Short Sales and Deeds in Lieu of Foreclosure

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A short sale or deed in lieu may help avoid foreclosure or a deficiency.

Many homeowners facing foreclosure determine that they just can’t afford to stay in their home. If you plan to give up your home but want to avoid foreclosure (including the negative blemish it will cause on your credit report), consider a short sale or a deed in lieu of foreclosure. These options allow you to sell or walk away from your home without incurring liability for a “deficiency.”

To learn about deficiencies, how short sales and deeds in lieu can help, and the advantages and disadvantages of each, read on. (To learn more about foreclosure, including other options to avoid it, see Nolo’s Foreclosure area.)

Short Sale

In many states, lenders can sue homeowners even after the house is foreclosed on or sold, to recover for any remaining deficiency. A deficiency occurs when the amount you owe on the home loan is more than the proceeds from the sale (or auction) — the difference between these two amounts is the amount of the deficiency.

In a “short sale” you get permission from the lender to sell your house for an amount that will not cover your loan (the sale price falls “short” of the amount you owe the lender). A short sale is beneficial if you live in a state that allows lenders to sue for a deficiency — but only if you get your lender to agree (in writing) to let you off the hook.

If you live in a state that doesn’t allow a lender to sue you for a deficiency, you don’t need to arrange for a short sale. If the sale proceeds fall short of your loan, the lender can’t do anything about it.

How will a short sale help? The main benefit of a short sale is that you get out from under your mortgage without liability for the deficiency. You also avoid having a foreclosure or a bankruptcy on your credit record. The general thinking is that your credit won’t suffer as much as it would were you to let the foreclosure proceed or file for bankruptcy.

What are the drawbacks? You’ve got to have a bona fide offer from a buyer before you can find out whether or not the lender will go along with it. In a market where sales are hard to come by, this can be frustrating because you won’t know in advance what the lender is willing to settle for.

What if you have more than one loan? If you have a second or third mortgage (or home equity loan or line of credit), those lenders must also agree to the short sale. Unfortunately, this is often impossible since those lenders won’t stand to gain anything from the short sale.

Beware of tax consequences. A short sale may generate an unwelcome surprise: Taxable income based on the amount the sale proceeds are short of what you owe (again, called the “deficiency”). The IRS treats forgiven debt as taxable income, subject to regular income tax. The good news is that there are some exceptions for the years 2007 to 2009. To learn more, see “Income Tax Liability in Short Sales and Deeds in Lieu,” below.

Deed in Lieu of Foreclosure

With a deed in lieu of foreclosure, you give your home to the lender (the “deed”) in exchange for the lender canceling the loan. The lender promises not to initiate foreclosure proceedings, and to terminate any existing foreclosure proceedings. Be sure that the lender agrees, in writing, to forgive any deficiency (the amount of the loan that isn’t covered by the sale proceeds) that remains after the house is sold.

Before the lender will accept a deed in lieu of foreclosure, it will probably require you to put your home on the market for a period of time (three months is typical). Banks would rather have you sell the house than have to sell it themselves.

Benefits to a deed in lieu. Many believe that a deed in lieu of foreclosure looks better on your credit report than does a foreclosure or bankruptcy. In addition, unlike in the short sale situation, you do not necessarily have to take responsibility for selling your house (you may end up simply handing over title and then letting the lender sell the house).

Disadvantages to a deed in lieu. There are several downfalls to a deed in lieu. As with short sales, you probably cannot get a deed in lieu if you have second or third mortgages, home equity loans, or tax liens against your property.

In addition, getting a lender to accept a deed in lieu of foreclosure is difficult these days. Many lenders want cash, not real estate — especially if they own hundreds of other foreclosed properties. On the other hand, the bank might think it better to accept a deed in lieu rather than incur foreclosure expenses.

Beware of tax consequences. As with short sales, a deed in lieu may generate unwelcome taxable income based on the amount of your “forgiven debt.”

