Orlando Real Estate Voice

Housing and Economic Recovery Act of 2008 FAQ

U.S. Department of Housing and Urban Development

 

www.hud.gov

August 4, 2008

Q: How will the law help struggling homeowners keep their homes?

A: Through the Federal Housing Administration (FHA), an estimated

400,000 borrowers in danger of losing their homes will be able to refinance

into more affordable government-insured mortgages. The program offers

government insurance to lenders who voluntarily reduce mortgages for at-

risk homeowners to at least 90% of the property’s current value.

 

Q: When will the program begin?

A: The program will begin on October 1, 2008 and sunset on September

30, 2011. Homeowners in danger of losing their homes before October 1,

however, should not wait to contact their loan servicers and should begin

applying for federally insured mortgages now.

 Q: Who is eligible?

A: To be eligible to participate in this program, a borrower must:

• Have a loan on an owner-occupied principal residence. Investors,

speculators, or borrowers who own second homes cannot participate

in this program.

• Have a monthly mortgage payment greater than at least 31 percent of

the borrower’s total monthly income, as of March 1, 2008.

• Certify that he or she has not intentionally defaulted on an existing

mortgage, and did not obtain the existing loan fraudulently.

• Not have been convicted of fraud.
•  

Q: How can a homeowner access this new program?

A: Homeowners or a servicer of an existing eligible loan need to contact an

FHA-approved lender. The FHA-approved lender will determine the size of a

loan that a borrower can reasonably repay and that meets the requirements

of the program. If the current lender or mortgage holder agrees to write-

down the amount of the existing mortgage and make the new loan

affordable, the FHA lender will payoff the discounted existing mortgage.

Loans provided under this program must be 30-year fixed rate loans.

 Q: Are lenders required to participate in this program?

A: No. The program is completely voluntary for lenders, investors, loan

servicers, and borrowers.

 Q: How does this law help neighborhoods that have been hit by theforeclosure crisis?

A: The impact of the current crisis has not been isolated to individual

borrowers or investors, but has been felt broadly by neighbors,

communities, and governments across the nation. The law strengthens

neighborhoods hit hardest by the foreclosure crisis by providing $3.9 billion

in Community Development Block Grants to states and localities to buy

foreclosed homes standing empty, rehabilitate foreclosed properties, and

stabilize the housing market.

 Q: Will this law be a bailout for speculators, homeowners, investors,

and lenders?

A: No. It is narrowly tailored to keep families in their homes. For example:

• Only primary residences are eligible: NO speculators, investment

properties, second or third homes will be refinanced.

• Investors and lenders must take big losses first in order even to

participate. The owner of the old mortgage can get a maximum of

90% of the current value of the home (which presumably will be

considerably less than the value of the original loan). In many cases

the loss will be significantly greater, but 10% is the minimum.

• In addition, lenders must waive any penalties or fees, and help pay

            for the origination and closing costs of the new loans.

• Most homeowners will have seen the equity in their homes disappear

 before being able to refinance under this program. In addition, the

FHA will get a portion of any future profits on the house, to make sure

the government recoups its investment over the long run.

 Q: Will this law reward families who bought homes they could notafford?

A: Many homeowners facing foreclosure were misled, were deceived, or

were in other ways the victims of unfair lending practices. To prevent future

abuses by lenders, this law will establish a nationwide loan originator

licensing and registration system to set minimum standards for all

residential mortgage brokers and lenders. It also strengthens mortgage

disclosure requirements to help ensure that borrowers understand their

mortgage loan terms.

 

Q: How will this law make it more affordable to own a home?

A: There are a number of provisions that will make homeownership more

affordable:

• Creates a refundable tax credit for first-time homebuyers that works

like an interest-free loan of up to $7,500 (to be paid back over 15

years) .

• Grants states $11 billion of additional tax-exempt bond authority in

2008 that they can use to refinance subprime loans, make loans to

first-time homebuyers and to finance the building of affordable rental

housing.

