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Critical Short Sale Issues

by Ashlie DuCros

CRITICAL SHORT SALE ISSUES
 From the many calls and emails I receive, I can tell there is still a lot of misunderstanding surrounding a lot of issues involving short sales. The following are a number of recurring critical issues involving short sales.

 1.  CALIFORNIA INCOME TAX APPLIES TO ALL SHORT SALES. Unlike Federal law which extended its exemption until December 2012, on certain loans which received debt relief on a short sale beginning in January 2007. However, California only gave this tax break on certain qualifying loans for debt relief on short sales that closed escrow between JANUARY 1, 2007 through DECEMBER 31, 2008. Therefore, there is no exemption for California Income Tax on short sale debt relief this year or in any future years until, and if, the California State Legislature ever decides to pass a bill extending this relief.

 Remember that even under Federal Income Tax rules, only a very limited number of short sales in which there is debt relief on loans are exempted from income tax. Those are only loans on the personal residence of the borrower, and specifically a loan to purchase the personal residence, a loan to refinance the purchase money loan without taking out any money (i.e. essentially an interest rate change), and loans on personal residences in which the  money is used to improve the personal residence. In other words, there is no tax relief even on a personal residence if the loan receiving the debt relief was a loan for cash to the owner which was spent on something other than improving the personal residence.

 2.   A NON-RECOURSE LENDER CAN MAKE A  SHORT SALE DEAL WITH THE OWNER FOR THE OWNER TO CONTINUE TO MAKE PAYMENTS AFTER THE CLOSE OF ESCROW.  There is much confusion over this issue because of the perception that the California “anti-deficiency” statutes and case law apply to short sales. This is incorrect. The “anti-deficiency” statues in California apply when a foreclosure sale takes place. The whole point of a short sale is to avoid the foreclosure sale, and if the debt is forgiven in a short sale, then no monies would be due to a Lender after the close of escrow. If a foreclosure sale takes place, the owner may be subject to a deficiency judgment if the loan is a recourse loan, i.e. it is not protected by the California “anti-deficiency” statutes.

 These statutes and related case law are somewhat complicated in defining recourse versus non-recourse loans, sold out junior lien holders, etc. Therefore, every few years or so I publish a Newsletter which discusses the basic anti-deficiency rules. You need only review my April 2008 Newsletter for an understanding of the basic “anti-deficiency” rules. However, the Owner must always be referred to a lawyer for legal advice if they are trying to make a decision as to whether or not to close a short sale instead of letting the property get sold at a foreclosure sale.

 Remember that there are two types of short sales. A short sale in which the Lender not only releases the lien ( i.e., reconveys the Deed of Trust) but agrees to cancel the note or in some other way in writing, agrees to forgive any debt remaining after the payoff at the close of escrow. On the other hand, some Lenders, even those that could not collect money from the owner/borrower after a foreclosure sale, sometimes merely offer the owner/borrower a “Release of Lien” without a cancellation of the Note. In this case, the escrow closes because the Deed of Trust is removed, but the Seller is obligated to continue to pay on the Note. This is because there was no forgiveness. Some Sellers go along with this arrangement of continuing to pay on the Note after the close of escrow because the Listing Agent did not explain the contents of the Lender’s “consent” letter.

 Therefore, there are certainly cases in which a foreclosure is preferable over a short sale. Here is the example: The Lender would not be able to seek a deficiency after a foreclosure sale because it’s a non-recourse loan under the anti-deficiency statutes and the other loan or loans is/are also non-recourse loan(s). Now, the Seller gets a “consent letter” on a short-sale transaction involving these facts, but the lender or lenders are only agreeing to a “Release of Lien” without cancelling the debt. Therefore the Seller would then have to make payments on the note (s) after the close of escrow. In this case, the Seller would financially be better off with a foreclosure because after the foreclosure, the Seller would owe nothing to the lender(s).

 3.  THE PROPER USE OF C.A.R. FORM SSA (SHORT SALE ADDENDUM). First, a date must be filled in on paragraph A which allows either party to cancel after that date if there has not been a written short sale approval.  I have seen files in which the SSA form was lacking any date in paragraph A.  It would obviously be difficult to determine the outcome of any dispute involving an SSA without a date filled in paragraph A. Second, paragraph B involves two choices. These choices must be carefully considered and properly negotiated depending on which party the agent is representing. The first choice is whether or not the time periods for the contract begin immediately or only after there is written short sale consent. The second choice deals with the disposition of the deposit. Is it cashed immediately or only upon the written short sale consent? These are critical issues for the Buyer and Seller. Finally, please use my ADDENDUM TO C.A.R. SSA FORM WHICH WAS PUBLISHED IN BOTH MY MAY AND JULY 2008 NEWSLETTERS.
 
