Priscilla's Bronxville Real Estate Blog

It is important to improve your credit score as much as possible, and to get rid of any errors on your credit report that are adversely affecting your score. Your credit profile affects your ability to get a mortgage, as well as your rate, both important factors for buying the home you want. Although the economy continues to show signs of improvement, the jury’s still out on whether or not lenders will begin to loosen their lending criteria…and to what degree.

The good news is, there are many proactive steps you can take to repair less-than-perfect credit—but it will take time. Unfortunately, there are many bogus organizations who claim they can fix your credit problems quickly. It’s important that you understand fact from fiction before proceeding with any such firm.

The Federal Trade Commission (FTC ) offers the following red flags to watch for from a credit-repair service:

Claim: The company wants you to pay for credit repair services before they provide any services.
Fact: Under the Credit Repair Organizations Act, credit repair companies cannot require you to pay until they have completed the credit repair services they promised.

Claim: The company doesn’t tell you your rights and what you can do for yourself for free.
Fact: The law allows you to ask for an investigation of information in your file that you dispute as inaccurate or incomplete. This investigation doesn’t cost any money.

Claim: The company recommends that you don’t contact any of the three major national consumer reporting companies (Equifax, Experian, and TransUnion) directly.
Fact: Under the Fair Credit Reporting Act (FCRA), the consumer reporting company and the information provider (the person, company, or organization that provides information about you to the consumer reporting company) must correct inaccurate or incomplete information in your report. To take advantage of all your rights under the FCRA, contact the consumer reporting company and the information provider in writing.

Claim: The company tells you they can get rid of most or all the negative credit information in your credit report, even if the information is accurate and current.
Fact: Any credit repair company that claims to be able to legally remove accurate and timely information from your credit report is lying. There’s no easy fix for bad credit. Improving your credit takes time and a conscious effort to pay your debts.

Claim: The company suggests that you apply for an Employer Identification Number to use instead of your Social Security number so you can invent a “new” credit identity – and then, a new credit report.
Fact: If you follow illegal advice like this, you may find yourself in hot water. It’s a federal crime to lie on a loan or credit application, to misrepresent your Social Security number, or to get an Employer Identification Number from the Internal Revenue Service under false pretenses. You could be charged and prosecuted for mail or wire fraud if you use the mail, telephone, or Internet to apply for credit and provide false information.

Your real estate professional or financial advisor can point you in the right direction for learning the specific steps you can take to repair your credit. They can also suggest lending options that might be available to you.

Linda Goold, Tax Counsel for the National Association of REALTORS® recently wrote an article for RISMedia’s Real Estate magazine advising consumers how to handle cancellation of mortgage debt on their tax returns. She offered some great information that is worthy of sharing.

According to Goold, in today’s market, a lender will sometimes forgive some portion of a borrower’s debt. The general tax rule that applies to any debt forgiveness is that the amount forgiven is treated as taxable income to the borrower. Some exceptions to this rule exist and a law enacted in December 2007 provides relief to troubled borrowers when some portion of mortgage debt is forgiven. However, this relief expires on December 31, 2012. Goold provides the following general information you need to know about this law and cancellation of mortgage debt. Be sure to review this information with your accountant or personal tax advisor before filing this year’s tax return:

General Rule for Debt Forgiveness: If a lender forgives some or all of an individual’s debts, the general rule is that the forgiven amount is treated as ordinary income and the borrower must pay tax on the forgiven amount. Exceptions apply for bankruptcy, insolvency and certain other situations, including mortgage debt.

Current Law for Mortgage Debt (Jan. 1, 2007 through Dec. 31, 2012): A borrower can be excused from paying tax on forgiven mortgage debt. The debt must be secured by a principal residence and the total amount of the outstanding obligation may not exceed the original mortgage amount plus the cost of any improvements. The objective of the legislation was to assure fairness: Homeowners should not be required to pay income tax where there is no cash realized in a transaction.

