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Tax Breaks On Mortgage Aid May Expire: What Does It Mean For You?

Are you responsible for paying taxes on forgiven mortgage debt?

It has been said that the only two things that are certain in life are death and taxes. And even then, taxes are the worse of the two because, according to Will Rogers, “death doesn’t get worse every time Congress meets.” But a few years ago, Congress actually passed legislation (the Mortgage Forgiveness Debt Relief Act) that would relieve taxes on forgiven mortgage debt, such as in a short sale. Unfortunately, that legislation is scheduled to expire at the end of 2012. Unless extended by Congress, what would expiration of the Mortgage Forgiveness Debt Relief Act mean for you?

 Here are some questions that homeowners are asking about paying taxes on forgiven mortgage debt.

How does the Mortgage Forgiveness Debt Relief Act work?
The idea behind this legislation is rather simple and applies most clearly where the bank agrees to extinguish a mortgage loan in order to recover less than the full value of a primary home (ordinarily through a short sale). If you have a home on which you owe $200,000 and you were to sell it as a short sale for $175,000 with the bank agreeing to extinguish the remaining debt, you would ordinarily be responsible for paying taxes on the $25,000 difference because the IRS considers the debt forgiven as income.  The Mortgage Forgiveness Debt Relief Act, however, makes that $25,000 in non-taxable.  If you are planning on selling your home before foreclosure as a short sale, there is a big incentive to do it before the end of 2012 when the legislation expires.

Do the provisions apply to any forgiven debts related to my mortgage?
No. According to the IRS’s website, the Mortgage Forgiveness Debt Relief Act “applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.”The debt must also be secured by your home.

Will Congress extend the provision past December 31, 2012?
There are signs that the provision will be extended past December 31, 2012. In fact, the Senate Finance Committee recently passed a one-year extension for the legislation. However, as of right now, Congress has not passed the extension. It is expected to, however, as part of a larger tax measure that is being discussed by lawmakers in the months to come before year’s end.

Are there instances in which the homeowner is still responsible for the taxes?
The Mortgage Forgiveness Debt Relief Act does not apply to all homes that are sold for less than what the homeowner owes on them. If you have a short sale on a home that is not your primary residence (a second home or investment property) or if you have debt forgiven on a home equity line of credit, you are still required to report those monies to the IRS.

Will I be taxed on the difference between my outstanding mortgage balance and the value of my home if my home goes through foreclosure?
There is no short answer to this question. For homeowners who have a recourse mortgage (i.e., a mortgage where the lender can pursue the borrower for any money owed as a result of the difference between the selling price and the amount owed) , any debt that is forgiven is considered as income. 

On the other hand, with non-recourse mortgages, the forgiven debt is not considered income to the borrower according the Mortgage Forgiveness Debt Relief Act. With these mortgages, the lender is not allowed to pursue you for the price difference following a foreclosure. The laws regarding recourse and non-recourse mortgages generally depend on the state in which you live.

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Are the Banks Following through on Their Promise of Mortgage Help?

In February 2012, five major banks agreed to help troubled homeowners in order to settle lawsuits brought against them. Are they following through with their promises?

Five of the major banks in the United States are following through with their promise to help thousands of troubled homeowners who have had problems paying their mortgage payments. According to reports from the government, more than 140,000 homeowners have received financial assistance that totaled $10.6 billion and there is more to come.

The five major banks involved in this mortgage relief are JPMorgan Chase, Wells Fargo, Bank of America, Ally Financial and Citigroup. In total, the five banks have agreed to offer as much as $25 billion in relief in order to settle cases against them that resulted from investigations of foreclosure abuse. The agreement was reached in February so the banks are making good progress on their efforts to hold to their word.

There was only one reported incidence of one of the banks faltering. Bank of America did not complete any modifications between March 1, the first effective date of the settlement, and June 30. But BofA responded to those reports quickly by saying that it completed more than 3,800 mortgage modifications between July 1 and August 21. Those modifications totaled nearly $600 million in financial help. One of the reasons cited for not getting modifications completed by June 30 was because homeowners had to wait until a three-month trial period before they were finalized.

The other four banks, however, completed a total of about 7,100 first mortgage modifications during the March 1 to June 30 time period. The total money spent among those four banks was about $749 million. About $367 million of that was for modifications made through JPMorgan Chase which helped almost 3,000 troubled homeowners during that initial four month period.

