The House of Representatives has voted to extend The Mortgage Debt Relief Act until 12/31/2013, giving underwater homeowners another 12 months to get out from under their upside down homes and mortgages without incurring a federal tax liability. The extension was included in the passage of the so-called “fiscal cliff” legislation.
Short sales, foreclosures and principal reductions done via loan modifications are all considered “debt forgiveness” and are therefore typically taxed as ordinary income. The Mortgage Debt Relief Act excludes homeowners from having to pay the tax on debt forgiveness on their primary residence.
The extension of this legislation will likely cause a wave of short sales as homeowners rush to get their short sales completed before the end of 2013.
The Battiata Real Estate Group specializes in lender approved short sales and has completed more short sales than virtually any other agent in California. They can be reached at 760-930-9898 or online at Battiata.com.
Time is running out for homeowners who want to short sale their home and avoid paying income taxes on the debt forgiveness.
That’s because the Mortgage Tax Debt Forgiveness Relief Act, which excludes most sellers from having to pay income taxes on the debt forgiveness associated with a short sale, loan modification or foreclosure, expires at the end of 2012.
A short sale, foreclosure or a loan modification that involves principal reduction, is debt forgiveness, which is considered to be ordinary taxable income by the IRS and CA Franchise Tax Board. Therefore, when any of the above occurs, the lender will issue the seller a 1099C for whatever amount was forgiven. Normally, the seller has to pay federal and state income taxes on that forgiven debt.
However, the Mortgage Tax Debt Forgiveness Act of 2007 (and a companion law at the CA state level) excludes most sellers from having to pay taxes on that 1099C, assuming the debt is purchase money or was used to improve the property (cash out refinance money that was not used to improve the property is still taxable).
While there has been talk about extending this bill, and even a bill proposed by the Senate Finance Committee this summer, a 2 year extension would cost the federal government an estimated $2.7 billion in revenue, and there are concerns that Tea Party freshmen in the House will likely oppose the debt-relief extension because they see it as another costly bailout funded by taxpayers.
Bottom line, there is too much uncertainty to depend on our elected officials approving an extension. Upside down homeowners who want to get out from under their homes without incurring a tax liability need to make sure they close before the end of the year.
The impact of a short sale on credit scores comes not from the short sale itself, but from the missed payments.
If a borrower remains current on their mortgage during the short sale process, their credit score will not drop a point.
100% of the negative impact on a borrower’s credit score comes from the missed payments that lead up to the short sale, assuming a borrower stops making their payments.
If a borrower does not stop making payments, they will have no negative impact on their credit score from the short sale.
Keep in mind, the short sale will still be reported on their credit report – it will appear as “Debt settled for less than the amount owed” and it may impact the borrower’s ability to qualify to buy another home depending on the lender and the loan program, but it will not impact their credit score.
Currently FHA, VA, Fannie Mae & Freddie Mac require a 2 year seasoning period after a short sale before a borrower can qualify for a government insured loan.
However, with that said, FHA has just initiated a new loan program that allows a borrower to qualify for an FHA loan the next day after completing a short sale, subject to certain conditions.
Matt Battiata has written a new book, “Upside Down Nation: The Handbook for Upside Down Homeowners.” Matt will be discussing the new book and the Southern California housing market on National Public Radio affiliate station KPBS Midday Edition (89.5 FM) today, Monday June 11 at 12 noon & this evening on KPBS TV Evening Edition at 6:30 pm.
You can get more information on the book here.
Southern California’s median sale price rose year-over-year in April for the first time in 16 months, reflecting stronger, affordability-driven demand and a slimmer inventory of homes for sale – especially low-cost foreclosures. Last month’s sales were modestly higher than a year ago, thanks to significant gains in the coastal counties, but remained well below average, a real estate information service reported.
“The housing market continued its painfully slow crawl back toward normalcy last month. You can see it in the fading role of foreclosures, the uptick in median prices here and there, and the higher levels of sales in coastal counties,” said John Walsh, DataQuick president.