Income Tax Liability in Short Sales and Deeds in Lieu

If your lender agrees to a short sale or to accept a deed in lieu, you might have to pay income tax on any resulting deficiency. In the case of a short sale, the deficiency would be in cash and in the case of a deed in lieu, in equity.

Here is the IRS’s theory on why you owe tax on the deficiency: When you first got the loan, you didn’t owe taxes on it because you were obligated to pay the loan back (it was not a “gift”). However, when you didn’t pay the loan back and the debt was forgiven, the amount that was forgiven became “income” on which you owe tax.

The IRS learns of the deficiency when the lender sends it an IRS Form 1099C, which reports the forgiven debt as income to you. (To learn more about IRS Form 1099C, read Nolo’s article Tax Consequences When a Creditor Writes Off or Settles a Debt.)

No tax liability for some loans secured by your primary home. In the past, homeowners using short sales or deeds in lieu were required to pay tax on the amount of the forgiven debt. However, the new Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) changes this for certain loans during the 2007, 2008, and 2009 tax years only.

The new law provides tax relief if your deficiency stems from the sale of your primary residence (the home that you live in). Here are the rules:

  • Loans for your primary residence. If the loan was secured by your primary residence and was used to buy or improve that house, you may generally exclude up to $2 million in forgiven debt. This means you don’t have to pay tax on the deficiency.
  • Loans on other real estate. If you default on a mortgage that’s secured by property that isn’t your primary residence (for example, a loan on your vacation home), you’ll owe tax on any deficiency.
  • Loans secured by but not used to improve primary residence. If you take out a loan, secured by your primary residence, but use it to take a vacation or send your child to college, you will owe tax on any deficiency.

The insolvency exception to tax liability. If you don’t qualify for an exception under the Mortgage Forgiveness Debt Relief Act, you might still qualify for tax relief. If you can prove you were legally insolvent at the time of the short sale, you won’t be liable for paying tax on the deficiency.

Legal insolvency occurs when your total debts are greater than the value of your total assets (your assets are the equity in your real estate and personal property). To use the insolvency exclusion, you’ll have to prove to the satisfaction of the IRS that your debts exceeded the value of your assets. (To learn more about using the insolvency exception, read Nolo’s article Tax Consequences When a Creditor Writes Off or Settles a Debt.)

Bankruptcy to avoid tax liability. You can also get rid of this kind of tax liability by filing for Chapter 7 or Chapter 13 bankruptcy, if you file before escrow closes. Of course, if you are going to file for bankruptcy anyway, there isn’t much point in doing the short sale or deed in lieu of, because any benefit to your credit rating created by the short sale will be wiped out by the bankruptcy. (To learn more about using bankruptcy when in foreclosure, read Nolo’s article How Bankruptcy Can Help With Foreclosure.)

Additional Resources

To learn more about short sales and deeds in lieu, including when these options might be right for you, see Nolo’s Bankruptcy and Foreclosure Blog or the bestselling Foreclosure Survival Guide, now available online at no charge. Both are written by practicing attorney Stephen R. Elias, president of the National Bankruptcy Law Project.

by: Stephen Elias , Attorney

Seller-financing license requirements delayed


The federal Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act requires most property owners who wish to seller-finance to be licensed as residential mortgage loan originators (RMLO). The Texas Department of Savings and Mortgage Lending, responsible for the act’s implementation in Texas, announced last week that it’s delaying the licensing deadline from May 31 to Aug. 31.

This delay is the first step toward reinstating the de minimis rule, which allows a seller to finance the sale of up to five properties within 12 months without a license. The Texas Finance Commission will consider a rule change reinstating the de minimus rule at its August meeting. This is good news for private-property owners and Texas REALTORS®.

Learn more about the SAFE Act and what these changes could mean for your transactions by listening to Texas REALTOR® Update Episode 77.

TDHCA 77, The largest bond program released for First Time Homebuyers!

The Texas First Time Homebuyer Program
Approximately $500 million in funding for first time home buyers.

The Texas Mortgage Credit Program
increases a family’s disposable income by reducing its federal income tax obligation. The tax credit is valid for the life of the loan as long as the borrower occupies the property as their primary residence.