• Raises conforming loan limits for the FHA, Fannie Mae and Freddie

Mac to $625,500. Because of the high cost of housing in California, a

majority of the state IS residents were previously shut out from these

programs. Raising these loan limits will lead to lower interest rates on

some loans, greater refinancing opportunities, and enable more

borrowers in high cost areas to avoid the type of nontraditional and

frequently abusive loans that led to the current crisis.

• Provides couples using the standard deduction with up to an

additional $1,000 deduction for property taxes ($500 for individuals).

 Q: Does the law provide help to those who still cannot afford to own a

home?

A: Yes. The bill includes a number of provisions to increase the supply of

affordable housing, which has been a major problem in California pre-

dating the current foreclosure crisis. For example:

• The bill creates a new permanent affordable housing trust fund -

financed by Fannie Mae and Freddie Mac and not by taxpayers – to

fund the construction, maintenance and preservation of affordable

rental housing for low and very low-income individuals and families

nationwide in both rural and urban areas.

• In addition, the legislation provides a temporary increase in the Low-

Income Housing Tax Credit and simplification of the credit to help put

builders to work to create new options for families seeking affordable

housing alternatives.

 Fact Sheet: 

The President has signed into law legislation that will allow HUD’s Federal

Housing Administration (FHA) to continue providing targeted mortgage

assistance to homeowners. The Hope for Homeowners program will

continue FHA’s existing and successful efforts to provide aid to struggling

families trapped in mortgages they currently cannot afford. Under the

program, certain borrowers facing difficulty with their mortgage will be

eligible to refinance into FHA-insured mortgages they can afford. The

program will be implemented on October 1, 2008.

 

Homeowners May Already Be Eligible For Assistance

Families should not wait to seek mortgage relief. Right now, homeowners

can determine if they are already eligible for mortgage assistance through

FHASecure, FHA’s existing refinancing program. They can obtain

information through any of the following options:

 

1. Contact a local, HUD-approved housing counseling agency at

www.HUD.gov;

2. Contact the HOPE NOW Alliance at (888) 995-HOPE; or

3. Call FHA at (800) CALL-FHA.

Sustainable. Affordability Homeownership

Hope for Homeowners maintains FHA’s long-standing requirement that

new loans be based on a family’s long-term ability to repay the mortgage.

FHA only allows owner-occupants to be eligible for FHA-insured

mortgages. Borrowers must also meet the following eligibility criteria:

• Their mortgage must have originated on or before January 1, 2008;
• Their mortgage debt-to-income must be at least 31 percent;
• They cannot afford their current loan;
• They did not intentionally miss mortgage payments; and
• They do not own second homes.

Features of FHA-insured loans under the new program include:

• 30-year, fixed rate mortgage;
• Maximum 90 percent loan-to-value ratio;
• No prepayment penalties;
• $550,440 maximum mortgage amount;
• Extinguishment of any subordinate liens; and
• New home appraisals from FHA-approved appraisers.

 

HUD, Treasury, FDIC and the Federal Reserve will form the

Congressionally-mandated Board of Directors and work together to

establish additional program standards.

 Voluntary Lender Participation

FHA will continue to offer lenders an alternative to foreclosing on

borrowers. Similar to FHASecure’s recent expansion, lenders will be

encouraged to write-down the outstanding mortgage principal balances to

90 percent of the new value of the property. In many cases, reductions in

principle will cost lenders less than the losses associated with foreclosure.

 Market Stability and Liquidity

By continuing to slow the rate of foreclosures, this program will support

FHA’s existing effort to stabilize local housing markets. From September

2007 to June 2008, FHA has guaranteed more than $93 billion of mortgage

capital.

 

Funding .

FHA will insure up to $300 billion in new loans. Borrowers will pay an

upfront premium of 3 percent of the original mortgage amount and an

annual premium of 1.5 percent of the outstanding mortgage amount. Any

additional costs incurred by FHA will be reimbursed by Fannie Mae and

Freddie Mac.