- Vince MacIsaac -

American Recovery and Reinvestment Act of 2009
First-Time Home Buyer Tax Credit


1.Who is eligible to claim the tax credit?
First time home buyers purchasing any kind of home—new or resale—are eligible for the tax
credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and
before December 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs. If the purchase happened before December 31, 2008 please see #17.


2. What is the maximum tax credit?
The maximum credit is up to $8,000 but no more than 10% of the purchase price of the home, the credit will be for the lesser of the two.

3. What is the definition of a first-time home buyer?
The law defines "first-time home buyer" as a buyer who has NOT owned a principal residence
during the three-year period prior to the purchase. The tax credit is for home buyers (either spouse
if filing jointly) who meet this guideline. Ownership of a vacation home or rental property not
used as a principal residence does not disqualify a buyer as a first-time home buyer.

4. How do I claim the tax credit? Do I need to complete a form or application?
Participating in the tax credit program is easy. You claim the tax credit on your federal income tax
return. No other applications or forms are required. No pre-approval is necessary; however,
prospective home buyers will want to be sure they qualify for the credit under the income limits
(SEE #7) and first-time home buyer tests explained above.

5. Does the credit need to be repaid?
There is NO recapture or repayment clause IF the home is owned for at least 36 months before
being sold.


6. What types of homes will qualify for the tax credit?
Any home purchased by an eligible first-time home buyer will qualify for the credit, provided that
the home will be used as a principal residence and the buyer has not owned a home in the previous three years. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats.


7. Instead of buying a new home from a home builder, I have hired a contractor to construct a
home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been "purchased" on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after January 1, 2009 and before December 31, 2009. In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date (closing).

California Dept. of Real Estate, Broker #01050210. Please consult a licensed legal, tax and/or investment professional to obtain laws and qualifications as they pertain to your specific situation. The information provided is not intended or written to be used as legal, tax and/or investment advice. Loan approval is not guaranteed and is subject to verification of specific information that is requested at time of application. Specific programs and rates may not be available for all borrowers.


8. How do I qualify and what is "modified adjusted gross income?”
To qualify for the full tax credit, married couples’ modified adjusted gross income (MAGI) should
be under $150,000 and single filers’ MAGI should be less than $75,000. Partial tax credits may be available for married couples with MAGI incomes over $150,000 but under $170,000 and single filers with incomes over $75000 but under $95,000. Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains. To determine modified adjusted gross income (MAGI), add to AGI certain amounts such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.


9. Can you give me an example of how the partial tax credit is determined? Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000. Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800.


**Please remember that these examples are intended to provide a general idea of how the tax
credit might be applied in different circumstances. You should always consult your tax advisor for
information relating to your specific circumstances.


10. Does the credit amount differ based on tax filing status?
No. The credit is in general equal to $8,000 for a qualified home purchase, whether the home
buyer files taxes as a single or married taxpayer. However, if a household files their taxes as
"married filing separately" (in effect, filing two returns) they would each claim 5% of the home
purchase, therefore the credit of $8,000 is claimed as a $4,000 credit on each of the two returns.

11. I heard that the tax credit is refundable. What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the
taxpayer has little or no federal income tax liability to offset. Typically this involves the
government sending the taxpayer a check for a portion or even all of the amount of the refundable
tax credit.

For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income
tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit
the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that taxpayer qualified for the
$8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000
minus the $1,000 owed).

12. What is the difference between a tax credit and a tax deduction?
A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer
who owes $8,000 in income taxes and who receives a $8,000 tax credit would owe nothing to the
IRS. California Dept. of Real Estate, Broker #01050210


Please consult a licensed legal, tax and/or investment professional to obtain laws and qualifications as they pertain to your specific situation. The information provided is not intended or written to be used as legal, tax and/or investment advice. Loan approval is not guaranteed and is subject to verification of specific information that is requested at time of application.
Specific programs and rates may not be available for all borrowers. A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $8,000 in income taxes. If the taxpayer receives a $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,2 00 (15 percent of $8,000), or lowered from $8,000 to $6,800.

13. I am not a U.S. citizen. Can I claim the tax credit?
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a
principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of "nonresident alien" in IRS Publication 519.

14. If I am qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return? Yes. The law allows taxpayers to choose ("elect") to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount. The law allows taxpayers to elect to treat qualified 2009 purchases as a 2008 purchase so the can receive the tax credit on their 2008 tax returns.


15. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in
2008 or 2009, depending on in which year my credit amount is the largest?
Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in 2009
and a larger credit would be available using the 2008 MAGI amounts, then you can choose the
year that yields the largest credit amount.