Program Highlights Include:
• $50,000,000 allocation has been released for immediate use
• Unassisted Rate: 4.99% (No DPA)
• Assisted Rate: 5.74% (Must use DPA)
• Minimum Fico Score: FHA/VA/USDA = 600; Conventional = 620
• Fees: 1.0% Discount, 1.0% Origination
• Loan Types: FHA, VA, Conventional, USDA, refinancing of Subprime Loans
• Income & Purchase Price Limits apply
• MCC is not allowed
• Loans must close and fund by 08/31/2010
• No allocation or set aside requirements for Targeted, Low Income or Assisted/Unassisted loans
• Rita Go Zone area is exempt from the first homebuyer requirement. Rita Go Zone expires on
12/31/2010
Down Payment Second Lien for the Assisted Rate Program:
• $2,500,000 allocation
• 5% Down Payment Assistance
• 0% interest 30-year loan, deferred
• Not Assumable
• No payments required, therefore not required to be included in the DTI ratio
• Funds may be used for down payment, closing costs, prepaids and/or earnest money
• Second Mortgage Bond Registration Form must be completed after First Mortgage is
registered.

For additional information access:

Contact:
Ouida Bailey | Sr. Loan Officer
593 Angel Drive
Lakehills, Texas 78063
210-827-5527
obailey@fcmchou.com

Protect your home and land from abusive eminant domain

Dear Fellow Texans,

In Texas, a family’s home is their castle and there was a time when we protected our home and property with our lives. In 1836, Texans stood together in defiance of an oppressive government, one that was attempting to trample their rights as citizens. Unfortunately, rural and urban Texans today face a very similar problem in the form of eminent domain.

Last November, Texans took the first step toward strengthening private property rights against abusive eminent domain by passing Proposition 11 with an overwhelming 81% of the vote. While passage of Proposition 11 was a good first step, true eminent domain reform will only happen when additional protections are passed into law.

Now the legislature needs to complete eminent domain reform by also passing additional reforms that establish stricter penalties for not negotiating in good faith; demand adequate compensation for loss of access; provide a 10-year buy back provision for land that isn’t used; and clarify that eminent domain must only be exercised for public use.

The 14th Amendment to the U. S. Constitution says in part: “No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law.” This is one of the founding principles our country was built on, and I need your help to ensure the Texas Legislature finishes the job.

A fair and equitable solution exists to this problem, and it begins with you. Will you exercise your rights and help protect Texas? Please click here to read and sign my petition and send the message: “In Texas, a family’s home is their castle” and it will be protected from injustice of any kind.

May God Bless Texas,

P.S. Every Texas homeowner, neighborhood association and landowner needs to unite against abusive eminent domain.

Bandera Realtors ‘git ‘er done’ for Texas Association of Realtors

By Judith Pannebaker, Bandera County Courier – www.bccourier.com

If it’s one thing real estate agents and brokers understand it’s “location, location, location.”

Bandera’s Medina River Ranch could not have been a more appropriate – or gorgeous – location for a seminar of Region 7 Realtors of the Texas Association of Realtors (TAR). Hosted by the Bandera County Board of Realtors, the two-day session took place on Thursday and Friday, June 17 and 18.

During a working luncheon on Friday, Bill Jones, TAR chairman of the board and Travis Kessler, TAR president and CEO, spoke to realtors from Bandera, Canyon Lake, Del Rio, Eagle Pass, Fredericksburg, Kerrville, Laredo, New Braunfels, Seguin and Uvalde.

“We have attended more than 19 conferences similar to this across the state, meeting with the leadership of our membership,” Jones said. One of the mandates of TAR is to protect the private property rights so that landowners and homeowners do not become unduly burdened by ever-increasing taxes. “Texas is growing rapidly and the two greatest issues facing residents today are those of transportation and water,” he noted, adding, “Texas has plenty of water. It’s just in the wrong place.”

TAR’s other function is to make the Texas Legislature aware of issues facing its members. Jones candidly asserted that the TAR is a lobbying group. “However, we only address one issue – private property rights.”