 Program Timeline

The program will last from October 1, 2008 through September 30, 2011.

Since September 2007, FHASecure has helped more than 290,000 families

obtain safer, more affordable mortgages. FHASecure is on pace to help

500,000 families by the end of the year.

If you have patience then buying a short sale is the way to go. If you can wait the 3-4 months that it takes to negotiate a short sale then your patience should pay off. A short sale is another word for pre-foreclosure. You are purchasing from a motivated seller and negotiating with a motivated lender. The seller want to sell to avoid foreclosure and the lender also wants to avoid foreclosing. Foreclosing on a property is very expensive to a lender, sometimes costing the lender up to $40,000 to foreclose on a property. The savings can depend upon many factors like condition of the property, location of the property, the motivation of the lender and seller. A buyer normally can purchase the property for approximately 10%-20% below market value.

So, if you have the patience and are looking for a great deal on an Orlando area property please give me a call.

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Jerry LaRose is an Orlando Area Residential Real Estate Expert, who can assist you with the purchase and/or sale of Real Estate in Orlando, Windermere, Winter Garden Florida or any place in the country. Jerry has created a team of professionals throughout Orlando and the country to ensure that you enjoy a smooth transition to your new area. Please visit www.JerrySellsOrlando.com for your real estate needs. Please give me a call if you have questions about the Orlando and Central Florida real estate market.

P.S. If you are listing your home as a short sale in Orange County Florida and Orlando, Windermere, Winter Garden, or Ocoee Florida make sure you hire an agent who knows how to do short sales and has the experience to get the job done. We are doing successful short sale packages. Call us at 407-580-7011 to find out more about Orange County Short Sales and Orlando Area Short Sales.

Included in H.R. 3221, the Housing and Economic Recovery Act of 2008, were numerous additions, and amendments to real estate tax rules. Below is a brief summary of the tax provisions that were part of H.R. 3221.

Low-Income Housing Tax Credit

• Temporarily increases the volume cap for low-income housing tax credits for 2008 and 2009.

Homebuyer Tax Credit

• The tax credit only applies to first time homebuyers. A first time homebuyer is defined as a homeowner who has no present ownership in a principle residence or has not had ownership of a principle residence for at least 3-years.
• The tax credit is 10% of the purchase price, capped at $7,500. The tax credit is reduced when the buyers adjusted gross income (AGI) is over $75,000 ($150,000 married filing jointly). The amount is reduced by the amount over the allowed AGI divided by $20,000.
• The tax credit does need to be repaid, therefore working more as an interest free loan than a true tax credit. The credit is repaid out of your taxes over 15-years, or a rate of 6.66% of the credit per year. If the home is sold before the credit is paid back, payments are accelerated in the following taxable years by the amount still owed on repayment over the original amount of the credit. However, if your gain on the house does not exceed the amount still owed at the time of sale, you will not owe any more repayment on the credit.
• The home must be purchased between April 8, 2008 and June 30, 2009. The purchase must be of an owner occupied primary residence.
• You cannot get the credit is the property is purchased from a relative, the purchase is financed by a tax exempt qualified mortgage issue/bond, the taxpayer is a nonresident alien, or if the taxpayer disposes of the residence before the close of the taxable year.

Standard Deduction for Property Taxes

• Creation of a new standard deduction for property taxes by nonitemizers in the amount of the taxes, capped at $500 ($1000 for joint filer).

FIRPTA FIX

• Modifies FIRPTA to allow the documents to be given to a qualified substitute instead of the buyer.