Does the relief apply only to a sale? No. The provision has broader application. Lenders might forgive some portion of mortgage debt in a sale known as a short sale or in a foreclosure where the debt is wiped out. In addition, if a borrower still living in the home is able to make an arrangement with a lender that reduces the principal balance of a mortgage, the amount forgiven in that workout will not be taxed.

Can the homeowners in a short sale or foreclosure claim a loss? No. The loss is considered a personal loss and is therefore ineligible for either capital loss or ordinary loss treatment.

What happens to the seller when mortgage debt is forgiven? Until January 1, 2013, the homeowner will pay no tax on any forgiven amount. Under pre-2007 law, the amount of forgiven mortgage debt, would have been treated as income, and taxed at ordinary income rates.

Does this provision apply to a refinanced mortgage? Only in limited circumstances. The relief provision can apply to either an original or a refinanced mortgage. If the mortgage has been refinanced at any time, the relief is available only up to the amount of the original debt (plus the cost of any improvements). Thus, if the original mortgage was $125,000 and later refinanced in a cash-out arrangement for a debt totaling $140,000, the $15,000 cash-out is not eligible for relief if a lender later forgives some amount related to the cash-out. Tax relief is generally not available for second mortgages or home-equity lines of credit where the funds are not used for home improvement. Any amount that is not eligible for the relief provision will be taxed as ordinary income.

How does the homeowner get the correct information to the IRS? The lender is required to provide the homeowner and the IRS with a Form 1099 reflecting the amount of the forgiven debt. The borrower/homeowner must file a Form 982 to reflect the amount forgiven and to show the reason why the forgiven amount is not taxable. Any taxable portion of forgiven debt will then be reported on the homeowner’s Form 1040 for the tax year in which the debt was forgiven.

What if a property declines in value, but the owner stays in the house? The provision would not apply. The provision applies only at the time of sale or other disposition or when there is a workout (reduction of existing debt) with the lender. No mechanism exists to reflect a loss of value while the property is still being used as a residence.

Do all lenders forgive mortgage debt when property values decline or your are in foreclosure? No. Some states have laws that allow a lender to require a repayment arrangement, particularly if the borrower has other assets. Forgiveness of debt is always at the lender’s discretion.

The President, in his recent State of the Union address, called on Congress to approve new legislation that would give all homeowners who are current on their mortgages the opportunity to refinance at record-low mortgage rates.

While details of the program have yet to emerge, the new legislation – in theory – is designed to give responsible homeowners a reasonable chance to refinance without running into roadblocks from lenders. This would also give homeowners an opportunity to take advantage of today’s continued, record-low interest rates.

According to CoreLogic, a company that tracks national mortgage activity, an estimated 28 million homeowners could cut the interest rates on their loans by more than one percentage point if they could refinance. If you’re one of the many homeowners considering a refinance, here are some important facts you need to know first. Be sure to consult with your real estate agent and/or financial advisor, as well.
1.Make sure you are in good standing on your mortgage. As the President emphasized, refinances will be considered for those homeowners who have a good payment history and are current on their mortgages. If you’re currently underwater, a refinance is probably not an option for you. Consult your real estate professional about other options, including loan modifications and short sales.
2.Check your current credit score. Refinance candidates need to demonstrate steady income and good credit. Make sure your credit rating is up to snuff and see what immediate measures can be taken to improve it if it’s not.
3.Examine how much longer you plan to live in your home. If you are planning to put your home on the market in the near future, refinancing probably doesn’t make sense. You need to make sure you’ll be living in your home long enough to recoup the closing costs of the refinance.
4.Consider the length of the loan. Where you’re at with your current mortgage can play a significant role in your decision to refinance. If you’re close to retirement, for example, and your loan is almost paid off, refinancing could result in extending the life of your loan, ultimately costing you more. Also, if you’re several years into a 30-year mortgage, your goal should be to refinance into a 15- or 20-year mortgage instead. Otherwise, you’re extending the number of years in which you’ll pay interest. Your refinancing goals should be short-term and long-term savings.
5.Find out the costs involved. Before you plunge into a refinance, find out the costs involved. Weigh these fees against the money you will save (contingent upon how long you plan to stay in your home) to make sure refinancing is the right step.

