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.
Tis the Season to Save . . . On Taxes!
Everyone hates paying taxes. We all accept it as inevitable but look for ways to reduce our tax liability. Luckily for us, the IRS offers incentives in the form of tax deductions. Some common deductions include charitable contributions, interest on your home mortgage, and interest on your student loans. While you may have no control on when you pay your mortgage and interest, you do have control on when you make charitable contributions.
Basically we are talking about the time value of money. You get the same tax deduction for your charitable donations whether you make them all in January, throughout the year, or all on December 31. This allows you to use your money throughout the year instead of letting someone else use it.
Some people might want to make charitable deductions but are afraid that if they don’t make them in little contributions throughout the year, the money will be spent come December and they will lose out on the deductions. If you are really serious about making charitable contributions but also not wasting your money, put aside the money you want for charitable contributions each month in a savings account. This allows the money to collect interest, which you can use for yourself, or you can add it to your charitable contributions at the end of the year and get even more tax deductions. Either way, you have the money to make your charitable contributions, you got the value of having the money for the entire year, and you still get your tax deductions.
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
Federal Housing Credit
Housing market prices are still low, rates are still very low and sales are increasing. Is now the right time for you to buy your new home?
Many people are trying to purchase a property before the $8,000 housing credit expires in November. Currently, if a property is not purchased by the end of November, you will not be able to get the $8,000 credit. However, before claiming the tax credit, make sure that you have qualified for it and verify the amount that you can claim. Even though you purchased a house, you may not qualify for the entire $8,000 credit as it is based on the amount of the house.
Beware of Fraud
Since houses are worth less today than they were purchased for, i.e. the homeowner is underwater on his mortgage, some families have tried to put their homes on the market as a short sale and then have a family member purchase the house at the lower price and then sell the property back to the original homeowner at that lower price. While the homeowner would still get to live in his house, this is considered fraud and lenders are cracking down on this. California, Florida, and New York have been identified as the top three states in the country where these fraudulent transactions happen. If you are caught doing this, you could go to jail. I understand that people don’t want to leave their homes but it isn’t worth committing fraud and going to jail.
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.
Choosing a Realtor
Looking to sell your property? Finding the right realtor and listening and acting on that realtor’s advice can mean the difference between selling your property within a couple of months despite the down market or having your listing sit on the market for six months to a year.
When looking for a realtor you want to interview a few candidates before choosing one. I know a couple who didn’t do this when they sold some property in Florida a few years ago who ended up paying the realtor a 12% commission because they didn’t know what was reasonable and they hadn’t taken the time to check around.
In addition to checking out at least 3 realtors, you want to consider the realtors ties to your community. Does the person live in the community and have a reputation for honesty? Do they have a lot of contacts that will help them sell your house? Are they experienced? Do they have a website that will feature your house? The biggest issue I have with realtors is getting them to answer the phone or call back when you leave a message. If the realtor isn’t answering the phone for you then they likely aren’t answering the phone when a potential buyer calls either.
You may also want to consider whether the realtor is staying current on trends in housing. The big thing now is staging properties so that they appeal to buyers. This can mean decluttering the house and even doing a few cosmetic repairs before listing it. Is the realtor going to tell you what your house really needs to sell it at the price you want or are they too afraid of upsetting you. Remember, while the house was once your home, now that you are selling it, you should treat it like a business asset. Don’t get emotionally involved.
Using a reverse mortgage to supplement income
As IRAs, 401ks and other retirement accounts have lost value due to the financial decline of the recent years, many seniors have lost a chunk of their retirement income. Thus, their accounts and assets are worth less but their living expenses have not decreased. This is a problem.
Many retirees spend the winter in Florida and then summer in other areas. While this was great in the past, due to their loss of income, it might not be feasible for them to continue this lifestyle right now. They can try to rent out their properties in Florida to supplement their income. They can also try to sell the properties, but don’t expect to get much for them due to the glut of foreclosures on the market in Florida right now. The other option that seniors can take advantage of is a reverse mortgage.
For the last ten years or so banks in Florida have been touting the benefits of reverse mortgages for seniors. A reverse mortgage allows a senior citizen to take out a mortgage against the value of his home. Unlike a home equity loan, the senior doesn’t have to make monthly payments to pay off the mortgage. Instead, the mortgages are paid off when the senior dies or moves out of the house. At that time the house is sold and the bank is repaid for the mortgage and any remaining proceeds from the sale go to the senior or his estate. This gives the senior money now that he needs to live off and allows for it to be paid back at his death.
There is a concern that banks might not be interested in these types of loans right now as housing prices are falling. They might be worried that the house won’t cover the cost of the mortgage at the senior’s death. However, these mortgages are backed by the government. In addition, Congress increased the amount that can be borrowed from a house from $417,000 to $625,000 this year. Another great feature of these loans is that the fees banks can charge are capped by the government. All in all, these mortgages can offer seniors another option to supplement their income if they need additional help.
Purchase a timeshare in Florida or a condo?
Even in this down economy timeshare sales in Florida are bustling. But are they a good deal? It really depends on what you want to do and which company you go with.
I recently attended a couple of timeshare presentations in New Smyrna Beach and Orlando, Florida and while the salespeople made a strong argument, my husband and I decided that timeshares weren’t for us. After all, why should we spend $29,000 to own a two bedroom apartment for one week a year when for $24,000 I can purchase a one-bedroom condo in Orlando right now. That’s right, for less than a timeshare you can purchase a condo in Orlando and use it whenever you want 365 days a year.
However, while that works better for my husband and I it might not be the best option for everyone. For example, if you have a large family that you travel with, a timeshare might be better as it would allow you to choose where you want to spend your vacation and you can trade your week in the condo you purchased for a week somewhere else in a larger condo if you need. However, one downside to timeshares that you need to remember is resale. They are not the easiest things to sell once you have purchased them. In addition, just like a regular condo purchase, you will have maintenance fees for the entire time you own the unit, even though the unit is totally paid for.
There are plenty of things to consider when looking to purchase something to use for vacations. If it will be considered a second home you can get tax credit for the interest you pay on your loan as well as the taxes you pay on the property regardless of whether you pick a timeshare or condo. In addition, you need to consider what to do with your property when you can’t use it.
Now is a great time to purchase a timeshare or vacation condo, just do some homwork first to determine which option is right for you.