The banks are volunteering the information about how many homeowners they have helped since the agreement was put into place. The data is made public which is one of the motivations for them to keep good to their promise. Another motivation for helping homeowners with their mortgage modifications is due to the fact that each bank gets credits for their efforts. For instance, the bank is given a credit of 45 cents for every dollar that it forgives in a short sale if the bank owns that loan. If the mortgage loan is held by an investor, the bank gets a credit of 20 cents for every dollar. Short sales, which occur when the bank lets a homeowner sell their home for less than what they owe, account for the biggest debt forgiveness under this new settlement. In fact, the five banks forgave nearly $9 billion worth of mortgage debt as a result of short sales.

According to Katie Porter, a law professor at UC Irvine who has been following the settlement and the compliance of the banks, this is a great step in the right direction. However, she says more needs to be done. Do you feel the same way?

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Is Serial Refinancing a Good Idea?

As mortgage rates continue to fall lower and lower, should homeowners keep refinancing their loans even if they may have recently completed a refinancing?

With mortgage rates continuing to be at historic lows, it’s no wonder that millions of homeowners are refinancing their homes to take advantage of these low rates. But does it really pay to refinance your home more than once in a short period of time?

According to The Wall Street Journal, there are more than two million homeowners who have refinanced their mortgage loans at least two times since 2009. Between the years of 2006 and 2008, more than three million homeowners refinanced their home two times or more. That is because the mortgage rates continued to drop below their expectations through the years and it made financial sense to refinance several times to save money over the term of their loan. This is referred to as “serial refinancing” and many banks and lenders have helped homeowners save money by waiving closing costs when they refinance their mortgage loan.

Refinancing is a much viable option now than it was at the height of the housing boom. According to Freddie Mac, more than 85 percent of the mortgage borrowers who refinanced during that time ended up with a loan amount that was higher than their balance because they decided to take out some extra cash at the time as well. In order to do this, many borrowers agreed to thousands of dollars of closing costs and a large fee if they decided to pay off their mortgage early. During those days, it was only prudent to refinance your mortgage if you could save at least two percentage points on your interest rate and if you planned on staying in your home long enough for the lower monthly payments to break even with the upfront costs that refinancers had to pay.

These days, however, homeowners are refinancing their mortgages when they can save as little as three-eighths of a point. One homeowner – Dean Spalding – is also a financial executive in Kentucky. He has refinanced his 15-year loan four times in the last three years. Two of those times were in the last year alone. He has a balance of $350,000 on his home and he has been able to reduce his mortgage rate from 4.25% to 2.875% by refinancing. His last refinancing effort has given him a savings of $150 on his monthly payments.

But it can’t be that easy, right? There is a small catch. In exchange for waiving the closing costs, the lender has to do something to make up for that loss of revenue. As a result, many of them are increasing the rate that you qualify for by about 0.25%. That differs depending on the actual lender, but that’s what many of them are starting at. But that’s a small price to pay in exchange for getting a much lower mortgage rate that will save you money in the long run. This exchange is also helping the banks bring in business during a time when mortgage applications are significantly down.

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Is serial refinancing worth all the trouble? Or would you rather pay the extra percentage point or two in order to avoid all of the paperwork involved in a refi?

Four Common Myths about Prequalifying for a Mortgage

There is a great deal of misinformation out there about getting prequalified for a mortgage. Here is the real truth about some of those common myths.

One of the most important things that you need to know before you start shopping for a home is your prequalification status. This is one of those terms that many inexperienced home buyers get confused about. Many home buyers think that prequalification is the same thing as preapproval, but that simply isn’t the case. Your prequalification is the actual amount of a mortgage that you can afford and that number is based on your current financial situation. If you’ve been confused about what it means to prequalify for a mortgage, here are some common misunderstandings and real answers to give you a better understanding.

Myth 1: Getting Prequalified is the Same as Getting a Mortgage Loan
Many people think that once you are prequalified for a certain amount, it is the same as signing up for a loan. But that is simply not true. A mortgage loan is much more involved and it is a much larger commitment than getting prequalified. Prequalified just tells you how much you can afford. The commitment begins when you get approved for a mortgage loan.