“If it’s good for the Texas consumer, it’s good for Texas,” Kessler added. He also said that by meeting with grassroots realtors in meetings, TAR directors could identify concerns that may soon be facing them on a statewide level.

“We listen to the issues that are particular to one area,” he said, “and that often helps us spot future problems.” TAR has members in all 254 Texas counties. “When we started 17 years ago, we had 43 members,” Kessler said.

During a question and answer session, Kessler also warned realtors to beware of real estate scams emanating online.
“Unscrupulous people are taking a realtor’s information and posting it on social networks and Craigslist,” he explained. “This is an insidious problem and there’s no one solution. They do it because, as of now, they can get away with it.”

Actions to Take Before Buying a Home Today

As the housing downturn has shown, home ownership is about more than buying a home – you have to make sure you can keep the home over the long term. If you’re thinking about buying a home, these five steps can help ensure you get the right house for you and the affordable financing that helps make home ownership a long-term success:

Get Educated. A little mortgage know-how goes a long way toward ensuring you get an affordable mortgage
Before you hire an agent or find a lender, get educated on the loan process and key factors that make a loan affordable. You’ll want to know about loan types – fixed-rate mortgages, adjustable-rate mortgages, FHA and VA loans – and the full range of line items that contribute to the total cost of securing the loan, including discount points, appraisals, and real estate agent commissions.

If you would like more in-depth information, the Department of Housing and Urban Development (HUD) can put you in touch with the nearest housing counseling professional in your area. You can also check with local government, neighborhood associations and neighborhood bank branch offices for information sessions on home buying as well as homebuyer-education programs.

Get Your Finances in Order. Given today’s stronger lending guidelines, it’s more important than ever to get your finances in order
First, get a copy of your credit report, which usually includes your credit score. If your credit score is low (anything below 620), take the time to improve it. If you find errors on the report, take the time to correct them. This may put your home buying plans on hold (creditors typically look for a two-year history of consistent, on-time bill payment to establish good credit), but it could result in a better loan and more affordable rates.

Establish a Budget. Before you start searching for your home, make sure you know how much home you can afford
Lenders will evaluate all your debts and take into account your full financial situation when qualifying you for a mortgage. A key factor is how much income you bring in versus how much you will pay out each month. Here’s a good guideline to check where you are:

* Your housing expense (the mortgage payments on the house you are buying) should generally not exceed 28 to 33 percent of your total monthly gross income.
* All revolving debt (including car payments, credit cards payments, and your mortgage payment) should not exceed 36 to 40 percent of your total monthly gross income.

It’s always helpful to create a monthly budget, itemizing all your recurring expenses, including estimated maintenance costs, taxes, utility bills, and condo or homeowners’ association dues. Then, test your budget. If you can pay all these debts and continue to add to savings, you may be ready to buy a home. If not, you may have to revise your plans.

Start Saving. Having savings in reserve helps ensure you can afford the upfront costs of home ownership
Upfront costs of home ownership include:

* Down Payment – Five to twenty percent of the purchase price. Keep in mind, a lower down payment means you’ll have to qualify for a higher loan amount and pay for mortgage insurance – adding to your monthly mortgage payment.
* Deposit – Two percent of the purchase price, typically. Sometimes called earnest money, a deposit shows the seller you’re serious about buying the home. If your offer is accepted, the deposit or earnest money will be applied towards the down payment. If your offer is rejected, the down payment will be returned to you.
* Closing Costs – Three to five percent of the purchase price, on average. These costs include all fees required to execute the sale, including attorney fees, title insurance, appraisals, and points.

Get Pre-Approved. In today’s competitive market, home buyers should get pre-approved for a mortgage before they begin their house hunt

To be pre-approved for a loan, your lender will gather information about your job, assets, income, and debts and then determine how much financing you’re qualified to receive. If you are pre-approved, you will receive a pre-approval letter from the lender. When you’re ready to make an offer on a home, this pre-approval letter will tell the seller you’re a serious and qualified buyer. It will also give you an edge over competing buyers who are not pre-approved.

