to get rid of credit card debt is to not have it in the first place, but if you do have debt that you need to get rid of, put the card in a place you won’t be tempted or cut it up. Then, set aside some money each month to start paying down the balance. I would also recommend using any extra money you receive such as your income tax return or some extra cash from friends or your boss at Christmas to pay down a little extra on the debt. Life really is much simpler and less stressful without the debt. Try it and I’m sure you will feel the same.
What if I get laid off?
Christmas is literally just around the corner and the market delivered more bad news today. In November a record 533,000 people lost their jobs and 1 in 10 families is behind on their mortgage. That doesn’t paint a very pretty picture of the economy or encourage must optimism in market forces. Instead, many people are wondering if they could be next. The best way to survive this economic crisis is to make a plan.
In several of the previous columns I mentioned the importance of budgeting, whether you are budgeting to ensure you have enough money to pay the bills, shop for Christmas, or save for retirement, budgeting is key. In this market, you also need to be budgeting for the rainy day possibility that you may become one of the thousands losing their jobs.
In the past when times got tough, Americans got plastic. Now, however, credit cards are increasing their fees and interest rates and reducing their credit limits because they are afraid of not being able to last this crisis either. Like it or not, Americans now need to prioritize their needs, learn how to budget, and start saving, which means eliminating the plastic unless you can afford to pay the entire bill when it comes due.
By prioritizing what you need from what you want, you may find that you can live without a few little comforts and use the money you would have spent on that to pay down your credit cards or save just in case the unthinkable happens and you do get laid off. The government can’t save everyone.