Myth 2: All Lenders are the Same When Getting Prequalified
You might think that getting prequalified is going to be the same regardless of the lender. But when you are going through the prequalification process, you want to make sure you find a company that will work with you. During this stage, the lender will do some coaching and advising so you want to be sure you work with a company that you are comfortable with. If you do not feel comfortable working with them during the prequalification stage, you could be asking for trouble in the next phase of your mortgage loan shopping.

Myth 3: No Preparation is Needed for a Prequalification
Getting prequalified is not as difficult as getting approved for a loan, but much of the process is the same and it does take some preparation on your part. In fact, you should prepare for the prequalification phase the same way you prepare for the mortgage approval stage. You may not be required to bring any paperwork when you are getting prequalified, but it will help you get a more accurate figure of what you will be able to afford. Bring your most current pay stubs with you along with tax returns from the last two years. You should also be able to prove your current income and a recent credit report. This will give the lender a better idea of your financial situation and they can be more accurate with your prequalification amount.

Myth 4: Stretching the Truth about Your Financial Situation has No Long-Term Effects
Many first time home buyers go into the prequalification stage thinking that they can exaggerate their income or their current financial status so they can get prequalified for a larger amount. But this can be detrimental to the entire process. For one thing, if you are prequalified for a larger amount than you can afford because you lied about some numbers, you could end up in major financial trouble if you get approved for that loan amount. But you should also be honest about your income. Don’t hide anything because you could lose credibility with the lender and they could decide not to work with you any longer.

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These four misconceptions about getting prequalified for a mortgage are very common. But now that you know the truth, you can get a more accurate figure when you decide to go through the prequalification stage for your next home.

What are Lenders Allowed to Ask You When Applying for a Mortgage?

When you are applying for a loan, a mortgage lender can ask you about almost anything related to your finances. But there are a few questions they may try to ask that you simply don't need to answer.

Due to the collapse of the housing industry in 2008, lenders have been more careful about who they loan money to for mortgages. As a result, that means more guidelines for underwriting and more information from borrowers on applications. But regardless of the more stringent guidelines, there are still some things that lenders are not allowed to ask you. Here are some of the questions that lenders are not allowed to ask you when applying for a mortgage.

Family Status

Asking about your marital status is a little tricky. A mortgage lender is allowed to ask about your marital status, but only in a certain way. For instance, they can ask if you are married, separated or unmarried. However, they are not allowed to ask if you are single, divorced or widowed.

Similarly, mortgage lenders are not allowed to ask you if you are currently pregnant or if you are planning a family. Of course, the answer to this question could work against you if the answer is “yes” because it could affect your financial future. Lenders can only ask about your current dependents and their ages because that is information that is already available on your tax returns.

Child Support and Alimony

While a mortgage lender can ask if you are paying child support or alimony, they cannot require you to report any income that you receive from an ex-spouse. However, it is often beneficial to you if you are receiving these payments because it will put you in a better position to qualify for the mortgage loan.

Disabilities

A potential mortgage lender is not allowed to ask if you have any illnesses or disabilities when you are applying for a mortgage. This information is protected under the Americans with Disabilities Act and the Fair Housing Act.

What To Do if Asked an Illegal Question

Even though potential lenders are not allowed to ask these questions, that does not mean they are not going to pop up during an interview or application process. If this happens to you, the first thing you should do is tell the lender that you are not required to provide an answer to that question. Next, you should take the issue to the company’s manager. If the manager does not want to do anything about your complaint, you may need to take your complaint to the state’s banking commission. You can do this by filing formal complaints with the Federal Trade Commission or the Consumer Federal Protection Bureau. You should also look for a different mortgage lender that you are more comfortable with. If the lender is breaking the law during the interview process, there is a chance that they will be less than ethical when handling your mortgage.

Despite these questions that mortgage lenders cannot ask you, there are many questions left that they are allowed to ask. For instance, anything related to your income, your assets and your job is fair game. They can also ask about your current debt and your available credit. Be prepared to answer those questions and bring along any documentation and bank statements that will prove you can repay the mortgage loan if you get approved.

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You May Get a Big Advantage by Getting a Mortgage From a Small Bank

Large, nationally known banks may first come to mind when you’re applying for a mortgage, but you should not over look the advantages that smaller, community, banks may offer you.

Community banks, which the FDIC defines as having under $1 billion in assets, generally focus on lending and collecting deposits. Most are either stand-alone corporations or are owned by a bank holding company, which is designed for the sole purpose of owning a bank. In contrast, most of the larger, more widely known banks are commercial banks that are owned by financial holding companies. They may have subsidiary companies engaged in different types of financial activities, including investment banking, insurance sales, credit cards and stock brokering.

