Oscar's Blog

Mortgage Debt Relief Act

2008-11-21T12:49:01Z

Friends:

Below is a transcript of the federal mortgage debt relief act. This is something every short sale professioanal should know about. I have also included the HUD link.

Oscar

Federal Law & Resources

Housing & Urban Development Department (HUD)

Mortgage Debt Relief Act

Text Copied From IRS Site

Direct Link to IRS Site

Mortgage Forgiveness Debt Relief Act

What is the Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

What does that mean?
Usually, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. The Mortgage Forgiveness Debt Relief Act of 2007 allows you to exclude certain cancelled debt on your principal residence from income.

Does the Mortgage Forgiveness Debt Relief Act of 2007 apply to all forgiven or cancelled debts?
No, the Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.

What about refinanced homes?
Debt used to refinance your home qualifies for this exclusion, but only up to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified.

Does this provision apply for the 2007 tax year only?
It applies to qualified debt forgiven in 2007, 2008 or 2009.

If the forgiven debt is excluded from income, do I have to report it on my tax return?
Yes. The amount of debt forgiven must be reported on Form 982 and the Form 982 must be attached to your tax return.

Do I have to complete the entire Form 982?
Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form 982 to your tax return.

Where can I get this form?
You can download the form at IRS.gov, or call 1-800-829-3676. If you call to order, please allow 7-10 days for delivery.

How do I know or find out how much was forgiven?
Your lender should send a Form 1099-C, Cancellation of Debt, by January 31, 2008. The amount of debt forgiven or cancelled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.

Can I exclude debt forgiven on my second home, credit card or car loans?
Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion.

If part of the forgiven debt doesn't qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?
Yes. The forgiven debt may qualify under the "insolvency" exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent. A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982.

Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?
There is no dollar limit if the principal balance of the loan was less than $2 million ($1 million if married filing separately for the tax year) at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982, page 4.

Is there anything else I need to know before filing?
Yes. Because the Mortgage Forgiveness Debt Relief Act of 2007 was passed so late in the year, the software systems used by tax preparers and at the Internal Revenue Service need to be updated to accept the revised Form 982. The IRS expects to be able to process the new Form 982 electronically on March 3, 2008.

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How do I Know if a Short Sale is Right for Me?

2008-11-21T12:17:57Z

Should I Short Sale?

(Download Article)

A short sale is a transaction in which the homeowner sells a property for less than what is owed. The lenders voluntarily take a loss, and forgive the unpaid portion of the debt. Shortsales only take place when the value of the property is less than what is owed to the lender, and the owner is insolvent. A property worth less than what is owed is "over-mortgaged".

A short sale is right when an insolvent homeowner in default owes more to a lender than what the property is worth. The homeowner has to be unable to ever for the complete loan balance. In these circumstances, the lender is in the unfortunate position of facing losses regardless. For the lender, foreclosure will not bring enough funds to payoff the debt. In addition, collecting losses from a foreclosed and insolvent homeowner is a difficult proposition. Because of this, the lender is better off forgiving the debt.

Based on the explanation above, a shortsale is right for the homeowner if:

The homeowner is insolvent
The property is over-mortgaged
The homeowner is incapable of covering the lender for any shortfall
The home loan is in default

Short sales are not an alternative for the homeowner if:

The homeowner is solvent
Is employed and with a bright future
The homeowner is capable, presently or in the future, of paying for any lender's shortfall.

Under the circumstances just mentioned, most lenders will not allow a short sale. Lenders do not forgive debt from homeowners with present or future payment capacity. A good alternative for a homeowner in this position is a release of lien. In a release of lien, the property is sold for less than what is owed, but the homeowner still owes to the lender. To pay for that balance, the homeowner enters into a payment plan.