“Of course, there are still a lot of things that make this market abnormal,” he said. “Investor and cash buying are still unusually robust. The jumbo loan market has yet to recover, and the use of plain-vanilla adjustable-rate mortgages, or ‘ARMs,’ remains far below normal. Lots of homeowners are ‘underwater,’ and the market remains awash in uncertainty over the economy, home prices, and the way lenders will handle the many thousands of homeowners who are behind on their mortgage payments.”
Orange County recorded 2,920 residential real estate sales in April 2012, up 17.5% from April 2011, when 2,485 were recorded. The median price in April of 2012 declined however, to $420,000, down from $430,000 in April 2011.
With that said, there were some positive numbers on a regional basis for Southern California. The median price rose 3.6% in Southern California as a whole, although this was mostly attributed to April sales in the higher cost coastal market that skewed the median price up.
Distressed sales – the combination of foreclosure resales and short sales – made up about 47% of Southern California’s resale market in April of 2012.
The graphs below represent the most recent foreclosure data for Orange County, CA.
Foreclosure Filings: The number of Notices of Defaults fell from a peak in August of 2011 of 2030 to a low of 1175 in April 2012. A declining number of NOD’s points to a decline in the number of distress sales, so this is a good sign for the Orange County real estate market.
Foreclosure Outcomes: Foreclosure outcomes were relatively unchanged over the past year, with the exception of the number of homes going directly back to the bank, which is at a one year low. This indicates the desire on the part of lenders to avoid taking homes back. They would much rather sell it as a short sale, before it gets to foreclosure, or worst case, sell it at auction if it does go to foreclosure. The last thing they want to do is own more real estate.
Foreclosure Inventories: Foreclosure Inventories have remained relatively unchanged, although the number of preforeclosures has declined.
Filings per Origination Date: The majority are between Q3 2005 and Q2 2007, which was the peak of the market in Orange County.
The Mortgage Debt Relief Act expires December 31, 2012. That means that this is the last year you can do a short sale and avoid having to pay income taxes on the debt forgiveness of the short sale.
And since most short sales take 4-6 months to close escrow, time is running out to do a successful short sale.
If you plan on doing a short sale this year, you need to get started as soon as possible to make sure your short sale closes escrow in 2012.
To get started or for more information, call The Battiata Real Estate Group at 1-800-980-0628.
Many people are surprised to learn that they can qualify for a short sale with little or no financial hardship and without being behind on their mortgage payments. This is called a Strategic Short Sale.
In the past, lenders required borrowers to have a major financial hardship and to be delinquent on their mortgage payments in order to qualify for a short sale.
This is no longer the case. Hence, the birth of the Strategic Short Sale.
At The Battiata Real Estate Group, we have done hundreds of short sales for borrowers who have no financial hardship to speak of, and have never missed a payment or been behind on their payments.
If you want to do a short sale on your upside down home, and do not have a financial hardship, it is critical that you hire an agent who is experienced at negotiating strategic short sales.
If you are considering a short sale, contact The Battiata Real Estate Group at 1-800-980-0628 or email us at email@example.com.
You can dramatically minimize the impact of a short sale on your credit by continuing to make your payments during the short sale process.
The primary impact of a short sale comes from the missed payments, not from the short sale itself. This is why you will often hear people say that a short sale and a foreclosure are similar as far as the impact on your credit. This is because the lead-up to the short sale or the foreclosure is the same, assuming the borrower is not making payments during the short sale. In other words, in both cases, the borrower misses multiple payments, the lender files a Notice of Default (NOD) and in some cases, a Notice of Trustee Sale (NOTS), although the NOTS is postponed in a successful short sale.
If, however, the borrower keeps current on their payments during the short sale process, they will see no negative impact on their credit. “Debt settled for less than the amount owed” is the way a short sale is reported, and it has no impact on the borrower’s credit score.
Note: I have seen many instances where a borrower with good credit (i.e. mid to high 700′s or higher) does a short sale and keeps current during the process and does not incur any negative impact on their credit score.
So, if you want to minimize the impact of a short sale on your credit, keep making your payments during the short sale process. In addition, be sure you hire a listing agent who is extremely experienced in short sales so that they can negotiate a short sale approval with your lender despite the fact that you are current on your mortgage payments. At The Battiata Real Estate Group, we have done hundreds of short sales for clients who have never missed a payment or been behind on their mortgage payments.