Another important difference between community banks and large commercial banks is that community banks tend to concentrate their activities in small geographical regions, while large banks may conduct business nationally or even worldwide.

With their focus on a particular area, small banks may be more familiar with local conditions in the housing market than are the major commercial banks. As Richard Brown, Chief Economist of the FDIC said, "Community bankers tell us that they have local ownership, they make decisions locally and it's based on their knowledge of the local market area. They also tell us there is a different way of doing business at community institutions. Some researchers … have described" community banking as more "relationship lending instead of transactional lending."

Relationship lending can work in your favor when you’re applying for a mortgage. With their knowledge of the nuances of the local housing market, community banks may be more willing to lend you money than a commercial bank.  In particular, this may apply if you already have a checking or savings account, or have a car or business loan, with that bank. Even better, the loan officer may personally know you, and with your banking history readily available, it is more likely that you would get a loan that a large commercial bank may turn down.

You might also take into account the benefit to your own neighborhood by conducting business with a local, community bank. Small community banks mostly gather deposits from their region and then tend to lend to local homeowners and businesses. Large commercial banks can get their deposits from sources around the world and fund loans across the country, as well as buying foreign currencies or bonds, corporate stock or bonds and various other securities.

Then, remember that a community bank’s localized service lends itself well to negotiations. Smaller banks want your business, since mortgage lending is one of their prime business operations, compared to large banks, which may make investments in many other areas. And you are often talking to the person making the lending decision, which should increase your odds of getting a better deal. They may be more flexible compared to the layers of bureaucracy you may have to wade through when dealing with a large bank.

Also, keep in mind that customer service is an area where local banks excel.  If you need help, either while your mortgage is being processed or you have begun making payments, it is far easier to get an answer by stopping by your local community bank’s branch office and dealing face to face with your banker than it is to contact a loan officer from a large commercial, whom you have likely never met, by phone.

A good way to start the process of getting a mortgage is finding the most competitive mortgage rates in your area by checking BestCashCow.com. You can also use the sites’ mortgage calculator to see the monthly cost of a mortgage as well as to compare mortgages of different lengths.

Now you are ready to select a bank that will give you a mortgage with best possible interest rate.

Renting or Buying: New Information for the Debate

Do you actually benefit financially from renting or buying a home? A new study may shed some light on that topic.

There’s always a debate about which is better financially – renting a home or buying one. While there will always be differing opinions on the matter, there is some new information that may help answer the questions or at least help you make a decision about which one is best for your situation.

In a recent study by Zillow.com of more than 7,500 cities in the United States including 224 metropolitan areas, researchers were looking for a “breakeven point” at which the cost of buying a home is a better financial decision than the cost of renting a home or apartment. In more than 75 percent of the cities and metropolitan areas, that point of breaking even was right around three years.

Three years, however, is just an average figure. In 7 percent of the cities that were included in the study, it took five years or even longer to reach the point of being a financial benefit. Some of the more popular cities where it takes longer to break even are located in California, including Santa Cruz, San Jose, San Luis Obispo and other. Oak Harbor, Washington is also on the list of cities where it takes five years or more for it to be financially beneficial to purchase a home.

On the other hand, there are some cities on the low end of the spectrum. In a few cities, it only takes 1.6 years to reach the break even point. Some of those cities include Miami, Mobile, AL, Tampa and Memphis. Red Bluff, CA and Salisbury, MD are also included in that list.

According to some analysts, these numbers have not always been that way. With mortgage rates and home affordability at historic lows, it is becoming more beneficial to purchase a home these days. Also, combine that with the average 5 percent increase in rent across the country in the past year, renting has become less of a benefit than it has been in years past. The study is also the first of its kind which studies the numbers and tells people the actual amount of time that living in a home becomes beneficial over renting. It’s also different than previous studies which only included the price-to-rent ratio because the current study used the overall cost of home ownership.

According to an article this year in the New York Times, today’s average home price in many areas across the country have reached the same levels that they were at in 2004. The values of these homes are also expected to increase by about 1 percent between now and next year. If you can get financing and you are tired of renting, this may be the best time for you to try to purchase a home if you can get financing for it.

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