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Prior to 2007 homeowners who had a short sale or foreclosure were subject to pay income taxes on any amount of forgiven debt. So let’s say a homeowner in 2006 had a mortgage of $400,000 and decided to sale as a short sale for $200,000, that homeowner would have had income of approximately $200,000 according to the IRS. Assuming this put that homeowner in the 25% tax bracket, this homeowner would owe an additional $50,000 taxes to the US government. Keep in mind, perhaps none of this money went into the pocket of the homeowner, it was simply forgiven debt. The same would be true for a bank foreclosure.

Back in 2007 the US government signed into law the Mortgage Relief Act which provided homeowners who used their home as a primary residence relief up to $2 million for married couples and $1 million for individuals from any shortage being treated as income by the IRS. In the previous example above, the $200,000 would be free from being treated as income as long as it was their primary residence. The lender must formally forgive the loan.

The US government is giving homeowners until December 31, 2012 to complete a short sale or foreclosure. Starting January 1, 2013 any debt forgiven, even on a primary residence, will be treated as income by the IRS and subject to taxes.

A homeowner doesn’t always control when the bank will take back a home or when the bank will complete the foreclosure transaction, so they cannot guarantee they’ll make the December 31 deadline.

A distressed homeowner does control to a greater extent the execution and timing of a short sale. While there is no guarantee the bank will agree to a short sale, or that the buyer will wait around long enough for the lender to agree, it is generally known the seller has more control over their fate in a short sale than a foreclosure.

Time is running out for many sellers as we have 11 ½ months to complete the short sale. Some short sales go smooth, and others are a bit trickier. Sometimes we have to sell it 2 or 3 times if buyers walk. The bank may respond right away, or it could take several months for the banks to complete their analysis depending on who the lender is, whether there is a 2nd mortgage or equity line involved, and especially if mortgage insurance is involved.

Most people just think the banks are slow, which is true. However, the process can be more complicated as the 1st lender may be due money back on certain losses by a private mortgage insurance company. This takes time for all to evaluate, and it must go in steps.

Some loans are guaranteed by FNMA or Freddie Mac, and there are governmental programs in place the lender must follow. A popular program you may have heard of is HAFA (Home Affordable Foreclsoures Alternative) Program. If the home falls under this program, certain procedures and timelines must be followed. Sometimes it takes time just to see if the loans qualify for this program. There are other programs as well.

This is why a seller should decide soon if they may need to sell their home due to hardship. The decision today could save thousands in taxes for years to come. Waiting too long could cost a seller big time.

A bankruptcy may be a solution to avoid such taxation after 2012, so we wouldn’t be surprised to see bankruptcies rise next year from sellers who miss this deadline.

The good news is lenders have beefed up their short sale department staffs the last few years and are equipped to handle more sales today than they were 5 years ago. We’ve had much success completing short sales, although the buyer must be educated that the bank will take some time, and they may counter the accepted price with the seller a bit higher.

No short sale is complete until the lender(s) sign off and everybody agrees to the terms. Short sales are a way to bring otherwise underwater overpriced property to the market at today’s lower prices. Education is the key for everyone involved. The agents involved, both buyer agent and seller agent must be competent in handling complex short sale transactions as both buyer and seller must be educated about the process.

Sales are already heating up this season, so 2012 could be an interesting ride.  I’ll keep you posted on news affecting buyers and sellers in the NW Michigan real estate market.

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Years ago, when the market was HOT (2004-2007), it was nearly impossible to write an offer contingent on the sale of a buyer’s home and have it accepted by the seller. There were so many offers on any given listing that for the seller to even entertain the thought of accepting one that had such an onerous contingency was a non-starter.

Why onerous? Because no sale is guaranteed, even in the hay-day.  And now? Well, the situation is worse for many sellers than it was then so it is much more likely a buyer can make an offer successful on the sale of his/her property.

In order to do that, the following things must happen:

1. The buyer’s offer can be most successful on a property that has been on the market for longer than 3-4 months, or has had a price reduction and still not sold. The seller may be motivated enough to consider a contingent offer.
2. The buyer’s property has to primed and ready for the market. Fix-up items should be completed and the property painted and staged, if necessary.
3. A listing agreement should be signed, and the price agreed upon. All that is needed is for the buyer’s offer to be accepted and their property put in the MLS to start the sales and marketing period.

A good listing agent, before advising their seller to accept a contingent offer, will ask detailed questions about the buyer’s property and its chances of a successful sale. The listing and selling agents will discuss the property, the price, and how long they think it will take to sell. The listing agent may even ask to see the property to determine how quickly it is likely to sell and if the asking price is realistic.

If the listing agent thinks the property will sell then she is more likely to advise her client to accept the buyer’s offer. The seller can still entertain a non-contingent offer but must give the first buyer a notice they have 72 hours to remove the contingency or the contract is canceled.

Selling a property before buying the next one is often the only way many buyers can move to their next home.

