CREDIT
Q: How are credit scores affected by bankruptcy, foreclosure, or a short sale?
A: There are so many variables that impact a credit score that it’s impossible to calculate the exact impact of any of these events by themselves. Ken Byrne, Vice President, Residential Lending with First Savings Mortgage Corporation (www.kenbyrne.net), has provided us with what he believes is a fairly accurate indication of how much certain events can lower credit scores. Note that Ken has listed two individuals at different credit score levels; a person with a 780 (which is an excellent score on the 300-to-850 FICO scale) and someone with a 680 score. He indicated he would anticipate the following results based on the credit event indicated in the first column:
Credit Event
|
Effect on a 680 Score
|
Effect on a 780 Score
|
Maxing-out a card
|
-10 to-30
|
-25 to -45
|
30-day late payment
|
-60 to -80
|
-90 to -110
|
Debt settlement/short sale
|
-45 to -65
|
-105 to -125
|
Foreclosure
|
-85 to -105
|
-140 to -160
|
Bankruptcy
|
-130 to -150
|
-220 to -240
|
The impact of these events is cumulative; if you are 30 days late on a payment AND have a short sale you credit score will be lowered by (approximately) the total impact of both events, not the greatest of the two.
Q: What other financial impact do you need to be aware of when considering the possibility of bankruptcy, foreclosure, or a short sale?
A: Again, there are a variety of answers to this question depending on the individual’s specific situation, but the best synopsis I’ve found is from the Distressed Property Institute which provides training on how to work with distressed properties.
RETIREMENT ACCOUNTS
Q: Can a bankruptcy, foreclosure, or short sale put my retirement savings in jeopardy?
A: Laws in each state protect IRAs, 401s, and other retirement accounts from being attached in the event of bankruptcies, foreclosure, or other debt settlement options (including short sales). Since these are state laws, the amount protected varies by state and you should contact your accountant or legal advisor for more specific information. Retirement accounts in Virginia are protected up to one million dollars ($1,000,000).
TAXES
Q: How does bankruptcy, foreclosure, or a short sale affect my taxes?
A: There are several situations in which the Internal Revenue Service (IRS) says you do not have to pay taxes on the amount forgiven by the lender and the 3 most commonly affecting homeowners are:
1. Bankruptcy
2. Insolvency
3. “Qualified” Principal Residency Indebtedness
The term “qualified” here is very important; the amount qualified can be affected by refinancing, taking out a second mortgage, or setting up a “Home Equity Line of Credit (HELOC).” The rules are explained in an IRS brochure entitled “Cancelled Debts, Foreclosures, Repossessions and Abandonments (Publication 4681).” This brochure even provides you a worksheet so you can see if you qualify for Insolvency. Click here to download Publication 4681 at the IRS.
Two excellent articles have also been published on this subject; excerpts and links can be found below. Though these articles provide excellent insight into the tax laws relevant to cancelled debts, each situation is different and you should always seek the advice of a competent tax consultant concerning your specific situation.
The Washington Post
Saturday, August 29, 2009
A Quick Lesson on Short Sales and Taxes
By Benny L. Kass
Q. I am in the process of selling my house in a short sale. My mortgage is $450,000. The current value of my house is $375,000, and my lender has agreed to allow me to sell it for that price. Under the terms of the sale, my broker will get a 3 percent commission and after all closing costs are paid, the lender will get all of the net sales proceeds -- $360,000. I have been told that I will have to pay some kind of income tax. Please advise.
A. If this is your principal residence and if the money you borrowed was used to buy, build or substantially improve that home, you will not have to pay income tax on debt that was forgiven by your lender. Click here for article on Short Sales and Taxes.
THE WALL STREET JOURNAL.
April 30, 2009
Smart Money
Tax Hits on Property Short Sales
By BILL BISCHOFF
It's not so unusual these days to have mortgage debt that exceeds the current value of your principal residence. If you hang on to the property long enough, you have a reasonably good chance of riding out the storm with little or no harm done. On the other hand, if you have to sell now, you face what's called a "short sale" -- which means selling for a net sales price (after subtracting commissions and other closing costs) that's less than the outstanding mortgage debt.
What are the tax consequences of a short sale? Click here for aricle on Tax Hits on Property Short Sales.
Want to read about frequently asked questions regarding tax consequences of a short sale? Click here to access “Frequently Asked Questions” on the IRS website.
SECURITY CLEARANCES
Q: How does bankruptcy, foreclosure, or a short sale affect a security clearance?
A: It depends upon the event, the type of clearance, and a multitude of other factors including the participant’s long-term credit history. Once thing is certain; more and more personnel in the military, at all levels, are impacted by these types of events and the personnel that review clearances are aware borrowers have little recourse to these options.