The number of short sales officially surpassed the number of foreclosures in January 2012, according to a Bloomberg News article that quoted a recent LPS study.
Short sales accounted for 23.9 percent of home purchases in January, the most recent month available, compared with 19.7 percent for sales of foreclosed homes, data compiled by the Jacksonville, Florida-based company show.
“It’s a fairly recent phenomenon that short sales have been increasing,” Jonathon Weiner, a vice president in the applied analytics division of Lender Processing Services, said in a telephone interview. “Short sales should be the dominant way of disposing of assets” in distress, he said.
As I have written many times in this blog and elsewhere, while it took them almost 5 years to figure it out, lenders have finally realized that they lose significantly less money when they do a short sale versus going through the foreclosure process.
For this reason, I believe we will see this trend continue as short sales become lenders dominant, preferred method of handling distressed assets.
The Battiata Real Estate Group will be holding a Seminar for Upside Down Homeowners Saturday April 21 at 10am at The Del Mar Hiltion.
Attendees will get the facts from industry experts on foreclosure, deed in lieu of foreclosure, short sale and loan modification, including the tax, legal & credit implications of each.
Topics will include:
Government and private short sale & loan modification programs (incl. HARP & HAFA) and who will qualify.
Lender Outreach programs offering cash incentives to homeowners of up to $35,000 for successful short sales.
How to do a strategic short sale on your home regardless of whether or not you have a financial hardship.
Short Sale FAQ’s, including rental properties, 2nd homes, luxury homes with loan balances of $1 million & higher, asset protection etc.
Credit impact of a short sale, loan modification, foreclosure etc and how to repair your credit afterwards.
Tax implications: The Mortgage Tax Debt Relief Act (expires Dec 31, 2012) & The Insolvency Exclusion
How to avoid signing a promissory note or making a seller cash contribution in a short sale.
Attendees will leave this seminar with a clear understanding of all of their options. This seminar is FREE but you must register to be admitted as space is limited.
This is our 12th Upside Down Homeowner Seminar in the past year and each and every one has been full to capacity, so do not delay.
To register or for more information call 1-800-980-0826 or click here
2012 is shaping up not just to be the year of the short sale, but the year of the strategic short sale.
A strategic short sale is a short sale with no financial hardship. In other words, the seller makes the decision to do a short sale on an upside down home even though they can make their payments and are not behind. It is simply a business decision; a proactive move to get out from under an upside down property.
At the Battiata Real Estate Group, we have seen a dramatic increase in the number of southern California homeowners who are opting to do strategic short sales on their upside down homes. This may be in part due to the fact that the Mortgage Tax Debt Forgiveness Relief Act expires December 31, 2012. This is the bill that excludes most homeowners from paying taxes on the debt forgiveness of a short sale.
Many people wrongly assume that lenders require a financial hardship in order to do a short sale. While this used to be the case, it is no longer. Most lenders will do a short sale with absolutely no financial hardship in order to avoid foreclosure.
If you are interested in a strategic short sale, contact my office at 1-800-980-0628 or email me directly at firstname.lastname@example.org.
FHA has introduced new guidelines for homeowners qualifying to buy another home after completing a short sale. Until now, homeowners had to wait 2-3 years after a short sale before they could qualify for an FHA loan. Now, in cases of a medical hardship or relocation due to job change/loss, FHA has waived the waiting period.
Here are the qualifying guidelines for this program:
1) Homeowner must have been current on their mortgage and all other credit obligations for the 12 months leading up to their short sale.
2) Homeowners must document “hardship” defined as:
a) Job loss and subsequent job transfer/relocation.
b) Catastrophic medical bills (and/or a death in the family) incurred by a member of the borrower’s “nuclear family.”
3) They must be downsizing and relocating to another area.
4) Credit scores must be above 620 and any outstanding collections (i.e. medical bills) need to be paid in full through escrow at close of escrow.
“How soon can I buy again after a short sale?”
“How long do I have to wait?”
