Short Sale Blog

Here is the latest short sale news at Seattle Short Sales. We assist hundreds of Seattle area homeowners with short selling their home and avoiding foreclosure.

The Mortgage Forgiveness Debt Relief Act of 2007

Seattle Short Sales - Tuesday, October 23, 2012

The Mortgage Forgiveness Debt Relief Act of 2007 became law on December 20, 2007. The aim of the Mortgage Forgiveness Debt Relief Act is to protect homeowners who have lost their home through foreclosure, or who have taken action to avoid foreclosure through a short sale or mortgage modification, from the double hit of having to then pay income tax on their forgiven mortgage debt.

Normally, forgiven debt is considered by IRS to be the same as taxable income. For example, if your lender forgives $100,000 of your mortgage debt, whether through foreclosure or via a short sale, that $100,000 would be considered taxable income for the year that that debt was forgiven. However, in recognition of the global financial crisis that has resulted in millions of American homeowners struggling to pay their mortgages, the Act was passed as a special provision, to relieve these homeowners of having to pay income tax on the forgiven debt.

The Mortgage Forgiveness Debt Relief Act originally applied only to homeowners who were foreclosed upon, or whose debt was forgiven, between January 1, 2007, and December 31, 2009. Its expiry date has since been extended to December 31, 2012. It is possible that that expiry date will be extended further, but so far no decision has been made about an extension.

The Mortgage Forgiveness Debt Relief Act applies only to mortgage debt that was owing on your principal residence. For your home to qualify as “principal residence”, you must have both owned the home and used the home as your principal residence for periods aggregating 2 years or more during the 5-year period ending on the date of the sale or exchange of the home. Other things to know:

  • The maximum amount you can treat as qualified principal residence indebtedness is $2 million, or $1 million if married and filing separately.
  • The Act applies to debt that is forgiven through foreclosure, through a short sale, or through modification of the terms of the mortgage. Forgiven debt is normally considered by IRS to be income. In IRS terms, what the Act does is allow you to “exclude” this income when filing your tax return.
  • The forgiven debt must have been used to buy, build, or substantially improve the residence. In other words, forgiven debt on both first and second mortgages can be included under the Act provided that the debt was used for one of those purposes - but not if it was used for other purposes, e.g. to pay off credit cards or to buy a new car.
  • The forgiven debt must be secured by that same residence.
  • Refinanced debt proceeds may also qualify for exclusion under the Act, provided that they were used to “substantially improve” the residence and not for other purposes.
  • Debt that has been forgiven on second homes or investment homes does not qualify for exclusion under the Act - but it may be exempt from income tax due to other exclusions such as Insolvency.

If your lender forgives more than $600 of your debt, they are required by law to issue you a 1099-C, Cancellation of Debt form. Make sure that you examine the form as soon as you receive it. Check that the amount of debt forgiven (listed in Box 2), and the fair market value listed for your home (Box 7) are both correct. If there are any problems with the form, have your lender correct them immediately.

To exclude forgiven debt from taxable income, fill out IRS Form 982 and attach it to your income tax return.

For more detailed information about excluding forgiven debt from your taxable income, through the Mortgage Forgiveness Debt Relief Act and through other exclusions such as Insolvency and Bankruptcy, download IRS Publication 4681.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

Is my Income too High to be Approved for a Short Sale?

Seattle Short Sales - Saturday, August 04, 2012

Many homeowners who are underwater with their mortgages are still employed. Their financial troubles stem from added expenses: caring for elderly relatives, unexpected medical costs, or children starting college, rather than from low income. They may be reluctant to apply for a government short sale program (such as FHA or HAFA) because they are afraid that their income is too high to qualify.

The good news is that neither of the two government short sale programs run by the Department of Housing and Urban Development (HUD) have any income limits for homeowners who are considering a short sale. The two programs are the FHA Pre-Foreclosure Sale Program, and the Home Affordable Foreclosure Alternatives program (HAFA). While you may be able to get your short sale approved outside one of these programs, the advantages of these government short sale programs are:

  • your deficiency balance (the shortfall still owing after paying sales proceeds to your lender) will automatically be waived, and
  • you may be eligible for a cash payment of up to $3000 for relocation assistance.


FHA Pre-Foreclosure Sale Program
The Federal Housing Administration (FHA) is a non-taxpayer-funded division of HUD. Its role is to improve housing standards and loans, particularly by insuring mortgages for home-buyers who might otherwise have difficulty qualifying for a loan.

If your mortgage is insured through FHA, you may be eligible for the FHA Pre-Foreclosure Sale Program.

FHA does not have any upper income limit that might disqualify a struggling homeowner from their short sale program. However, they do have a requirement that the homeowner’s inability to continue to make their mortgage payments must be a result of a change in their financial situation, e.g. either a drop in income, or increased living expenses.

