How The Mortgage Forgiveness Debt Relief Act of 2007 Benefits First Time Home Buyers
By Roy Landers
The Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) has finally been passed by both chambers of Congress as of December 14, 2007 and has been signed into law by the President. This long awaited bill provides much needed debt relief to thousands of home owners who unfortunately have been caught up in the catch-22 of the sub-prime loan fiasco and are losing their homes through the foreclosure process. Once the adjustable rate loans on those homes "adjust up" the home owner almost always cannot afford the higher payments and the foreclosure tidal wave sweeps them from their homes.
Even worse, if the home owner made arrangements to sell the house for less than the actual mortgage, through what is commonly known as a short sale, the IRS came swooping in and claimed the difference between the actual sale price and the mortgage owed on the property as "earned income". The foreclosed home owner not only lost his/her house, they also incurred an additional tax bill. Talk about a raw deal.
For example. If Joe and Jane Smith owned their home with an adjustable rate mortgage note of $500,000 and was paying at a low adjustable interest rate of 3% per year their payments would be approximately $1,250 per month. But after a two to three year period the interest rate adjusts to 5.75% on the same amount of $500,000. The payment adjusts to approximately $2,396 per month. Joe and Jane's budget will only allow for payments of $1700 per month maximum. They are in trouble. To add insult to injury the real estate market is spiraling down and property values have taken a nose dive, including Joe and Jane's home. The property's value is now $400,000. Joe and Jane's property value is now upside down. They can't afford to pay the mortgage on the property and they can't sell it even for the amount they owe on it. A "catch-22".
They don't pay the mortgage and the bank forecloses. Joe and Jane in the meantime find a buyer who will purchase the home for $375,000. The bank, because it knows something is better than nothing, agrees to accept the buyer's offer and to release Joe and Jane from the responsibility of the $500,000 mortgage debt, a difference of $125,000. This is called debt forgiveness. To the IRS it's called income. Under the IRS code the IRS could and in many cases has sought to tax the home owner for the debt forgiveness amount. In this case Joe and Jane, as if not already in enough financial trouble, would owe taxes on the $125,000 too. That is until the recent passage of the Mortgage Forgiveness Debt Relief Act of 2007.
This Act amends the Internal Revenue Code to exclude from gross income amounts attributed to a discharge of indebtedness incurred to acquire a principle residence (the one the home owner lives in). The amount of debt forgiveness can be up to $2 Million. This is great relief for all of the Joe and Jane's of the adjustable rate world who just can't keep their homes because the payments are too high and in many instances the property value has also decrease significantly.
THIS IS GREAT NEWS FOR TWO REASONS:
1. The current homeowner is relieved of a staggering and depressive tax obligation possibility, given a way to sell the home for less than owed on it and avoids a foreclosure on the home owner's record.
2. Because the bank has taken the property back in its Real Estate Owned (REO) department it is very motivated to get rid of the property as quick as possible to avoid holding it and suffering a further loss as well as bank regulation demerits that a bank suffers when property is taken back after a mortgage failure. How Does This Help A First Time Home Buyer? It helps the first time home buyer in many ways. The definition of a first time home buyer is anyone who has not owned a home within the last three years prior to obtaining a mortgage on their principle residence.
The Mortgage Forgiveness Debt Relief Act of 2007 will increase short sales of homes that homeowners cannot afford and now know they cannot be held liable for any "debt forgiveness" tax. Sellers who are forced into foreclosure will have more flexibility in negotiating with the mortgage holding bank and the buyer who makes an offer to purchase the property. Since the property value is now very low it is an excellent time for a buyer to buy the property and lock in the interest rate at a fixed amount that the buyer can afford. The interest rate should be fixed at a 30-40 year period. There are plenty of them available. The bank is inclined to work with the buyer in order to get rid of the unwanted inventory.
Remember banks are in the lending business, not the real estate business. They cannot make money unless loans are made. If they hold on to the real estate as inventory they don't make money. In fact they lose even more money because the home is now vacant, subject to vandalism and the maintenance and upkeep does not stop. The bank also has to hire a property management company to oversee the property. Get the picture. The bank does not want the property. It wants to sell it. This is great for a first time home buyer. He/she can get a great low market buy, locked in with a long term mortgage rate that they know they can afford before going into the loan and best of all when the real estate industry rebounds, which it surely will, the buyer will reap the benefits of increased value appreciation that helps to build a solid estate.
The first time home buyer can also use one or more of several down payment assistance programs that will help with the down payment on the property purchase. This is money that never has to be repaid. There are several local, state and federal programs available. Down payment assistance up to $50,000 or more is possible. Now is the time to Stop Making Your Landlord Rich!! and own your own home. Hope this helps somebody go out and make their dream of home ownership come true.
Roy Landers is an attorney and real estate broker. He specializes in helping first time home buyers obtain a home. He has written a book entitled "Ultimate Guide To Free Down Payment Money For First Time Home Buyers. Visit his website at http://www.housingamericans.com . He can be contacted at