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.
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
Multi-family Investments - Great options for this economy
Yes it is difficult to get a mortgage right now. Banks are loaning money but they want more downpayments and they are taking more precautions to protect their investments. As such, I would recommend that couples looking to purchase a home consider a multi-family.
Multi-families are great because it allows the couple to purchase a home, thus saving them from paying those pesky association fees you get with condos and many townhouses. In addition, the couple becomes the landlord rather than paying someone else.
If a couple purchases a 3-family home, they can rent out two of the levels and will likely make enough money doing that to cover most if not all of the mortgage for the entire property. In addition, if the couple can get people to sign a lease to move into a level of the home prior to closing on the property, that might influence the bank because it will show that you are getting additional income. As banks are very concerned about debt to income ratios right now this can really help you get the mortgage you need at an interest rate you can be happy with.
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.
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.
Giving Thanks for Government Spending
Thank goodness the government has money to spend. The current administration is trying to stay afloat by throwing money at every large company that gives a hint of bankruptcy because we all know that the best way to teach a spendthrift how to become responsible with money is to give the person more money.
There are many different economic theories, one of which is budgeting. Some say that the best way to teach someone how to manage money efficiently is to give the person a budget and if they use up the money before paying for all their bills, they will know better next time and be more careful with their money.
However, large corporations in the United States don’t have that problem. Every time they looked close to running out of money, they would sell an asset, borrow from the bank, or issue more stocks. Now, those options just aren’t available. Money is tight so there are less people and companies with the money to buy stock and even those who do have the money are scared.
Look at Warren Buffet, considered a market genius. He purchased a large stake in Goldman Sachs last month and now, just a month later, their shares are trading at half what they were. If someone of Warren Buffet’s caliber can lose money in this market why should I think I can make something? Why risk my future and retirement buying stocks that might be worthless next week.
Obviously the companies aren’t going to make money issuing new stock, instead that will likely make their current stock prices drop even further so what’s the next option. Oh yeah, borrow money from the banks. Except for one little problem, the banks aren’t lending money. Yes, they claim they are. In fact there are even reports that some entrepreneuring banks are even lending money for home purchases, but is that just an urban legend? Besides, banks are scared silly right now because of all their bad mortgage debt so do you really think they are going to lend money to a business in this economy where nobody can afford to buy more than the necessities.
The companies could also try to sell off some assets, perhaps gets rid of a division that isn’t as profitable. But once again, nobody’s buying. Unfortunately, this vicious cycle will keep repeating itself unless there are some major changes. Yes, keeping the companies in business now will save some jobs but that isn’t enough. While saving jobs is great, we need to concentrate on ways to create more jobs to really kick start this economy.
Mortgage Problems? Check this out!
To combat the issue of rising foreclosure, Congress recently enacted HOPE for Homeowners. This program is designed to help homeowners who are at least three payments behind on their mortgage but have not filed for bankruptcy.
If you qualify, the program extends the terms of the loan, meaning you will be paying a lot more interest over the term of the loan but will have lower monthly payments. This plan helps the taxpayer by keeping the monthly payments lower so that hopefully the taxpayer will be able to continue to make the payments and avoid foreclosure. Also, the extended term of the loan does increase the interest payments, however, that interest can be deducted from the taxpayer’s federal income tax.
As long as the taxpayer isn’t trying to move anytime soon this sounds like a great alternative. However, for taxpayers who might be moving in the next few years, this option means that you will likely be trying to sell your house for less than your mortgage. Because the program extends the term of the loan, taxpayers are paying less each month on the balance of the loan and instead a large chunk goes to interest. Thus, due to the lower housing values if you try to sell in the next few years, your mortgage will be more than the value of your house.
It is great that Congress is coming up with programs to help prevent foreclose, but this plan won’t fit everyone’s needs and you need to be aware of the limitations when considering whether it is right for you.
Going, Going, Gone. House sold for $10,000!
Pinch me, I must be dreaming. A 4 bedroom 2.5 bath home with over 2,000 square feet built in 2006 is going on auction starting at $10,000. This isn’t just a rare deal, there are plenty of others available as well.
In this current market life is pretty tough if you don’t have any savings to fall back on. For those that do have a little cash lying around though, there are plenty of opportunities to invest for retirement. One of the best options that I have seen is the Florida housing market. Yes, house values are falling like crazy in Florida and getting a mortgage is incredibly difficult, however, rental rates have not fallen and people who have been foreclosed on still need a place to live.
The Cape Coral/Fort Myers area has 58 houses and 44 lots going up for auction this month. Many of these homes have never been lived in and the auctions are starting at $10,000 or $25,000 for houses and $1,000 for a lot. With so many homes being auctioned at once and the market already saturated, it is very possible that people will be walking away next weekend with a house for only $10,000 plus closing costs!
A quick check on Craigslist shows that houses in the area are renting for $950 a month for a house or $500 a month for a two bedroom condo. Even if you rent the house out for $500 a month, the potential for future earnings is enormous.
Florida isn’t the only area in the country with some great auctions going on. Check out the following website for more info.
http://www.williamsauction.com/Search/SearchResultsState.aspx?statusid=1&CategoryID=1&p=1.2
Pay a Little Extra Each Month
Do you have a mortgage? Is it 25 years, 30 years or even longer? The majority of mortgage companies will allow you to pay extra each month if you can. The idea is to make certain to pay on the principle and not the interest. The principle determines the amount of interest that you pay. If you pay a little on the principle each month that is extra, you will in the long run end up fixing your finances and paying a lot less in interest.
Make certain that you pay a minimum of $5.00 extra each month. On the month’s that you can afford to do so pay as much as $100 extra toward the principle. Doing this every month will greatly reduce the amount of interest that you end up paying on the mortgage.