Tag Archives: short sale

Home Buying After Foreclosure or Bankruptcy- How Long Until I Am Eligible?

Only a few short years ago, the Denver Market was flooded with short sales and foreclosure properties for sale. The bankruptcy rate in Colorado was still fairly high then. Many people lost their homes during that time and have been renting since then. With the current tight rental market and rising rental rates, they may now be wondering, “How long until I can buy again”?

The answer is “it depends…”. Bankruptcy, Foreclosure, Short Sales and Deeds-in-Lieu are all called, “derogatory credit events” in the lending world. The waiting period before you are eligible for a new home loan will vary depending on: which type of “event” you had, the circumstances that lead to it, and the type of loan you want to get for your next house (VA, FHA or Conventional).

The lending world breaks down these events types even further: Foreclosure, Deed-in-Lieu, Short Sale, Multiple Bankruptcies, Chapter 7 Bankruptcies, and Chapter 13 Bankruptcies.

VA seems to be the most forgiving of these derogatory credit events. With VA financing, the buyer is eligible for a new loan only one year after a Chapter 13 bankruptcy. The wait period for the other types of events is only two years.

For FHA, the wait period for Chapter 13 bankruptcies is also after one year of on-time payments and approval from the bankruptcy court. It is 2 years for a person having a Chapter 7 or multiple bankruptcies, and 3 years for a Foreclosure, Deed-in-Lieu, or Short Sale.

Conventional Loans tend to be less forgiving. Wait periods range from 2-7 years depending on the type of event. After the wait period is up, the buyer may also be required to come with a higher down payment amount for their new loan.

The following chart, provided by the Wynn Team with Citywide Loans, provides a “short and sweet” visual summary of the waiting periods required for each circumstance and loan type.  Here is the link to the chart:

Derog Waitng Period for mortgages

Buyers should keep in mind that even if the waiting period has elapsed, lenders still make loan approval decisions based on credit scores and debt-to-income ratios. The waiting period is an added requirement.

If you are ready to buy or sell a home, please contact me!  I would love to help you make that move!  Or, if you have any questions, also please fill out the form below.

 

Debt forgiven in a Short Sale may be taxed as income in 2013!

As you are probably aware, home prices fell off the proverbial cliff around 2007-2008.  And even though values have been improving in the Denver market over the past year or two, most people are still climbing their way out of the housing market’s “pit of despair”.  Those who bought their home with little down, or who had taken equity out of their home before the bust, may now find themselves owing more on their house than it is currently worth.

This becomes a problem if you now have to sell your home.  If you are “upside-down” in your home when you sell, you will either have to bring money to the closing table to pay your lender back in full- or, if your credit is already shot from late payments or pre-foreclosure, maybe a short sale is a good alternative.  In a short sale, the bank allows the homeowner to sell the home for less than what is owed on it.  The lender(s) either agrees to take the proceeds of the sale and forgives the balance owed, or they may require the seller to pay back a portion, or all, of the remaining balance after the house is sold.

Unfortunately, that is not necessarily the end of the story or the financial consequences for the seller.  Up until 2007, the amount of mortgage debt that was forgiven was taxable as income on your federal tax return.  (Ouch! Seems a bit like kicking you when you are already down)!  The Mortgage Forgiveness Debt Relief Act of 2007, now allows many people to exclude the forgiven debt from their income- but you have to “qualify” for the exclusion. For example, the debt forgiven has to be on your primary residence.  It has to be debt that was used to buy, build or substantially improve your home.  The amount forgiven can be no more than $2M for a couple filing jointly ($1M separately). Other conditions apply.

Now here’s the rub!  As you may suspect, all good things must come to an end.   The Mortgage Forgiveness Debt Relief Act expires at the end of 2012.  That means, if you are trying to sell via short sale, you need to close the sale by the end of the year to take advantage of this tax break.  In 2013, any mortgage debt forgiven will go back to being taxable income on your federal return.

This is just a “heads up”  call on my part.  There may be other ways that you can get relief from the tax burden- it just won’t be under the protection of this Act.  To know for sure, you will need to consult a tax adviser or attorney about your specific circumstances.

For those of you that don’t mind poking around the IRS website, you can get a lot of great information about this issue there. Here is a link to a great summary article:  http://www.irs.gov/uac/Ten-Facts-for-Mortgage-Debt-Forgiveness.  The IRS has an interactive online tool (the ITA tool) to help you determine whether cancelled debt is taxable.  You can also find more information on their website in Publication 4681- Cancellation of Debts, Foreclosures, Repossession and Abandonments, or have a look at Form 982.

In the best case scenario, if you need to short-sell your home, you already have it on the market, under contract, and have a very responsive lender (and only one of them).  But, even if you don’t manage to get your short sale closed by the end of the year, all is not lost!  A short sale can still be a good alternative in 2013 and beyond.  If you have a financial hardship, you still have a good chance at getting the bank to forgive some or all of your remaining balance.  You would just have to pay the taxes on that amount- but it’s still less than paying the full balance. If you are in a financial bind, paying less is almost always better than paying more.

The consequences and issues surrounding short sales can be pretty complex. Consequences vary, and can depend upon which state you live in, who your lender is, what type of loan you have, and more. This tax relief Act is just one little piece of the story.

If you have any questions regarding short sales, contact me at 720-201-3049.  I would be happy to discuss whether a short sale might work for you!