DON’T FORECLOSE SAVE YOUR CREDIT!
Short Sales vs. Foreclosure
A Short sale may be a better alternative for homeowners due to the fact that after two years you can purchase a home again. With a foreclosure or a Deed in Lieu which works like a foreclosure, you cannot get a FANNIE MAE or other type of government loan for at least seven years. In addition, if you work for the government you may not get a security clearance with a foreclosure on your record. On your credit report it will show as a settlement for less than owed rather than a foreclosure. With a foreclosure a Deficiency Judgement will be filed with the clerk of Court and attempts to collect can last for twenty years. With a Short Sale there is a chance that you will receive a 1099-C at the end of the year causing you to pay taxes on the shortfall. You will then need to get the advice of a CPA to help facilitate a hardship with the IRS.
Did you know that until recently, mortgage debt on a primary residence that was forgiven from a Short Sale or Foreclosure could be counted as “taxable income” by the IRS?
The good news is that on December 20, 2007, the Mortgage Forgiveness Debt Relief Act
was signed into law. Effective from January 1, 2007 through December 31, 2009, any forgiven or “cancelled” primary mortgage debt from a principle residence, or debt used to improve the residence, will not be taxable. The limits are up to $2,000,000 for married couples filing jointly, or $1,000,000 if filing separately. The Emergency Economic Stabilization Act of 2008
extended the time period through December 2012. You can find more information on the IRS online filing form titled Reduction of Tax Attributes Due to Discharge of Indebtedness
. Be aware, however, that second mortgages (not used to initially buy your property) and home equity lines are not exempted.
If you own real estate as an investment property or second home, your cancelled debt will trigger a 1099-C as “income“
. According to the IRS, there is an exception
to tax liability when the borrower is insolvent, meaning, your total liabilities are greater than your total assets at the time of the debt forgiveness (short sale real estate closing). Many borrowers are insolvent when performing a short sale. For a detailed explanation of potential tax liability and insolvency, please visit the IRS web page about “Questions and Answers on Home Foreclosure and Debt Cancellation”
and “Ten Facts for Mortgage Debt Forgiveness”
. Consult with your tax account on your particular situation, and after completing a short sale, have your CPA prepare your tax return.
Military personnel who are upside down in their mortgage and who need financial help may get help through the Homeowners Assistance Program (HAP)
. HAP is a long-established Department of Defense program that is managed by the US Army Corps or Engineers. HAP was initially used only to assist inBase Realignment and Closure (BRAC)
moves, but the new economic stimulus plan has expanded the program toinclude Permanent Change of Stations (PCS)
Following is a summary of the HAP program, specifically for PCS applicants:
include: PCSing more than 50 miles, having purchased your home or entered into a contract to purchase prior to July 1, 2006, you lived there and it was your primary residence, and your orders were between February 1 2006 through September 30, 2010.
2. Your home must have declined at least 10%
3. First priority HAP PCS
assistance is given in the Savannah District to applicants with the MOST COMPLETE PACKAGE
4. HAP benefits are based on the amount you originally purchased the property plus capital improvements
(prior fair market value PFMV verified by your settlement statement). The full amount of your negative value will not be reimbursed.
5. The government will provide benefits within two to four months of receiving your application
. They are working on staffing to improve the turnaround time.
6. The site states that no specific dollar amounts of loss reimbursement are addressed and HAP advises you to contact your local district CoE office. For Tyndall AFB, please contact theArmy Corps of Engineers Savannah District. However,elsewhere on its site, HAP mentions that up to 90% of your purchase price minus your sale price plus closing costs may be your benefit.
You may even be eligible for 95% in some cases, per HAP. This reimbursement is for what is called “Private Sale”
, which is a HAP payment to you after you sell yourproperty yourself.For a“Government Acquisition or Augmented Sale”
, HAP normally will cover your entire mortgage balance if it is greater than the sale price if you meet the other criteria.
7. The government claims they will make up “liabilities” to service members from a foreclosure
, but not past due payments or junior liens you obtained after buying the property.
8. Some of your closing costs will be paid for
, including title services and Realtor fees. HAP cares that these are common fees for your marketplace, and do not exceed 10% of your purchase price.
9. The government recommends you use a REALTOR®
to sell your home and states that using a Realtor will may increase your chances of finding a buyer.
10. You should try to market your home for at least 120 days,but the main consideration is if the offer on your home is“fair market value”
11. Your benefits will NOT be taxable
as income to you.
12. Per theREALTOR® Guide , you or your REALTOR® must maintain records of price changes, showings, offers
, etc to demonstrate that the house was not sold at too low a price. The CoE office will obtain an appraisal to verify the price was within market range.
13. There aremaximum price range limits for assistance. If you paid more for your home originally, you will not be eligible for HAP benefits at this time. This requirement may be changed in the near future.
As soon as you know you will have orders from Tyndall Air Force Base, apply for assistance immediately.
As of January 2011
– The Veterans Administration is now directing VA lenders to pay $1500 relocation assistance
at closing to those approved for a VA Compromise Sale. This assistance is currently available until January 1, 2014.