Tag Archives: short sales

Do You Know The Difference Between A Recourse Loan Or A Non-Recourse Loan?

You may have had your home recently foreclosed on and part of the Santa Maria real estate market on a mortgage home loan that you were upside down on, and maybe you may be plain tired and frustrated and about to become another statistic, but what you need to know is your loan recourse or non recourse, and what does that mean?  Just keep in mind the following is intended for general information only please seek legal counsel for your own specific situation.  Most of this information will be how California treats mortgage loans if outside California you may want to see how your state treats mortgage home loans.

This blog will be focused on what the difference is between a recourse and a non-recourse loan because there is a huge difference and most are not aware of the difference.   With all the Santa Maria homes for sale that are either in foreclosure or homes going through the short sale process it is something homeowners should be familiar with. So lets go with an everyday story you bought your house 2003 you paid $280,000.00 you put no money down when you bought your home with one of those popular 80/20 loans.   A couple of years goes buy and now your home is unbelievably worth $500,000.00.  Just like everyone else you get all kinds of good stuff in the mail full of useful advice to consolidate all of you bills and even make some more home improvements and get a new car using the equity of your home and only make one payment and get so much done.  Why wouldn’t you do it, so you take out a loan against the house and now you owe $450,000.00.  Now let’s fast forward to today.

Well the economy is not so good and your home is not worth $500,000.00 in fact its not even worth what you bought it for now.  More like $250,000.00 and you can’t make the payments anymore because the payments are based on what the home is worth.  So you are forced to either do a short sale or just walk away like so many others since you can no longer make the payments on your home.   But before you do just walk away and your home is another foreclosure, here is something to think about.

Loans that are recourse are basically loans, that allows the lender to use legal means to collect the deficiency balance from the borrower after the asset has been taken back and sold.   Kind of like your home now where you have a loan for more than the what the house is worth.  That being said the bank can come after you legally for the difference, which is kind of tough for most people since they don’t carry 100k on them.  Loans that are non-recourse are loans that the bank cannot come after the borrower for the deficiency amount.   For reference you can refer to California Code.  Please keep in mind that this pertains to your home not to your rental properties and investment homes.

http://www.legaltips.org/california/california_code_of_civil_procedure/577-582.5.aspx

In California when you buy a home it is considered “purchase money” whether it be one loan or two loans.  A loan that is considered a purchase money loan is a non-recourse loan.  The problem with most homeowners is that they refinanced their homes and turned their non-recourse loans into recourse loans.    Although if the lender did a non-judicial foreclosure he cannot come after you in the state of California because that is the trade off that they have for doing a non-judicial foreclosure vs. a judicial foreclosure which means going to Court.  So you get the benefit of the “one action rule”.  Unless you had a second that got completely wiped they can come after you for the deficiency and there are still more exceptions to the rule as you read along.

Now here is where it can get tricky if you have two loans but from different lenders and you don’t have enough to pay off the second,,,,, well the second can come after you but if both loans are from the same lender lets say both are with Wells Fargo and not purchase money so for example if you took out a second later you are okay AS LONG AS BOTH LOANS ARE NOT FROM DIFFERENT LENDERS.   The lender will come after you for the difference and can sell your account to collection agencies as well.   That means they can sue you and levy your bank account or even garnish your wages.

IF YOU HAVE AN FHA OR A VA THESE RULES DO NOT APPLY THESE ARE FEDERALLY SPONSORED LOANS AND SUPERSEDE CALIFORNIA STATE LAWS AND ,,,,,,YOU ARE CORRECT ARE RECOURSE LOANS….home being financed after the collapse are FHA financed and yes they can come after you.  I am not sure if you got that all down and I do hope that this made sense to anyone reading this.  If you are unsure if you will be sued seek some legal advice.

BUT THERE IS HOPE If YOU DO A SHORT SALE BEFORE THE YEAR END. For one California has a new law that any lender that agrees to a do a short sale whether it be a second or investment property.  That they will not come after you for any funds owed.  This is a huge weight off the shoulders of many homeowners that may be thinking of having to do a bankruptcy only to protect themselves.  Due to there being a deficiency amount on the money owed to the bank.  Last but not least the home forgiveness act which expires this year DEC 31, 2012.  IRS CONSIDERS ANY DEBT FORGIVEN TO BE TAXABLE INCOME.   So do the math with me you owed $500k you short sale for $250k the IRS WILL TAX YOU $250K UNLESS YOU ARE INSOLVENT OR FILE BK or the home was your primary residence.  But that all changes on Jan 1, 2013 there will be a tax bill unless there are changes in the Govt.  but it seems that even the Govt. is looking for ways to generate money and would not expect a bailout.  If you do not qualify for a loan modification seriously consider a short sale soon.

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Why You Should Do A Short Sale Soon!