For the lender, foreclosures are hostile, lengthy and costly transactions. Shortsales are faster, more amiable, and have a lower cost. Because of this, lenders facing insolvent homeowners with over-mortgaged properties commonly accept short sales. If the homeowner can in any way pay, the lender will typically only allow a release of lien. If a short sale is not an option for the homeowner, most likely a release of lien is. A foreclosure is almost always a bad choice.

www.bestshortsales.com www.rapidforeclosuredata.com www.shortsaleprocessing.com www.oscarpdx.com

What is a Short Sale

2008-11-21T12:06:50Z

What is a Short Sale

(Download Article)

A real estate short sale is the sale of a property for less than what is owed on it. The lenders voluntarily accept less than full payment and forgive the unpaid balance.This happens when a property is worth less than what is owed, the owner is insolvent, and can't make up the difference. In the sale of the property, a lender is paid off with a dollar value short of what it is owed, thus the term short sale. This article briefly explains why this happens and why they are so common.

The root of this issue is in collateralization. The vast majority of properties are purchased with the aid of financing. In order to pay for a property, a homeowner places a small down payment. Since the down payment is not sufficient to purchase the property, a loan is used to pay the remainder of the acquisition value. In other words, the homeowner finances part of the purchase value of the property with a loan from a lender. To guarantee payment, the homeowner pledges the property as collateral. This is called collateralization. This is an agreement between the owner and the lender, such that in case of default, the lender has the right to dispose of the property in order to get paid. In the U.S., properties are collateralized by trust deed, mortgage, and security deed. The term "mortgage" is generic.

Complete and timely payments incrementally reduce the loan payoff value. That is called amortization. The longer payments are made, the more amortized the loan becomes. A fully amortized loan is a loan with zero balance and paid off. On the other hand, because of interest, missed payments increase the loan payoff. That is called accrual.

At sale, unless the loan is fully amortized, the homeowner needs to payoff the remaining debt balance. If the property sale value is high enough, the proceeds of the sale will be sufficient to pay off the loan and for the homeowner to earn a profit or break even. If not, there will be a shortfall. To make up for this shortfall, either the homeowner will have to make up for the amount needed to pay off the loan, or the creditor will have to take less than the amount owed.

A property worth less than what is owed is "over-mortgaged". The main reasons properties become over-mortgaged include the owner paying too much, refinancing for too much, market decline, damage, deferred maintenance, negative neighborhood changes and disasters.

Often, owners of over-mortgaged properties needing to sell are unable to make up for the loan payment shortfall. It gets worse if they are insolvent. Usually, seeing only losses, they sooner or later get discouraged and become uncommitted to the property. This leads to default. Once this happens, it gets worse. The loan starts to accrue. Unpaid property taxes, utilities, and other costs also accumulate. In addition, usually maintenance is deferred. The property may even be abandoned. This results in further loss of value.

Once the property enters into this cycle, it becomes the lender's problem. The longer it passes, the worse it gets. Urgently, the lender needs to recover as much of the debt as possible. Lenders in this situation have only two alternatives. One of them is to foreclose. The other is to allow the homeowner to sell the property for less than what is owed. This is a shortsale. Either way, the creditor will take a loss.

Unless the property value is high enough, a lender that decides to foreclose only stands to lose. Only cash-in-hand investors looking for great deals buy at foreclosure sales. If the property is not sold at a significant enough discount, the creditor will have to keep the property. If this happens, the creditor will be liable for maintaining the property, insuring it, paying taxes, and many other costs. Not only that, to sell it, the lender will have to pay commissions!

Foreclosures are costly, lengthy and hostile transactions. Even in an appreciating market, every day the property is worth less. Once in foreclosure, the property enters a legal limbo full of risks for the lender. Hopefully, the homeowner stays until shortly before the foreclosure, does not damage the property and leaves amiably. However, there is a high chance that the homeowner will abandon the property. Vandalism often follows. If neither happens, it is because the homeowner wants to stay longer. These homeowners usually file for bankruptcy. The result is a longer foreclosure and further loss to the lender.

Shortsales are lower cost, shorter and more amiable transactions. They are a much less risky alternative to foreclosure because most of the above mentioned problems are avoided. The insolvent homeowner sells the property for less than what is owed. The lender gets paid off sooner and forgives any debt shortfall. That is a short sale. That is why they happen and why they are so common.

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