Second Home Conversion Tax Offset

• One of the offsets included in H.R. 3221 was the closing of a tax loophole concerning the conversion of a second home to a primary residence and the capital gains exclusion. This offset ONLY applies when a second home is converted to a primary residence and does not affect the capital gains exclusion when a home has only been a primary residence.
• The loophole allowed it so that if a second home was converted to a primary residence and was used as such for at least two out of the previous five years; the homeowner could use the $250,000/$500,000 capital gains exclusion.
• H.R. 3221 closes that loophole and will now only allow the capital gains exclusion to apply to gain received once the house became a primary residence
• Any gain earned prior to January 1, 2009 would be affected by this provision and there are some exclusions of this policy for extended military service (with limitations) as well as change of employment, health conditions or other unforeseen circumstances (not to exceed an aggregate period of two years).
• There is also an allowance of 5-years of gain if a property is converted from a principle residence to a second home.
• The new formula to calculate the gain allowed to be included in the capital gains exclusion would be: Profit from the sale multiplied by the number of days the home was a primary residence over the number of days the home was owned.

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Jerry LaRose is an Orlando Area Residential Real Estate Expert, who can assist you with the purchase and/or sale of Real Estate in Orlando, Windermere, Winter Garden Florida or any place in the country. Jerry has created a team of professionals throughout Orlando and the country to ensure that you enjoy a smooth transition to your new area. Please visit www.JerrySellsOrlando.com for your real estate needs. Please give me a call if you have questions about the Orlando and Central Florida real estate market.

P.S. If you are listing your home as a short sale in Orange County Florida and Orlando, Windermere, Winter Garden, or Ocoee Florida make sure you hire an agent who knows how to do short sales and has the experience to get the job done. We are doing successful short sale packages. Call us at 407-580-7011 to find out more about Orange County Short Sales and Orlando Area Short Sales.

• Will I owe the bank money after the short sale is accepted?
• If you are able to negotiate a price and buy it for less then I owe, will the bank come after me for the difference?

When the lender or bank accepts a short sale on the property for less than what was owed, then a deficiency exists with the loan. The deficiency is the difference between what the homeowner owed and the amount the property sold for.

For example, Mr. Jones owes $300,000 on her home and the lender accepts a short sale for $200,000. There is a deficiency of $100,000 for which the lender can then sue the homeowner. The key phrase is “can sue.” That is the right of the lender. However, that is a practice that almost never happens but, it is a real concern for the homeowner. In most cases, the homeowner wants nothing else to do with the lender once the property is sold.

If the deficiency judgment is granted, it would appear on the homeowners’ credit report just as any other judgment would appear.

Will they be required to pay the difference? During the short sale process, we will negotiate with the lender to not seek a deficiency judgment against the homeowner.

Some lenders as a matter of policy, will not seek a judgment against the homeowner because they feel they have waived their right by accepting a short sale however, if you can get them to openly acknowledge they will not seek a judgment; the owner will be more than happy.

There is a second issue as it relates to the deficiency and that is the 1099.

The lender will issue a 1099 to the homeowner for the difference. In Mr. Jones case, the lender will issue him a 1099 for $100,000. This will have to be reported as income Mr. Jones had received and thus he will have to pay taxes on the $100,000 as though it was earned income.

Upon successfully closing a short sale, lenders will always report a loss to the IRS and issue a 1099. However, the Mortgage Forgiveness Act of 2007 was signed into law on 12-20-07 and is now official, effectively getting rid of the question “will I be taxed on the Short Sale”. Prior to this action, forgiven mortgage debt due to foreclosure, short sale, or deed in lieu of foreclosure, was potentially taxable income to the borrower. This was the subject of much media attention and led to many questions and concerns from Sellers wondering whether or not they were going to get “hit with taxes” on the Short Sale. The new law, however, temporarily waives these taxes for debts forgiven (as high as35%) from the beginning of 2007 to the end of 2009.

