Tag Archives: bankruptcy

Distressed Borrowers Have Waiting Periods Reduced

Fannie Mae released a report this month, informing that there are simplified waiting periods for those distressed borrowers that have a prior derogatory credit event in their past, such as a: foreclosure, bankruptcy, preforeclosure sale (short sale), or deed-in-lieu of foreclosure.Fannie Mae waiting periods Continue reading

A Happy New Year With a Few Twists

mortgage debt forgivenessThe HOT topic for real estate that everyone was talking about coming up to the new year is official, but with an asterisk regarding the extensions of the Mortgage Forgiveness Debt Relief Act and American Taxpayer Relief Act. This is a little lengthy article, but worth your extra 15 minutes to digest. While federal government has extended the tax law, California to this date has not extended their tax law, but more importantly the Mortgage Debt Forgiveness has been definitely extended. What does all this mean to you and your situation, whether owner-occupied or an investment property that is upside down and you’re wanting an answer to what you have to do, CALL ME for help. Letting a property go to foreclosure or doing a Deed in Lieu could put you in a liability situation for all the debt of a Trust Deed. I work with CPAs and attorneys that can help. After over 20 years of short sales, hundreds closed, you owe it to yourself to only talk to the BEST!  CALL NOW! JOHN A SILVA — 619-890-3648. MAKE IT YOUR BEST YEAR!

III. Extension of Mortgage Cancellation of Debt Relief

Q 4. What is mortgage cancellation of debt relief?

A. As a result of a foreclosure on a recourse loan, a short sale or a deed in lieu of foreclosure, a lender may cancel, reduce or forgive the debt that the borrower owes on the loan. The IRS and the California Franchise Tax Board consider this cancelled or forgiven debt as income to the borrower. As a result, the forgiveness or cancellation of the whole or a portion of the loan balance, often termed “cancellation of debt income,” may result in a tax liability.

The cancellation of debt income is generally treated as “ordinary income,” as opposed to capital gains income which is taxed at a lower rate, and the taxpayer will typically receive a 1099 tax form from the lender in the amount of the cancellation of debt.

Under the tax law there exist various situations where the cancellation of debt income is not taxable including bankruptcy, insolvency and when there is a foreclosure on a non-recourse loan. However, for most homeowners involved in a short sale, foreclosure or deed in lieu of foreclosure, the tax relief provided by the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) signed by President Bush on December 20, 2007 and subsequently extended by the Emergency Economic Stabilization Act of 2008, provides the most important protection against having to pay tax on the cancellation of debt income.

As a result of the Mortgage Forgiveness Debt Relief Act of 2007, Internal Revenue Code §108(a)(1) (E) was added and provides that a taxpayer will not be taxed upon cancellation of debt income if the following conditions are met:

The property sold in the short sale is the taxpayer’s principal residence, as that term is used in IRC §121.

The cancellation of debt is Qualified Principal Residence Indebtedness under IRC Section 163(h)(3)(B). Qualified Principal Residence Indebtedness is a loan secured by the residence used to acquire, construct or substantially improve the residence. The income relief provided is capped at $1,000,000 in the case of a married person filing a separate return and $2,000,000 for all others. Any reduction of indebtedness excluded by IRC §108(a)(1)(E) will be applied to reduce the basis of the taxpayer’s principal residence, but not below zero. This could result in a higher amount of capital gains tax owed by the taxpayer. Also the cancellation of debt relief provided by the law, therefore, does not apply to any portion taken as “cash out” and not used to substantially improve the residence.

Q 5. How does the American Taxpayer Relief Act affect the mortgage cancellation of debt relief?

A. The original law applied to indebtedness discharged before January 1, 2010. That end date was extended by three years from 2010 to 2013 pursuant to H.R. 1424, the Emergency Economic Stabilization Act of 2008. The new law extends the date one year further to any indebtedness discharged prior to January 1, 2014.

Q 6. Does the federal law apply to potential cancellation of debt income under California tax law?

