Extension of Mortgage Debt Relief Act

The Mortgage Forgiveness Debt Relief Act has been extended for another year through 2013. What does this mean? It means that homeowners who sell their primary residence in a short sale or lose their home to foreclosure will not have the added insult to injury of losing their home and then having to pay taxes on the loss up to $2 million ($1 million if married filing separately).  There are circumstances when a short sale or foreclosure is the right strategic financial move, even for high income earners.  At least it is still an option to explore. Many homeowners whose mortgages are underwater and want to either move or simply move on are between a rock and a hard place. At least the mortgage debt relief provision is still on the books, but this provision may have a limited shelf life, so if you are considering taking advantage of this provision, do your analysis and make your move early this year. Here are some options still available to you in 2013:

Ride it out –Choose not to take any action.  Sometimes waiting may be your best option especially if you don’t have a pressing need to relocate.  Home prices recently jumped 3.6% from a year ago, the largest year-over-year rise we’ve seen in over two years. If that trend continues, staying put might be the right decision.  If your home value is $250k and prices jump up by 3.6% a year for the next five years, your home value would be close to $300k – a $50k gain.  Depending on how the market does, you could be in the black sooner than later. This option is best for people who don’t have an urgent and immediate need to move – in other words, have the luxury to ride it out.  I have access to regional housing sale trend data which would be helpful in making your decision.

Refinance under the HARP refinance program – Stay put and try to reduce your costs. Homeowners who don’t qualify for a traditional refinancing loan may still qualify for the HARP refinance program specifically for mortgage holders that are underwater but have not missed a payment.  If your loan is owned or guaranteed by Fannie Mae or Freddie Mac and your debt to equity value is greater than 80%, you may qualify. For complete details and to find out if you are eligible, call Kristin Stolte, Senior Loan Officer - NMLS#246738 at: 951-526-3181.

Sell your property through a short sale –Since some or all of the forgiven debt on a primary residence sold in 2013 may be excluded from income, this option might be viable if you want or need to move. It could cost you more in the long run to ride it out than to bite the bullet with a short sale. For example, if you end up having to rent your home and move to another location, the rental is no longer your primary residence and you lose the opportunity to exclude forgiven debt from your income. If you end up having to do a short sale later, it could be very costly.  The forgiven loss amount is added to your ordinary income. For example, a couple with taxable income of $200k who had a loss of $100k would bump up to the 33% federal tax bracket and owe over $30k more in federal taxes. A short sale might be a good option for someone who won’t be hurt by the credit score hit – a short sale or foreclosure will give you a drop in your credit score of 85 – 160 points (according to FICO).  If you don’t need to make any major purchases on credit for the next few years, this drop may not affect you.  However, if you plan on buying that’s a different story, but don’t cut off your nose to spite your face and stay in a property that is draining you JUST so you don’t hurt your credit rating. There is no guarantee that a bank will approve a short sale, but having a financial hardship makes a difference with the lenders.  If your income has dropped or you have some other compelling financial hardship, that may help you secure a short sale. Another factor is whether you simply have a first mortgage or the added complications of a second.  When there is only one loan on the property, or the same bank holds both the first and the second, the bank may be more likely to grant the short sale.  Neither of these reasons will guarantee your short sale is approved, but your chances may be better. Call me, Tina Mull, Your Short Sale Expert, at 951-757-6410.

Give the property back to the bank with a deed in lieu of foreclosure – For those who don’t qualify for a short sale, a strategic foreclosure in 2013 may still be an option with the extension of the Mortgage Forgiveness Debt Relief Act.  Be careful though, the IRS may not require you to pay income taxes on the debt but the bank may be able to get a deficiency judgment for the difference. 

Of course a short sale or foreclosure is only something to consider when you are between a rock and a hard place, but with the relief offered by the Mortgage Forgiveness Debt Relief Act extended for only one more year, the time to act may be now.  It’s best to talk with your tax professional, financial planner, and local real estate agent to analyze your options before making any final decisions.

Call Tina Mull, 951-757-6410, Short Sale Expert or email: tinamull4exit@gmail.com

credit: Nancy Anderson

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