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Home Foreclosures, Deeds In Lieu of Foreclosure and Short Sales... Credit and Tax Ramifications
Home foreclosures, Deeds in Lieu of foreclosure, short sales and tax ramifications. Although the economy is starting to improve, many clients are still facing unaffordable mortgage payments and/or homes which are “upside down” (mortgage balance is greater than property value). As a result, foreclosures, deeds in lieu of foreclosure and short sales are still commonplace.  Foreclosure. Payments are in default and lender repossesses home. Credit. Severe impact; lowers FICO score 200-300 points; remains on credit report for 7 years from date of filing.   Ordinary Income Tax. Under the Mortgage Indebtedness Forgiveness Act, may exclude up to $2 million of “qualified debt” from federal income tax. ”Qualified Debt” is incurred in acquiring, constructing or substantially improving principal residence. Clients who used their HELOCs as ATMs will not have the unqualified debt portion forgiven. California conforms but with lower limits than the federal government. The Act is set to expire 12/31/12 but the administration has requested an extension through 2015. Deed In Lieu Of Foreclosure. Borrower voluntarily conveys interest in property to satisfy the loan and avoid foreclosure. Borrower avoids public foreclosure proceeding. Credit. Has substantial impact on FICO score, but less than foreclosure; remains on credit report for 5 years.   ... more

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