A. No. California has its own cancellation of debt relief law which has been codified as California Revenue and Tax Code Section 17144.5 which is similar to the federal law but with some significant differences (see next question). That law has expired. However, C.A.R. has sponsored Senate Bill 30 (Calderon, D- Montebello) to extend California’s debt relief protections which is currently pending. The proposed law would be effective retroactive to January 1, 2013. Information on the status of the bill can be found at www.leginfo.ca.gov.

Q 7. What are some of the differences between the state and federal law on cancellation of debt on qualified principal residences?

A. California law has different limits for maximum indebtedness and the amount of cancellation of debt income that can be forgiven which are detailed below:

The maximum amount of qualified principal residence indebtedness is $800,000 for married couples filing jointly, registered domestic partners filing jointly, single persons, head of household, or widow/widower; and $400,000 for married couples or registered domestic partners filing separately;

The maximum amount of debt relief income that can be forgiven is $500,000 for married couples filing jointly, registered domestic partners filing jointly, single persons, head of household, or widow/widower; and $250,000 for married couples or registered domestic partners filing separately.

This is an excerpt from California Association of Realtors Legal — Part 2 coming next week will be on Taxation of Foreclosures and Short Sale.

Top six reasons mortgage applications are rejected

Half of refinance applications are abandoned or rejected, as are 30 percent of purchase mortgage applications, according to the Mortgage Bankers Association. All told, the Federal Financial Institutions Examination Council (FFIEC) says that well over 2 million mortgage applications were rejected last year.

Want to avoid falling into that number? It’s tough — especially in light of the fact that mortgage lenders have become increasingly restrictive in terms of their lending guidelines since the housing market crash.

Here, as a cautionary tale and primer on what to expect, are the top six reasons mortgage lenders reject applications.FFIEC

1. Income issues. Most failed applications falling into this category have income too low for the mortgage amount they are seeking; often, a spouse’s credit issues can create this problem, too, as the income the spouse plans to actually chip in toward the mortgage cannot be considered by a lender.

But increasingly, the recent vagaries of the job market are also causing this issue, as people who have changed their line of work or have changed from salaried employee to freelancer over the last couple of years can also have their home loan applications rejected based on income.

2. Muddled money matters. If the mortgage for which you’re applying plus your monthly payments on credit card, car and student loan debts will comprise more than 45 percent of your total income, you could have problems qualifying for a home loan. You might also run into problems if you rely too heavily on bonuses, overtime, cash wages or rental income — all of these can be difficult or impossible to get a mortgage bank to consider, and if they do, they might not take all of it into account.

3. Credit issues. Today, the mortgage-qualifying FICO score cutoff falls somewhere between 620 and 660, depending on which lender and which loan type you seek. More than one-third of Americans, by some numbers, have credit scores too low to qualify for a home loan. Even if your credit score is high enough to qualify, if you have any late mortgage payments, a short sale, a foreclosure or a bankruptcy in the last two years, loan qualifying could be difficult to impossible.

4. Property didn’t appraise. Since the whole industry had its hand smacked for allowing home values to skyrocket in a very short time, appraisal guidelines have tightened up — some would say, even more than overall mortgage guidelines. So, it is increasingly common to have the property appraise for a price lower than the sale price negotiated between the buyer and seller.

This is especially common in the refinance realm, as well over a quarter of U.S. homes are now upside-down, meaning the mortgage balance owed is greater than the value of the home.

5. Condition problems. With all the distressed properties on the market, and with most non-distressed sellers barely breaking even, more home-sale transactions than ever are falling apart due to condition problems with the property. Many lenders will not extend financing on homes where the appraiser points out problems like cracked or broken windows, missing kitchen appliances, electrical problems, or wood rot.

And in the world of condos and other units that belong to a homeowners association, if more than 25 percent of units are rented (rather than owner-occupied) or more than 15 percent are delinquent on their HOA dues, new applications for refinance or purchase mortgages on units in the development are likely to be rejected.