This will effectively put an end to the question from Sellers… will I be taxed on the Short Sale discount. The definitive answer (at least until the end of 2009) is NO! For a copy of the Mortgage Forgiveness Debt Relief Act of 2007, go to: http://www.govtrack.us/congress/bill.xpd?bill=h110-3648 or http://www.whitehouse.gov/news/releases/2007/12/20071220-6.htmlThe bottom line here is that only Acquisition funding can be forgiven by the Mortgage Forgiveness Debt Relief Act of 2007.Foreclosure, Deed in Lieu and Short Sales are all treated the same in regards to taxes. Any cancellation of debt is a taxable event except for any acquisition funding for your primary residence that you’ve lived in for the last 2 years. Everything else is taxable. However, please see you tax advisor if you have a second home or investment property that you are considering a short sale on. You accountant may advise you that you may have a loss on this investment property that would offset any gain. Please seek advise from your tax advisor.

In my dealing with lenders, we have found that they generally will not seek a deficiency judgment because of the hardship. There are a couple of options that the homeowner has as it relates to the deficiency judgment. In Mr. Jone’s case, he could file bankruptcy to address the judgment. Mr. Jones could also short sale the deficiency with the lender at a later date. In other words, offer the lender a lesser amount as “payment in full.”

Here is an important note. The lender, if they issue a 1099 cannot then sue for a deficiency judgment. The lender can only pursue one or the other. In other words, Mary can’t receive both a deficiency judgment and 1099 from the lender.

It is obviously in the best interest of the homeowner to be proactive and deal with the short sale before it becomes a foreclosure. At least there is a chance that we can negotiate away the deficiency before it even becomes an issue.

About the author:

Jerry LaRose is an Orlando Area Residential Real Estate Expert, who can assist you with the purchase and/or sale of real estate in Orlando, Windermere, Winter Garden Florida or any place in the country. Jerry has created a team of professionals throughout Orlando and the country to ensure that you enjoy a smooth transition to your new area. Please visit www.JerrySellsOrlando.com for your real estate needs. Please give me a call if you have questions about the Orlando and Central Florida real estate market.

Jerry LaRose, P.A., ABR, GRI, e-PRO, CLHMS, REALTOR® 407-580-7011

When you are preparing for a major purchase make sure you check your credit scores and credit reports from all three credit reporting agencies: TransUnion, Equifax and Experian. Looking at your scores and reports a few months before your loan application will help you get a complete picture of your credit health. Worried if your credit score makes the grade? If your credit score is above 700 you will probably qualify for a prefferedloan. Under 650, you may have trouble receiving new credit.

Payment history – A good record of on-time payments will help your credit.

Outstanding debt – High balances in relation to your credit limits can harm your credit. Aim for balances under 35%.

Credit account history – An established credit history makes you a less risky borrower. Think twice before closing old accounts before a loan application.

Recent inquiries – When a lender or business checks your credit, it causes a hard inquiry and a slight ding to your credit score. Apply for new credit in moderation.

Types of credit – A healthy credit profile has a balanced mix of credit accounts and loans.
If your credit score is a little low, pay your bills on time, reduce your debt, remove inaccuracies and avoid new inquiries for a few months. Plus, don’t forget that your credit score is not the only factor a lender may look at when they are evaluating your financial standing.

Jerry LaRose is an Orlando Area Residential Real Estate Expert, who can assist you with the purchase and/or sale of real estate in Orlando, Windermere, Winter Garden Florida or any place in the country. Jerry has created a team of professionals throughout Orlando and the country to ensure that you enjoy a smooth transition to your new area. Please visit www.JerrySellsOrlando.com for your real estate needs. Please give me a call if you have questions about the Orlando and Central Florida real estate market.

Jerry LaRose, P.A., ABR, GRI, e-PRO, CLHMS, REALTOR® 407-580-7011

• Will I owe the bank money after the short sale is accepted?
• If you are able to negotiate a price and buy it for less then I owe, will the bank come after me for the difference?

When the lender or bank accepts a short sale on the property for less than what was owed, then a deficiency exists with the loan. The deficiency is the difference between what the homeowner owed and the amount the property sold for.