The Navy Times newspaper recently printed an article on the subject, “Foreclosure may affect more than your credit score”; escerpts are below:
NAVY TIMES
Foreclosure may affect more than your credit score
Marine spouse Rebecca Hartman asks a timely question: How would a home foreclosure or a “deed in lieu of foreclosure” affect her husband’s career?
There is no definitive answer on whether a foreclosure or deed in lieu of foreclosure will affect a service member’s career. In a foreclosure process, the financial institution takes the borrower to court to repossess the property. With a deed in lieu of foreclosure, the financial institution enters into an agreement with the borrower to take back ownership of the property and releases the borrower from further financial obligations. This avoids having to go to court, which saves money for the lender.
“I’m concerned we’ll see a lot of that this summer,” an Army official said “We take into consideration when a home goes into foreclosure because service members can’t sell their homes” due to reassignment orders, said a service official familiar with the security-clearance process. “We understand they did not choose to move.”
That doesn’t give service members license to walk away from their homes when they get orders, she said. “No one is saying a foreclosure would not have an effect on a member’s security clearances. However, we do consider the circumstances. What we look at is a pattern of behavior, regardless of the amount of debt. “We look at whether you are being financially responsible, whether the condition was largely beyond your control and whether [you are making] a good-faith effort to repay the debt, or are you just ignoring the bills.” The officials noted that there are no set thresholds for debt amounts, credit scores or debt-to-income ratios. Every case is unique.
Experts say you need to keep in contact with your financial institution if you’re having problems — or expect to have problems — making your mortgage payments. And with the options available on installations to get financial advice and assistance, you need to seek help early for problems. Being proactive is a big plus in your favor.
Click here for the article "Foreclosure may affect more than your credit score" by Rebecca Hartman.
If you would like to speak with a Helping Neighbors in Need counselor concerning your specific situation,
go to the “CONTACT US” tab.
Assistance is free and all discussions are held in strict confidence.
FORECLOSURE VS. SHORT SALE
|
||
ISSUE
|
FORECLOSURE
|
SUCCESSFUL SHORT SALE
|
Future Fannie Mae Loan-Primary Residence
(Effective 5/21/08)
|
A homeowner who loses a home to Foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years.
|
A homeowner who negotiates a short sale will be eligible for a Fannie Mae backed mortgage after only 2 years.
|
Future Fannie Mae Loan-
Non Primary
(Effective 5/21/08)
|
An investor who allows a property to go to Foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of
7 years.
|
An investor who negotiates a short sale will be eligible for a Fannie Mae backed investment mortgage after only 2 years.
|
Future Loan with any Mortgage Company
|
All Form1003 applications will have Question C in Section VIII “Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?” A “yes” to this question will affect future rates.
|
There is no similar declaration or question regarding a short sale.
|
Credit Score
|
Typically will affect score for over 3 years.
|
Only late payments on mortgage will show and after sale mortgage will be reported as paid or negotiated. This may lower the score as little as 50 points if all other payments are being made. A short sale’s affect can be a brief as 12 to 18 months.
|
Credit History
|
Foreclosure will remain as a public record on a person’s credit history for 10 years or more.
|
There is no specific reporting item for ‘short sale’ on a credit report. The loan is typically reported ‘paid in full, settled’.
|
Current Employment
|
Many employers check credit regularly on employees who are in sensitive positions. A foreclosure may be grounds for reassignment or termination.
|
A short sale is not reported on a credit report and is therefore typically not a challenge to employment.
|
Future Employment
|
Many employers are requiring credit checks on job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and may affect employment.
|
A short sale is not reported on a credit report and is therefore typically not a challenge to employment
|
Deficiency Judgment
|
In foreclosure (except in those states where there is no deficiency) the bank has the right to pursue a deficiency judgment.
|
In short sales it is possible to convince the lender to give up the right to pursuit a deficiency judgment against the homeowner.
|
Deficiency Judgment (amount)
|
In a foreclosure homes go through an REO process if they do not sell at auction. In most cases this process results in a lower sales price and a higher deficiency judgment.
|
In a properly managed short sale the home is sold at a price closer to market value and should result in a lower deficiency than an REO transaction.
|
Security Clearances
|
Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. Police officers, military personnel, and other positions that require a security clearance may be affected and if a clearance is revoked, termination is possible.
|
A Short Sale on its own typically does not challenge most security clearances.
|
RETIREMENT ACCOUNTS
Q: Can a bankruptcy, foreclosure, or short sale put my retirement savings in jeopardy?
A: Laws in each state protect IRAs, 401s, and other retirement accounts from being attached in the event of bankruptcies, foreclosure, or other debt settlement options (including short sales). Since these are state laws, the amount protected varies by state and you should contact your accountant or legal advisor for more specific information. Retirement accounts in Virginia are protected up to one million dollars ($1,000,000).