6. Technical difficulties with application. The days when lenders just took your word for it are long, long gone. Applications with incomplete or unverifiable information are doomed.

If any of these mortgage loan application glitches arise in your homebuying or refinancing process, it’s critical that you connect with your mortgage professional, be it your banker or mortgage broker, to determine what course of action to take.

In some cases, it might be as simple as buying a stove you find at Craigslist and installing it before escrow closes; but with income issues your mortgage pro will need to help you determine whether it makes sense to pay some bills down, get a co-signer, or even wait six months so your income documentation will qualify.

Tara-Nicholle Nelson is an author and the Consumer Ambassador and Educator for real estate listings search site Trulia.com.

Getting a mortgage after foreclosure

There are some additional hurdles for homeowners who have gone through a foreclosure, short sale or bankruptcy, but a little patience and some financial hard work will go a long way.

MortgagesBuying a home is a challenging goal for most hopeful homeowners. But for those who have experienced a bankruptcy, foreclosure or short sale, the hurdles are even higher.

Still, it’s not impossible to buy a home after financial difficulties, says Dan Keller, a mortgage banker with Hometown Lending in Everett, Wash. In fact, Keller says, people who have cleaned up their credit and are otherwise qualified to get a mortgage can buy a home as soon as they have outlasted a prescribed waiting period after the bankruptcy, foreclosure or short sale.

Wait a while
The waiting period can last one to seven years, says Kirk Chivas, chief operating officer at First Commerce Financial in Wixom, Mich. The one-year requirement applies to buyers who complete a Chapter 13 bankruptcy, have a spotless subsequent credit history and want to get a new loan insured by the Federal Housing Administration or guaranteed by the U.S. Department of Veterans Affairs. The seven-year requirement applies to buyers who experienced a foreclosure and want to get a new conventional loan that can be sold to Fannie Mae or Freddie Mac.

In between are a number of two-, three- and four-year timelines based on similar criteria and other factors such as whether the buyer’s previous mortgage was current at the time of a short sale or the size of the buyer’s new down payment as a percentage of the home’s purchase price.

Generally speaking, the waiting periods after a bankruptcy tend to be more black and white while the waits after a foreclosure or short sale have more gray areas, Keller says. And in some cases, a waiting period can be waived or shortened if the buyer’s bankruptcy, foreclosure or short sale was due to extenuating circumstances or a hardship beyond his control.

Technically, it is possible for a buyer whose prior loan wasn’t in default at the time of a short sale to get a new FHA-insured loan with no waiting period, Chivas says. But he adds that he’s never encountered anyone in that situation.

Clean credit
Buyers must have very clean or perfect credit histories before they can buy homes after bankruptcy, foreclosure or short sale. A slip-up as small as one late credit card payment could disqualify a post-bankruptcy buyer from some loan programs, even if the waiting period has been completed, Keller says.

“Bankruptcy is a serious word,” he says. “If you do it, it’s a get-out-jail-free card. But once you get out of bankruptcy, you need to be flawless in your credit. Don’t even drop a gum wrapper.

Credit dings can be difficult to sort out for buyers who experienced a loan modification or short sale, in part because, as Chivas says, there’s “no consistency” in how lenders report those events to the credit bureaus. Buyers should review their credit reports and correct any errors or clarify the circumstances of adverse items.

Stable employment can be a plus, too, Keller says, noting that some loan programs are more lenient than others. “If there was a gap,” he says, “it needs to be explained.”

Consult a loan pro
Given these complexities, buyers are advised to consult a loan officer or mortgage broker early on for advice that applies to their situation.

“They may think they’re fine, but if they’re not talking to a professional, their hopes can get dashed or crushed,” Chivas says. “That’s why you want to speak to someone as soon as you start dreaming it up in your head” that you want to buy a home after a bankruptcy, foreclosure or short sale.

This article is by RealEstate.MSN.com, and is viewable here: “Getting a mortgage after foreclosure.”