16. I plan to buy a home before December 31, 2009, with this credit I will owe less in income
taxes. Is there any way to adjust my income now so I can save for a down payment?
Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce
their income tax withholding. Reducing tax withholding (up to the amount of the credit) will
enable the future home buyer to accumulate cash by raising his/her take home pay. This money
can then be applied to the down payment. Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919
contains rules and guidelines for income tax withholding. Prospective home buyers should note
that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest
charges and penalties. The provides a way for a home buyer to access the money allocable to the credit sooner than waiting


17. What if I purchased before December 31, 2008, does the new law apply to me?
Unfortunately the answer is no. If the home was purchased on or before December 31, 2008 home buyers will fall under the previous stimulus guidelines with a maximum credit of $7,500 or 10% of the purchase price, whichever is less. The home buyer will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit until two years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed. If the home owner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven.

California Dept. of Real Estate, Broker #01050210
Please consult a licensed legal, tax and/or investment professional to obtain laws and qualifications as they pertain to your specific situation. The information provided is not intended or written to be used as legal, tax and/or investment advice. Loan approval is not guaranteed and is subject to verification of specific information that is requested at time of application. Specific programs and rates may not be available for all borrowers.

 

5 Tip for Homebuyers Seeking a Mortgage

by Ashlie DuCros

Shopping for a mortgage...read this!!!! Click on the link below for more of this article.


Daily Real Estate News  |   February 18, 2009 
5 Tips for Homebuyers Seeking a Mortgage
Here’s a warning for potential borrowers: Nervous lenders have tough new rules and are paperwork crazy.

"Borrowers are going to have to prove they are the borrower they say they are," says Keith Gumbinger, vice president of HSH Associates, a mortgage-industry publisher in Pompton Plains, N.J.

Gumbinger says homebuyers should consider these things before they apply for a loan.

1. Down payments are critical. Borrowers should expect to put down at least 10 percent for a “conforming loan” – a mortgage that Fannie Mae and Freddie Mac will purchase.

2. Credit scores count. A 720 on the 850-point FICO rating scale will get a borrower access to the best rates. Rich Bira, branch manager of FCM Direct Lender in Chicago, says: "A score between 720 and 739 gets 0.125 percent added to the rate, a score between 700 and 719 gets 0.375 percent added to the rate, and a score between 680 and 699 gets 0.5 percent added to the rate.”

3. Consider VA and FHA. Borrowers without down payments or with less than stellar credit scores should consider these government-insured loans offered through the Federal Housing Administration of the Veterans Administration.

4. Unearth the records. Before applying, borrowers should organize tax, banking and other records that prove income, savings and debts. They should also expect to be patient about what may seem to be endless requests for information.

5. Get rid of debts. Limiting debts, including what borrowers expect to pay for the mortgage, to less than 43 percent of gross income is important.

Source: Chicago Tribune, Mary Umberger (02/15/09)

http://www.realtor.org/RMODaily.nsf/pages/News2009021806?OpenDocument

 

 

Is a Stimulus for Housing Next?

by Ashlie DuCros

Good news for homeowners!

Is a Stimulus for Housing Next?
Sources say the Obama administration's housing plan, to be unveiled Feb. 18, will allow bankruptcy judges to modify mortgages and will use Fannie Mae and Freddie Mac to refinance borrowers who owe more than their homes are worth but are current on their payments.

It also will reduce loan payments for struggling home owners through lower interest rates or longer loan terms, with the government possibly giving lenders a subsidy of $800 to $1,000 per loan to minimize losses.

Home owners could be forced to ultimately repay the difference between their original and reduced payments--a provision meant to keep borrowers from defaulting for the purpose of qualifying for assistance, and the administration also wants Fannie Mae and Freddie Mac to adopt national loan modification standards.

Source: The Wall Street Journal, Deborah Solomon (02/18/09)

© Copyright 2009 Information Inc.

http://www.realtor.org/RMODaily.nsf/pages/News2009021801?OpenDocument

Avoid Foreclosures!! Sellers, you have options! Know your Rights!

by Ashlie DuCros

 

Has your loan adjusted making your payment unaffordable?

Have you missed a payment or two and are not sure what to do?

You may qualify for one of the following “Non-Foreclosure” options:

 

1. Forbearance – when a lender all you to pay back late payments over 6-12 month period.

2. Loan modification – when a lender agrees to give you a better and more affordable interest rate.

3. Short Sale – when a lender forgives the balance after you sell your upside down house (benefits are avoiding foreclosure on your record, living in the house for free during the process and there is not cost to the borrower).

4. Short- Refi – When a lender discounts their payoff if another lender agrees to refinance the property.

 

Call me today to find out which one you qualify for, or simply login to

www.ADshortsales.com

 

 Ashlie DuCros

714-743-9889

ashlie.ducros@mailpcr.com

 

 

 

 

 

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Ashlie DuCros & Associates
Coldwell Banker Previews Global Luxury
21580 Yorba Linda Blvd.
Yorba Linda CA 92887
714-743-9778
Fax: 714-849-5489