There are consequences of doing a short sale whether it be within the Santa Maria real estate market or anywhere your house is located this is on the grounds that you owe more relative to your  mortgage home loan than what your home happens to be worth at this time, this is when you are upside down.  Do not get me wrong there are some benefits to a short sale as well, but we are only going to touch a little bit about the dark side.  Reality therea are millions of homes owners facing this and many of the homes in Santa Maria are short sales at this time.
Assuming that you read my last blog then you read with respect to the benefits of carrying out a short sale supposing that you did not you might want to visit that blog seeing that there are some benefits as to why you would want to do a short sale vs. letting your home foreclose if you do not qualify for a loan modification.  The  majority of Santa Maria homes for sale in addition to quite a bit of likely in Calif. are either a short sale or a foreclosure and a number homeowners could be contemplating what course of action to do whether to do nothing but walk away or work in connection with doing a short sale.  So if you are on the fence of just walking or doing a short sale maybe this can help.

You need to take into consideration that you owe $400,000.00 on a house that is just worth $200,000.00.  What takes place towards the difference???

First we choose to talk with reference to the IRS, the Feds also then we choose to talk in regard to the effect with regard to a state level regarding in what way or manner they look at that $200,000.00 dollar variation.   nonetheless what takes place provided that you do a short sale does the bank eat the difference,  The response depends relative to where you live.  You will have to look into the laws of your state, for instance provided that a bank agrees to do a short sale in the state of California whether it be a first or a second the bank will not be able to  come after you for the deficiency amount.  For instance if you had a second on your home in a foreclosure they may be able to take you to court for what you owe them.

Most reading this are probably thinking that’s cool sign me up also let’s do a short sale.  The only problem is that the IRS considers any canceled debt as ordinary income, even when dealing even with credit cards in reference to working on settlements.  So but now the picture is not so rosy especially with the condition that you have never made $200,000.00 in your life in addition to at this time looking at a tax bill of $200,000.00.   supposing that you do a short sale you will be receiving a 1099C for 200k with the condition that you do a foreclosure you will receive a 1099A, these will need to be filed even with your tax return.  So now what should you do?  You should have a couple of alternatives and do please keep in mind try to go to someone that is incredibly experienced with taxes this is not something you want to just let anyone do for you.

So here are some Exceptions towards the rule on paying taxes.. Listen up 😉

1)      The IRS will not collect taxes with respect to the deficiency amount assuming that the homeowner filed Bankruptcy also included the deficiency amount.

2)      The homeowner filed insolvency at the time of cancellation of debt, which means that you owed more than what you have in assets you do not have to file BK this may be done at the time when filing your tax return.

3)      assuming that this was a rental property in addition to you could offset debt by other business liabilities in addition to expenses basically back to being insolvent.

with the condition that you just let the home to go to foreclosure no worries this is straight from the IRS themselves

Update Dec. 11, 2008 – The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection let alone a foreclosure, qualify for this relief.  bear in mind DECEMBER 31, 2012 SO with the condition that YOU ARE THINKING OF carrying out A SHORT SALE DO IT SOON!!

This provision applies towards debt forgiven within calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exception ($1 million if married filing separately). http://www.irs.gov/newsroom/article/0,,id=174034,00.html

In closing the benefits always do out weigh the consequences in doing short sale vs. a foreclosure.  Biggest benefit would be when do you want to become a homeowner again, and stop having to deal with what is going to happen next,  both will impact your credit just one impacts it slightly less.  This was just a brief summary of the tax consequences involved as well as you will need to seek the counsel of somebody that can help you with filing for your taxes.  The real estate market will still have a few years of dealing with foreclosures in addition to short sales as the primary source of homes on the market.

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Short Sales And The First Time Buyer $7,500 Credit Do You Owe Money?

Since this has come up a couple of times regarding those that were able to take advantage of it during the time and purchased one of the Santa Maria homes for sale in the Santa Maria real estate market or where ever it may be as first time home buyers back in 2008, and took advantage of the First Time Home Buyer credit of $7,500.00.  I have had people asking me how it works especially during the tax season and although tax season is over still getting questions on it.  Just keep in mind everyone’s situation is different and to consult your tax preparer regarding your situation specifically, this is just for general use and information.

 

If you are unsure if whether you got the credit it or not more than likely you didn’t most are aware of when someone gives them $7,500.00.  But now lets move that clock forward to today and lets just say you NO LONGER HAVE THE HOUSE THAT YOU GOT THE MONEY FOR.  So now what happens if you lost that house you got the credit for??  Unlike the later credit that came out and you got $8,000.00 which was literally free money that you did not have to pay back and was literally free, you could not get any better than that, the govt. was literally bribing people and paying them to go out and buy a home.  But at the same time you do have to admit the $7,500.00 was pretty good also where else do you get a $7,500.00 INTEREST FREE LOAN THAT YOU PAY BACK OVER 15 YEARS.  When you take into account inflation you are actually paying less than that back so it was still a good deal just not as good.  BELIEVE IT OR NOT I STILL GET CLIENTS THAT WANT ARE ASKING ME FOR THE 8K FIRST TIME HOMEBUYERS PROGRAM.  Which I have to break their hearts and tell them they missed the boat on that opportunity.