Keep in mind, pre-qualification doesn’t mean you have an approved loan. You’ll still need to apply for a loan if your offer is accepted.

2nd verse of the Star Spangled Banner

This was sent from one of my friends and clients.  PLEASE listen to it! and pass this link on!

Herman Cain lead a Q&A session at the Douglas County Tea Party when a young woman asked him about the attack by the Left on our Judeo-Christian heritage in America…He addressed her question, then went to the last question of the night, and the crowd was not expecting what happened next..

http://www.youtube.com/watch?v=f9_bP219ehQ

“SAFE Act"

Texas Department of Savings and Mortgage Lending Issues Information on “SAFE Act”

from Commissioner Douglas Foster, TDSML

Many of you have witnessed the impact upon lenders in the last few months with the significant changes to RESPA. There are still more changes ahead in the mortgage lending arena for those of us in Texas with implementation, on April 2, 2010, of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”) which was signed by President Bush in July 2008 creating the Nationwide Mortgage Licensing System and Registration (NMLSR).

SAFE specifies minimum standards for all states in the regulation of residential mortgage loan originators (RMLO). Fortunately, Texas was one of only two states that already exceeded all of these standards. However, there are also certain mandates that remove flexibility we have provided in the past and significantly expand the range of individuals required to be licensed.

The purpose of this article is to both raise your awareness of the upcoming changes and to seek your continued cooperation in ensuring only properly licensed individuals are providing residential mortgage loans. Unlicensed residential mortgage loan origination is a misdemeanor offense in Texas. Many people who have never been required to be licensed before will need to have completed the licensing process prior to May 31, 2010.

Our agency developed an on-line verification system in 2007 that will eventually migrate completely to the NMLSR; however, we recommend you check our system and NMLSR to verify proper licensing at least through the end of 2010. You can reach the NMLSR website through links from our website home page.

Texans have in the past enjoyed a de minimus exemption for an owner of real property who originated no more than five mortgage loans in a rolling twelve month period. Under the SAFE Act, this exemption no longer applies. There remains an exemption for seller financing of your homestead, or on behalf of direct familial relations, but anyone else who originates a loan or provides seller financing not covered by the two above circumstances, even just once, without being licensed, will be committing a misdemeanor.

The department is concerned that realtors be fully informed of these changes as they may be asked to assist a client in establishing financing terms or paperwork related to seller financing or they may finance the sale of their own residential properties sale financing. Key issues in determining if RMLO licensing is required for a realtor in such situations would include either the forms of compensation or the type of services performed. Before we set up a couple of specific examples let’s restate that exemptions only exist if the dwelling serves as the individual’s primary residence or if you are providing a loan transaction on behalf of a direct familial relative.

If all of your compensation or gain from the transaction will be in the form of your real estate sales commission and you are earning no other fee and have no interest in the property being sold, and all your actions are to facilitate the closing of the sale, then you do not need to be licensed under SAFE.If, however, you are receiving a separate fee or earning interest on a loan then you may need to be licensed and we request you contact our department to discuss the specifics of the scenario.

As to services provided, your client may ask you to help them with drawing up standard terms or providing template documents for establishing a seller financed loan transaction. If it is their homestead they are exempt from licensure, but if you perform the functions of offering or negotiating rate or terms with the buyer you may have triggered the need to be licensed regardless of whether the property is a homestead or not. For a non-homestead transaction the seller in a seller financed transaction must have a licensed individual perform the loan functions of offering or negotiating rate and terms or become licensed themselves.

Please keep in mind, if the dwelling does not serve as the individual’s primary residence or the loan origination service is not on behalf of a direct familial relative, then the individual is acting in the capacity of a residential mortgage loan originator and must be licensed even for just one transaction.

There is significant information and resources available on our website including detailed plans on the implementation and timing of the various licensees’ transition plans. Please take an opportunity to review what we offer at www.sml.state.tx.us and thank you for joining us in protecting the citizens of Texas in one of their biggest financial decisions.