As an agent who works with short sales every day, I am asked this question all the time.
The information below is current as of February 2012. I will update our Battiata.com blog as any of these guidelines change.
The waiting periods below do NOT apply when applying for a non government insured loan, or when the derogatory item has been deleted from the borrower’s credit report (i.e. Short sale or missed payments deleted). We see borrowers who have repaired their credit or are borrowing from a credit union etc buying within six (6) months to a year after a short sale.
2012 Conventional Waiting Guidelines (Fannie Mae)
Short Sale / Deed in Lieu of Foreclosure –
TWO (2) Years up to Maximum 80% Loan to Value | 20% Down Payment
FOUR (4) Years up to Maximum 90% Loan to Value | 10% Down Payment – Subject to Private Mortgage Insurance underwriting guidelines.
SEVEN (7) Years above 90% Loan to Value | with less than 10% Down Payment – Subject to Private Mortgage Insurance underwriting guidelines.
FOUR (4) years after your bankruptcy has been discharged.
SEVEN (7) years after the sale date of your foreclosure.
FICO score requirement is 660 or higher
Fannie Mae has reduced waiting periods in cases of extenuating circumstances. Extenuating circumstances include:
Accident resulting in severe injury
2012 FHA Waiting Guidelines
Short Sale with late payments – You may apply for a FHA insured loan THREE (3) years after your short sale closes escrow.
Short Sale with no late payments – No Waiting Period.
Bankruptcy Ch 7 – You may apply for a FHA insured loan TWO (2) years after your Chapter 7 Bankruptcy has been discharged.
Bankruptcy Ch 13 – You may apply for a FHA insured loan ONE (1) year after your Chapter 13 Bankruptcy has been discharged.
Foreclosure – You may apply for a FHA insured loan THREE (3) years after your home has gone to foreclosure.
FICO score requirement is 640 or higher
2012 VA Waiting Guidelines
Short Sale with late payments – You may apply for a VA loan TWO (2) years after a short sale (unless your short sale was on a VA loan in which case restrictions apply).
Short Sale with no late payments – No Waiting Period.
Bankruptcy – You may apply for a VA loan TWO (2) years after a Bankruptcy.
Foreclosure – You may apply for a VA loan TWO (2) years after a foreclosure.
FICO score requirement is 620 or higher.
Experts are predicting a “deluge” of short sales in 2012, as under water homeowners race to start & complete short sales prior to the expiration of the Mortgage Forgiveness Debt Relief Act, which ends on December 31, 2012.
The Debt Forgiveness Act, which was passed by former President George Bush in 2007, excludes homeowners who do a short sale or go through a foreclosure on their primary residence from having to pay income taxes on the forgiven debt, with certain restrictions.
Both short sales and foreclosures are considered debt forgiveness, which is considered ordinary income by the IRS and CA State Franchise Tax Board.
After 2012, assuming these bills are not extended, homeowners will be forced to pay income taxes on the debt forgiveness associated with a short sale or foreclosure.
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).
A similar bill, passed by the California legislature, mirrors the federal law at the state level, excluding California homeowners from having to pay state income taxes on the debt forgiveness associated with a short sale or foreclosure.
“December 31, 2012 seems like a long way off,” said Matt Battiata, Broker of The Battiata Real Estate Group, and a nationally acclaimed real estate and short sale expert, “but short sales take an average of 4-6 months, and can take longer when buyers cancel or banks are overwhelmed. Since no one knows how backed up the banks may get this year, many people are starting early to be safe.”
Matt Battiata will host his 9th “Seminar for Upside Down Homeowners” March 10, 2012 at the Del Mar Hilton in Del Mar, CA. The Seminar is free but space is limited and past seminars have sold out. To register, go to Battiata.com, click here or call 1-800-980-0628.
Major US lenders are broadening their short sale incentive programs and offering cash incentives to more and more sellers in exchange for successful short sales.
These programs, in which a seller is offered anywhere from $5,000 to $35,000 cash at the close of escrow of a short sale, were initially started as pilot programs by Wachovia & Chase.
Both Chase & Wachovia realized early on that they lost significantly less money when a seller did a short sale as opposed to forcing the bank to foreclose.