 

 

Okay so lets go over some scenarios of what may have happened if you lost your home and be advised you will be using form 5405 for your taxes.

 

1)      You buy home you hook up with new love of your life and then honeymoon is over.  But the other person gets home in the settlement of divorce then they get to pay it back. Even though they did not originally buy the home they get the benefit of having the home.

2)      You happen to be married temporaily of course, and when you bought the home together filed joint returns.  Then of course the love fizzles now here is where it can get kind of weird if the divorce is not finalized then both are on the hook for paying the credit back.  Once it is finalized then the one that gets the home pays it back and as long as at least one of them continue to live in the home then the repayment is not accelerated if they both move out then it has to be paid all back that year. 😉

3)      You buy home in 2008 and 2011 you want to buy better and nicer home and want to sell 2008 home.  You move in to new home and as long as you are still going to sell the other home then at close of escrow is when you will have to repay the remaining amount of credit due.

4)      Last but not least and there are, I am sure other scenarios that people can dream up but I only have so much time to write this stuff as well as research it.  This one gets a little complicated; first of all you lose the home whether it be a foreclosure or a short sale.  If you move out of the home before the home is foreclosed because you think its going to be foreclosed then you owe the whole thing that year.  Now if lets say you stay in there till the very end, for example they can start foreclosing on you in June and kick you out next year in January then its that year that you will have the whole thing added to your tax bill, but then there is another step to that on the whole insolvency thing and that is form 982, that can maybe be a separate post.

 

  • Now lets say you do a short sale, it seems that there is not a lot of clarification vs a short sale or foreclosure its just if you lost the home you owe the money except for?? IRS website .. http://www.irs.gov/taxtopics/tc611.html Now I took the portion below straight out of the IRS website which you can click the link and visit yourself.

 

  • Acceleration of recapture – If a taxpayer disposes of the principal residence for which a first-time homebuyers credit was allowed (or ceases using it as taxpayer’s and spouse’s principal residence) before the end of the 15-year recapture period, the remaining credit repayment amount is added to the income tax liability of the taxpayer for the year of sale or cessation of use.
  • Exceptions to recapture – In the case of a sale of the principal residence to an unrelated person, the increase in tax due to accelerated recapture is limited to the amount of gain (if any) on such sale. For purposes of calculating gain, the adjusted basis of such residence shall be reduced by the amount of the first-time homebuyer credit allowed, to the extent not previously recaptured. In the case of an involuntary conversion, recapture is not accelerated if a new principal residence is acquired within a 2-year period. No amount is recaptured after the death of the taxpayer. “

The rules to the exception are “In the case of an involuntary conversion, recapture is not accelerated if a new principal residence is acquired within a 2-year period”

Generally, a foreclosure is treated as a sale and the accelerated repayment will be required in the year the deemed sale is complete.   So if you have been in the home for at least two years I think you will be okay if you happen to lose it through either a short sale or a foreclosure now that the credit was given in 2008 and we are now in 2011.

For more information just go to IRS.gov and do some homework or get with your tax preparer.

For A FREE List Of Foreclosures & Pre Foreclosures On The Central Coast Click HERE

If you have any questions about buying a Santa Maria home for sale in the Santa Maria Real Estate market or any properties on the Central Coastand need to get a loan in Santa Maria, CA or any where in the state of so I California not just on the Central Coast, so I can do California home loans, and first time home buyer loans, as well as refinance home loans and just plain simple mortgage loans. So please contact me by sending me an email at: GenePerez@GMSLoans.net

I do also service all the nearby communities and other markets such as the Santa Ynez real estate market, Nipomo Real estate market, Arroyo Grande real estate market, Grover Beach Real Estate Market, and all other surrounding areas regarding the homes on the Central Coast.

my goal is to provide you with resources you need. I can also help in getting the financing for your home. If you have any suggestions or questions in how I can provide more or better

information please let me know. I have been helping my clients for the last 15 years on the Central Coast, Gene Perez – 805-448-7101 , DRE 01321588

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Important Disclaimer: Questions and answers provided on this website and by Gene Perez is to be considered general information, and is not intended to substitute for informed professional financial, tax, legal, investment, accounting, or other professional advice.

Gene Perez is Licensed Real Estate Broker for Valley Hills Realty and a mortgage broker for Greater Mortgage Solutions.

This blog and its content is copyright of Gene Perez 2010. All rights reserved. Any redistribution or reproduction of part or all of the contents in any form is prohibited other than the following: you may print or download to a local hard disk extracts for your personal and non-commercial use only. You may copy the content to individual third parties for their personal use, but only if you acknowledge Gene Perez as the source of the material You may not, except with our express written permission, distribute or commercially exploit the content. Nor may you transmit it or store it in any other website or other form of electronic retrieval system without obtaining Gene Perez’s Знакомства

 

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