Despite the tightness of money these days, for people with a sufficiently high credit score and equity in their house, refinancing is still a popular option, as it can be a smart way to simplify and save money. Below are five reasons why you might want to consider refinancing:

1. To Get a Lower Mortgage Rate
Many lenders today are offering low rates, making a refinance a smart decision for struggling homeowners.

2. To Cash Out and Lower Debt
Several years back, a cash-out refinance was a popular way for homeowners to get their hands on some extra cash to do things like add renovations or purchase a new car. While this trend has become less popular, many are still using the cash-out refinance option to pay off their debt.

3. To Cash Out and Buy Property
Investment properties are a trend on the rise. Many homeowners are choosing to refinance their home to buy a second property to use as an investment.

4. To Convert to an ARM
Refinancing as a way to switch from an adjustable-rate mortgage to a fixed-rate can give homeowners not only a better rate, but a stable rate too. With inflation looming, having a fixed-rate loan makes many homeowners feel more comfortable.

5. To Consolidate Two Mortgages
Some homeowners want to refinance in order to combine their first mortgage with their home equity line of credit. Although home equity loan rates are often shockingly low, many people are worried about rates jumping in the future. By combining their two loans into one, they feel safer—plus paying off one loan can be more appealing than dealing with multiple credit lines.

As you probably know, there are a lot of issues on the table in Washington that stand to affect Bronxville area homeowners as well as home-buying and -selling consumers. One such issue involves a growing debate over the future of the Mortgage Interest Deduction (MID).

Introduced along with the Income Tax in 1913, the MID allows homeowners who itemize their taxes to deduct mortgage interest attributable to their primary residence and second-home debt totaling $1 million, and interest paid on home equity debt up to $100,000. Though the MID is a popular tax deduction for millions of U.S. homeowners, it has become a controversial topic in recent years. Many feel that the MID helped contribute to the housing bubble in the mid-2000s.

Lawrence Yun, the chief economist for the National Association of REALTORS® (NAR)—the largest professional association in the country—took part in a panel hosted by the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institute, and the Reason Foundation. Held in Washington, D.C. this past July, the “Rethinking the Mortgage Interest Deduction” forum provided Yun with a platform to emphasize that any changes to the MID, now or in the future, could threaten the progress made in stabilizing the housing market, and potentially erode home prices and values.

“NAR firmly believes that the mortgage interest deduction is vital to the stability of the American housing market and economy,” said Yun during the forum. “The MID facilitates homeownership by reducing the carrying costs of owning a home, and it makes a real difference to hard-working, middle-class families.”

According to HouseLogic, having a tax deduction for mortgage interest makes owning a home more affordable because the deduction lowers the amount of tax you pay. U.S. Census data shows 37% of homeowners with mortgages spend more than 30% of their income for housing. Saving on these costs is critical for homeowners as it allows them to allot funds for savings and other expenses.

Therefore, while policy makers are considering eliminating the MID, Yun believes that such a move would lower the homeownership rate in the U.S.

“While we must ensure that the conditions that led to the artificially inflated homeownership rate of the bubble years do not resurface, we also need to create the conditions for sustainable homeownership,” he explained.

Reducing or eliminating the MID is a de facto tax increase on homeowners, who already pay 80-90% of U.S. federal income tax, said Yun, adding that that share could rise to 95% if the MID is eliminated.

Yun also asserted that it’s a misconception that only the wealthy benefit from the MID, when in reality it benefits primarily middle- and lower income families. Almost two-thirds of those who claim the MID are middle-income earners and 91% of people who claim the MID earn less than $200,000 per year.