For example, Mr. Jones owes $300,000 on her home and the lender accepts a short sale for $200,000. There is a deficiency of $100,000 for which the lender can then sue the homeowner. The key phrase is “can sue.” That is the right of the lender. However, that is a practice that almost never happens but, it is a real concern for the homeowner. In most cases, the homeowner wants nothing else to do with the lender once the property is sold.

If the deficiency judgment is granted, it would appear on the homeowners’ credit report just as any other judgment would appear.

Will they be required to pay the difference? During the short sale process, we will negotiate with the lender to not seek a deficiency judgment against the homeowner.

Some lenders as a matter of policy, will not seek a judgment against the homeowner because they feel they have waived their right by accepting a short sale however, if you can get them to openly acknowledge they will not seek a judgment; the owner will be more than happy.

There is a second issue as it relates to the deficiency and that is the 1099.

The lender will issue a 1099 to the homeowner for the difference. In Mr. Jones case, the lender will issue him a 1099 for $100,000. This will have to be reported as income Mr. Jones had received and thus he will have to pay taxes on the $100,000 as though it was earned income.

Upon successfully closing a short sale, lenders will always report a loss to the IRS and issue a 1099. However, the Mortgage Forgiveness Act of 2007 was signed into law on 12-20-07 and is now official, effectively getting rid of the question “will I be taxed on the Short Sale”. Prior to this action, forgiven mortgage debt due to foreclosure, short sale, or deed in lieu of foreclosure, was potentially taxable income to the borrower. This was the subject of much media attention and led to many questions and concerns from Sellers wondering whether or not they were going to get “hit with taxes” on the Short Sale. The new law, however, temporarily waives these taxes for debts forgiven (as high as35%) from the beginning of 2007 to the end of 2009.

This will effectively put an end to the question from Sellers… will I be taxed on the Short Sale discount. The definitive answer (at least until the end of 2009) is NO! For a copy of the Mortgage Forgiveness Debt Relief Act of 2007, go to: http://www.govtrack.us/congress/bill.xpd?bill=h110-3648 or http://www.whitehouse.gov/news/releases/2007/12/20071220-6.htmlThe bottom line here is that only Acquisition funding can be forgiven by the Mortgage Forgiveness Debt Relief Act of 2007.Foreclosure, Deed in Lieu and Short Sales are all treated the same in regards to taxes. Any cancellation of debt is a taxable event except for any acquisition funding for your primary residence that you’ve lived in for the last 2 years. Everything else is taxable. However, please see you tax advisor if you have a second home or investment property that you are considering a short sale on. You accountant may advise you that you may have a loss on this investment property that would offset any gain. Please seek advise from your tax advisor.

In my dealing with lenders, we have found that they generally will not seek a deficiency judgment because of the hardship. There are a couple of options that the homeowner has as it relates to the deficiency judgment. In Mr. Jone’s case, he could file bankruptcy to address the judgment. Mr. Jones could also short sale the deficiency with the lender at a later date. In other words, offer the lender a lesser amount as “payment in full.”

Here is an important note. The lender, if they issue a 1099 cannot then sue for a deficiency judgment. The lender can only pursue one or the other. In other words, Mary can’t receive both a deficiency judgment and 1099 from the lender.

It is obviously in the best interest of the homeowner to be proactive and deal with the short sale before it becomes a foreclosure. At least there is a chance that we can negotiate away the deficiency before it even becomes an issue.

About the author:

Jerry LaRose is an Orlando Area Residential Real Estate Expert, who can assist you with the purchase and/or sale of real estate in Orlando, Windermere, Winter Garden Florida or any place in the country. Jerry has created a team of professionals throughout Orlando and the country to ensure that you enjoy a smooth transition to your new area. Please visit www.JerrySellsOrlando.com for your real estate needs. Please give me a call if you have questions about the Orlando and Central Florida real estate market.

Jerry LaRose, P.A., ABR, GRI, e-PRO, CLHMS, REALTOR® 407-580-7011