A lender looking to approve a homeowner for a short sale will also run a financial analysis to determine the homeowner’s ability to pay. They add up the homeowner’s total income, and subtract from that the homeowner’s total expenses (mortgage payment, food, bills, other debts). If they calculate that the homeowner can actually continue to afford mortgage payments, they may deny the short sale request and suggest a loan modification.

You can find the complete FHA short sale eligibility requirements here:
HUD Mortgagee Letter 2008-43

HAFA

HAFA is run by HUD as part of the Making Home Affordable program (MHA). As for the FHA program, there is no income limit for homeowners to qualify for a HAFA short sale.

To qualify for a HAFA short sale, homeowners must qualify for HAMP, the Housing Affordable Modification Program. If their income or cash flow is not sufficient to meet the qualifications for a loan modification, they then may apply for a HAFA short sale.

The original HAMP criteria required that the homeowners’ income not be too high relative to their mortgage payments. The monthly payments on their first mortgage had to be more than 31% of their gross monthly income for them to qualify for HAMP (and therefore for HAFA).

For example, if a homeowner’s mortgage payment was $1600/month, and they earned $5000 per month, they would qualify (because their mortgage payment is 32% of their income). But a homeowner with the exact same income, whose monthly mortgage payment was $1200 (or 20%) would not qualify.

However, effective February 2011, changes were made to HAFA eligibility regarding income. The servicer no longer is required to verify that the mortgage payments are more than 31% of the income - but they may implement their own income requirements. In other words, a letter documenting hardship is still required, but each servicer may decide on their own income thresholds.

Although further changes to the HAFA program took effect this past June, they do not include any changes about income requirements.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

Numbers in For First Half of 2011: We Have Discounted Over $18 Million in Mortgage Debt for Distressed Homeowners So Far This Year

Seattle Short Sales - Tuesday, July 12, 2011

We’ve already presented you with recent numbers straight from the Federal Housing Finance Agency: more and more distressed homeowners nation-wide are taking advantage of short sales to relieve themselves of mortgages that they can no longer afford. http://seattleshortsales.com/_blog/Short_Sale_Blog/post/Short_Sales_Continue_to_Grow_in_Spite_of_Decline_in_Other_Foreclosure_Prevention_Actions/

Well, our own numbers at Seattle Short Sales, Inc., are now in for June. And they clearly show that short sales are growing here in the Seattle area. Comparing the number of short sale approval letters that we negotiated over the last six months of 2010 to those from the first six months of 2011, we found that:

  • The number of new short sale approval letters that we were able to obtain from lenders grew by 43% over the six month period. In the last half of 2010 we negotiated 123 approval letters for our homeowners, and in the first half of this year that number was up to 176 new approvals.
  • The average discount that the homeowner received on their balance owing also grew by 6% in the first half of this year, compared to the last half of 2010. In the second half of 2010, the average discount a homeowner received from their lender to pay out their mortgage was $96,480. But in the first six months of this year, that average discount had grown to $102,278.
  • The total mortgage debt that we managed to get discounted for our homeowners grew by 52%. The total mortgage debt discounted for all the approval letters we negotiated in the second half of 2010 was $11,867,000. For the first half of 2011, that total debt discount was up to $18,000,001.

The majority of our short sale approval letters come with full deficiency waivers. This means that the homeowners, who were in a negative equity situation (owing more on their mortgage than the house was worth) are not responsible for paying back the debt discount - the shortfall on the discounted amount they paid back of their loan. They were able to rid themselves of the mortgage that they could no longer afford, and are free to get a new financial start in life.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

One third of homes in Seattle area worth less than their mortgages

Seattle Short Sales - Wednesday, February 09, 2011

An analysis published yesterday in the Seattle Times indicates that more than one third of mortgaged homes in the Seattle area are worth less than what the owners owe on their mortgages. This situation is known as “negative equity.”

The study looked at homes in King, Pierce and Snohomish counties. By the end of 2010, 34.3% of single-family homeowners with mortgages owed more on their mortgages than the value of their home. This number is up from just 23% one year ago, and also higher than the national average of 27%.

This situation is worse in Seattle than for other parts of the country because Seattle has lagged behind the rest of the country in feeling the effects of the mortgage crisis. As of last September, Seattle home prices were considered to be overvalued, which means that they could be affected even harder by coming home price drops - which are predicted to continue their downhill slide for another year or more. By late last year, Seattle was recording the highest rate of increase of foreclosures in the country.

Negative equity means that homeowners are more likely to default on their mortgages - whether they do so because they no longer have a choice, or whether they choose a strategic default.

According to the article, 28% of homes that sold in the Seattle metropolitan area in December were sold at a loss, relative to their original purchase price. In Snohomish County, that figure was 42%. Homes in King, Pierce and Snohomish counties are now worth approximately what their value was in 2004.

One way that homeowners are extracting themselves from a negative-equity situation is by undertaking a short sale. They work with their lender to obtain approval to sell the home at a loss, and to use the proceeds of the sale to pay off the loan at a discount. The number of short sales undertaken by homeowners struggling with negative equity grew by 250% from July 2009 to July 2010.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/


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