Filed under: Buying Tips, Elk Rapids Real Estate by Steve Parafin
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10120 E Elk Lake Dr Rapid City, MI

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Enjoy fabulous sunsets from this desirable Elk Lake home. This home features a California Drift stone gas fireplace, cathedral ceilings, underground sprinklers, central air, two two-car garages with living space above each, beautiful open frontage on the lake that offers fantastic views. It also lends beautiful perennial gardens and a lush landscape. Pride of ownership is written all over this home as it has been well taken care of.

MLS# 1724235 $629,000 4 Bed, 2.75 Bath 10120 E Elk Lake Dr Rapid City MI, 49676 STEVE PARAFIN 45th Parallel Realty Premier 231-264-6604

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Staging your home can be one of the most important thing you can do to help sell your home.   The video below offers some great and inexpensive tips for staging your residence.    Let me help you sell your home, today!

Filed under: Elk Rapids Real Estate, Selling Tips by Steve Parafin
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Today, we are going to be centering on the basics of an increasingly important portion of a buyer’s mortgage application – the credit score.

First, the 3 major national credit bureaus are: Experian (XP), Transunion (TU), and Equifax (EF)….But better terms to describe their function are:

1. Repository – they are huge “holders” of data; information about you and millions of other people.
2. Credit Reporting Agency (CRA) – these “repositories” get their data when creditors and courthouses “report” to them; and when you pull someone’s credit report, they in turn “report” that data to the entity that requested the information.

Credit Scores (in general)

1. What is a Credit Score?  It’s a number that, at a glance, helps lenders determine how likely you are to make your proposed payments on time.
2. How is it generated?  A score is only created when you pull someone’s credit file, and all the data retrieved is fed through a complex mathematical formula.  As a person’s data at the repositories changes, their score would change also….positively or negatively.
3. Why are scores different?  Fair Isaac Corporation (FICO) created the mathematical formulas that generate the score, BUT….

• There are different score formulas depending on what you are applying for….a mortgage, credit card, auto loan, insurance, or even if you are not applying for anything at all and get a “consumer” score directly from one of many websites that advertise “scores” these days.
• Fair Isaac sold their original formulas to XP, TU, and EF, which in turn, slightly altered them based on their own studies and analysis.
• The 3 bureaus typically don’t have the exact same data on a consumer.  So, if the data is different or has changed, the scores will also be different.

The FICO score on your mortgage credit report – The score range is 300-850.

What makes up the score? (The info below is from www.myfico.com).

1.    35% of the score is based on Payment History

a.    Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
b.    Presence of adverse public records (bankruptcy, foreclosure, judgments, suits, liens, wage attachments, etc.) collection items, and/or delinquency (past due items).
c.    Severity of delinquency (how long past due).
d.    Amount past due on delinquent accounts or collection items.
e.    Time since (recentness of) past due items (delinquency), adverse public records (if any).
f.     Number of past due items on file.
g.    Number of accounts paid as agreed

2.    30% of the score is based on the Amounts Owed

a.    Amount owing on accounts.
b.    Amount owing on specific types of accounts.
c.    Lack of a specific type of balance, in some cases.
d.    Number of accounts with balances.
e.    Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts), often referred to a Percentage of Usage.
f.    Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans).

3.    15% of the score is based on the Length of Credit History

a.    Time since accounts opened.
b.    Time since accounts opened, by specific type of account.
c.    Time since account activity.

4.    10% of the score is based New Credit and Inquiries

a.    Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account.
b.    Number of recent credit inquiries.
c.    Time since recent account opening(s), by type of account.
d.    Time since credit inquiry(s).
e.    Re-establishment of positive credit history following past payment problems.

5.    10% of the score is based on the Types of Credit Used

a.    Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.).

Special Note About Inquiries

This is always a hot topic because borrowers think they will hurt their score because their credit report is pulled.  But as explained above, New Credit only accounts for 10% of a person’s score, and of that, inquiries is only a part.  Also, keep in mind what an inquiry represents – application for additional credit.  If your credit report and score shows that you are a responsible borrower, then applying for more credit will have a minimal affect on your score.  But if you appear to be an irresponsible borrower, then the inquiry may drop your score a few points, or several points.

Note what Fair Isaac itself says about inquiries at www.myfico.com:

1. “For many people, one additional credit inquiry (voluntary and initiated by an application for credit) may not affect their FICO score at all.  For most people, a credit inquiry will only decrease their FICO score by a few points.”
2. “Looking for a mortgage or an auto loan may cause multiple lenders to request your credit report, even though you’re only looking for one loan.  To compensate for this, the score ignores all mortgage and auto inquiries made in the 30 days prior to scoring.  So if you find a loan within 30 days, the inquiries won’t affect your score while you’re rate shopping.”

by Dean Hartman on December 16, 2010

Filed under: Elk Rapids Real Estate by Steve Parafin
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