TAXES
Q: How does bankruptcy, foreclosure, or a short sale affect my taxes?
A: There are several situations in which the Internal Revenue Service (IRS) says you do not have to pay taxes on the amount forgiven by the lender and the 3 most commonly affecting homeowners are:
- Bankruptcy
- Insolvency
- “Qualified” Principal Residency Indebtedness
The term “qualified” here is very important; the amount qualified can be affected by refinancing, taking out a second mortgage, or setting up a “Home Equity Line of Credit (HELOC).” The rules are explained in an IRS brochure entitled “Cancelled Debts, Foreclosures, Repossessions and Abandonments (Publication 4681).” This brochure even provides you a worksheet so you can see if you qualify for Insolvency. Click here to download Publication 4681 at the IRS.
Two excellent articles have also been published on this subject; excerpts and links can be found below. Though these articles provide excellent insight into the tax laws relevant to cancelled debts, each situation is different and you should always seek the advice of a competent tax consultant concerning your specific situation.
The Washington Post
Saturday, August 29, 2009
A Quick Lesson on Short Sales and Taxes
Q. I am in the process of selling my house in a short sale. My mortgage is $450,000. The current value of my house is $375,000, and my lender has agreed to allow me to sell it for that price. Under the terms of the sale, my broker will get a 3 percent commission and after all closing costs are paid, the lender will get all of the net sales proceeds -- $360,000. I have been told that I will have to pay some kind of income tax. Please advise.
A. If this is your principal residence and if the money you borrowed was used to buy, build or substantially improve that home, you will not have to pay income tax on debt that was forgiven by your lender. Click here for article on Short Sales and Taxes.
THE WALL STREET JOURNAL
April 30, 2009
Smart Money
Tax Hits on Property Short Sales
It's not so unusual these days to have mortgage debt that exceeds the current value of your principal residence. If you hang on to the property long enough, you have a reasonably good chance of riding out the storm with little or no harm done. On the other hand, if you have to sell now, you face what's called a "short sale" -- which means selling for a net sales price (after subtracting commissions and other closing costs) that's less than the outstanding mortgage debt.
What are the tax consequences of a short sale? Click here for aricle on Tax Hits on Property Short Sales.
Want to read about frequently asked questions regarding tax consequences of a short sale? Click here to access “Frequently Asked Questions” on the IRS website.
SECURITY CLEARANCES
Q: How does bankruptcy, foreclosure, or a short sale affect a security clearance?
A: It depends upon the event, the type of clearance, and a multitude of other factors including the participant’s long-term credit history. Once thing is certain; more and more personnel in the military, at all levels, are impacted by these types of events and the personnel that review clearances are aware borrowers have little recourse to these options.
The Navy Times newspaper recently printed an article on the subject, “Foreclosure may affect more than your credit score”; escerpts are below:
NAVY TIMES
Foreclosure may affect more than your credit score
Marine spouse Rebecca Hartman asks a timely question: How would a home foreclosure or a “deed in lieu of foreclosure” affect her husband’s career?
There is no definitive answer on whether a foreclosure or deed in lieu of foreclosure will affect a service member’s career. In a foreclosure process, the financial institution takes the borrower to court to repossess the property. With a deed in lieu of foreclosure, the financial institution enters into an agreement with the borrower to take back ownership of the property and releases the borrower from further financial obligations. This avoids having to go to court, which saves money for the lender.
“I’m concerned we’ll see a lot of that this summer,” an Army official said “We take into consideration when a home goes into foreclosure because service members can’t sell their homes” due to reassignment orders, said a service official familiar with the security-clearance process. “We understand they did not choose to move.”
That doesn’t give service members license to walk away from their homes when they get orders, she said. “No one is saying a foreclosure would not have an effect on a member’s security clearances. However, we do consider the circumstances. What we look at is a pattern of behavior, regardless of the amount of debt. “We look at whether you are being financially responsible, whether the condition was largely beyond your control and whether [you are making] a good-faith effort to repay the debt, or are you just ignoring the bills.” The officials noted that there are no set thresholds for debt amounts, credit scores or debt-to-income ratios. Every case is unique.
Experts say you need to keep in contact with your financial institution if you’re having problems — or expect to have problems — making your mortgage payments. And with the options available on installations to get financial advice and assistance, you need to seek help early for problems. Being proactive is a big plus in your favor.
If you would like to speak with a Helping Neighbors in Need counselor
concerning your specific situation,
Assistance is free and all discussions are held in strict confidence.
Contact Barbara Byrd Bradley - 757.301.1034
or email Barbara@BarbaraBBradley.com
Byrd Realty Group, LLC
Keller Williams Realty/Town Center
4664 South Blvd.
Virginia Beach, VA 23452
Helping Neighbors In Need
We listen with open ears, open minds, and open hearts...
... Then we find solutions!