Now, with the perceived success of these pilot programs, other major banks, including Bank of America, Citi Mortgage, Wells Fargo, Litton Loan Servicing & others are starting to offer incentives as well.
“We are starting to see cash incentives more and more for our short sale clients,” said Matt Battiata, Broker of The Battiata Real Estate Group, and a nationally acclaimed real estate and short sale expert.
“We have seen incentives as high as $30,000 paid to our sellers at close of escrow on relatively inexpensive homes. The banks seem to be ramping up these cash incentive programs,” said Battiata.
Matt Battiata & The Battiata Real Estate Group will hold The Seminar for Upside Down Homeowners Saturday March 10 at 10am at The Del Mar Hilton in Del Mar, CA. This will be the 9th seminar for upside down homeowners that the Battiata Real Estate Group has held in the past year.
“There is still a tremendous amount of misinformation out there with regard to options for upside down homeowners,” said Matt Battiata, Broker & CEO of The Battiata Real Estate Group, “and with almost 50% of San Diego homeowners upside down, and The Mortgage Tax Debt Forgiveness Relief Act expiring at the end of this year, there is a huge need for reliable, accurate information.”
Attendees will learn all of their options in dealing with an upside down home, including the various government and private loan modification programs available, short refinances, short sales, deed in lieu of foreclosure and foreclosure as well as the legal, financial and credit implications of each.
The seminar is free, but space is limited and past seminars have sold out. To register call 1-800-980-0628 or click here.
The Obama administration’s Making Home Affordable (MHA) program includes a myriad of different programs for upside down homeowners. Here is a summary of the different programs available, all of which we cover in our Seminar for Upside Down Homeowners (next seminar Saturday March 10, 2012 at 10 am @ Del Mar Hilton):
Home Affordable Modification Program SM (HAMPSM)
Principal Reduction Alternative SM (PRA)
Second Lien Modification Program (2MP)
FHA Home Affordable Modification Program (FHA-HAMP)
USDA’s Special Loan Servicing
Veteran’s Affairs Home Affordable Modification (VA-HAMP)
Home Affordable Foreclosure Alternatives Program (HAFA)
Second Lien Modification Program for Federal Housing Administration Loans (FHA-2LP)
Home Affordable Modification Program for Rural Development Loans (RD-HAMP)
Home Affordable Refinance Program (HARP)
FHA Refinance for Borrowers with Negative Equity (FHA Short Refinance)
Home Affordable Unemployment Program (UP)
Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (HHF)
To find out if you will likely qualify for any of these programs, call Matt Battiata at 760-930-9898 or register for our upcoming Seminar for Upside Down Homeowners by clicking here.
Shadow inventory in the United States is currently estimated at over 7,500,000 homes and growing.
Consider the following:
Banks currently own over 800,000 REO’s (foreclosures) that they have not yet put on the market, and are simply sitting on. They cannot yet afford to take the losses on these homes, so they are letting them sit vacant, accumulating fines, property taxes, back HOA dues etc.
There are 6,500,000 mortgages currently in default in the United States.
What is the cure rate of these mortgages (the likelihood that they will be brought current as opposed to going to foreclosure or short sale)?
30 days late: 29% Cure Rate (in other words, 71% will go to foreclosure or short sale)
60 days late: 5% Cure Rate
90 days late: 0% Cure Rate
While these are national numbers, these default properties are heavily concentrated in the hardest hit states of Florida, Nevada, Arizona and California.
Recently, you may have read about major banks paying out thousands or even tens of thousands of dollars to incentivize upside down homeowners to do short sales. News reports over the past few months have detailed stories about JP Morgan Chase, Bank of America, Wells Fargo and other lenders paying out huge cash payments to homeowners to encourage them to do short sales as opposed to walking away and forcing the banks to foreclose.
Well, I am here to report that I now have first hand knowledge of this happening.
We just closed a short sale with a sales price of $420,000 in which the lender, JP Morgan Chase, paid the seller a $30,000 incentive to close escrow.
As lenders continue to see the benefits of short sales vs. foreclosure, we expect stories like this to become more and more common.
The primary impact of a short sale on a borrower’s credit score comes from missed payments, not from the short sale itself.
Therefore, any credit impact from a short sale is the result from missed payments, assuming the borrower stops making payments.
With this said, and contrary to popular opinion (even among realtors), it is not necessary to stop making your payments when you do a short sale.
Depending on how good your credit is before you start the short sale process, and depending on how established your credit is, the short sale and the missed payments will have varying impacts on your credit. The better your credit is, and the more established it is, the less impact the short sale and missed payments will have on your credit. And vice versa.
The bottom line is that the impact of missed payments varies for everyone, depending on your credit profile before the short sale.
I have seen a 50 year old homeowner, with very established credit and an 820 credit score, do a short sale, miss 7 months of payments, and end up with a 750 credit score. I have also seen a 23 year old with a 660 credit score miss 2 payments and see their score drop down to the high 500′s.
Again, it varies for everyone, depending on how good your score is and how established your credit is (in other words, how many years you have built your good credit up).
WIth that said, any impact on your credit from a short sale or missed payments should be a relatively temporary hit, as it is possible to quickly repair your credit after the short sale has closed escrow.
For our clients who take steps to repair their credit, we see them buying within 12-24 months after a short sale, and in some cases less.
Ask your Battiata Real Estate Group agent for more information on our credit repair program.
November 7, 2011 – With almost 50% of San Diego homes under water, and an increasing willingness on the part of lenders to work with upside down homeowners to avoid foreclosure, more and more San Diego homeowners are seeking to educate themselves on their options in dealing with an upside down home.
Matt Battiata and The Battiata Real Estate Group will host their “Seminar for Upside Down Homeowners” at 5 convenient San Diego County locations Tuesday November 15 through Saturday November 19.
The dates, times and locations are as follows:
Tuesday Nov 15 Carlsbad: Carlsbad Resort by the Sea @ 6pm
Wednesday Nov 16 Escondido: California Center for the Arts @ 6pm
Thursday Nov 17 Mission Valley: Courtyard Marriott Mission Valley@ 6pm
Friday Nov 18 Chula Vista: Chula Vista Comfort Inn 632 E St @ 6pm
Saturday Nov 19 Del Mar: Del Mar Hilton @ 12 Noon
“This seminar is a great opportunity for any upside down homeowner who wants to educate themselves on their options, whether a loan modification, deed in lieu of foreclosure, FHA short refinance, bankruptcy / lien stripping or a short sale,” said Matt Battiata, Broker & CEO of the Battiata Real Estate Group.
“The seminar is 100% informational – it’s purpose is not to steer people in any particular direction – it’s simply a forum for homeowners to learn about and discuss their options so they can make an informed decision.
The Battiata Real Estate Group has held “The Seminar for Upside Down Homeowners” twice in 2011.
“Our first two seminars were so well received, and tapped such a huge demand, that we have been deluged with requests to do it again,” said Battiata.
The seminars are free but are expected to be full. You must register to attend by calling 760- 930-9898 or register online at http://battiata.com/short-sale-san-diego/seminar-for-upside-down-homeowners/
Bank of America’s Loss Mitigation Department told us today that, as a matter of policy, they will no longer postpone foreclosure sale dates on properties that are 18 months or more in arrears.
Bank of America said they will consider postponements if there is an offer in review, but only on a case by case basis.
In general, it has been our experience that we are able to get most Bank of America foreclosure sale dates postponed as long as we are actively engaged in the short sale process, so while this is not surprising, the fact that they have a policy in place regarding this is significant.
The lesson here, with regard to Bank of America as well as any and all other lenders, is don’t let yourself get significantly behind in payments before starting the short sale process.
Or to put it in a different way, don’t wait until you are in the 11th hour of the foreclosure process to start to explore your options – be proactive and find out about your options early.
In other words, once you find out that your loan modification is not going to get approved, or will not be significant enough to make staying in your home possible, or you decide to stop making your payments, start the short sale process.
It is true that lenders do not want to foreclose if they can avoid it – but if you get far enough along in the foreclosure process, you are playing with fire, and lenders will foreclose.