Old debt and FHA

[scooby21]

I've applied for FHA loan-they had questions about old medical bills. They wanted to know how much I pay a month out to these but I told them they were collections and didn't pay anything. Asked if needed to pay them off. Loan officer said no and better to pay it off through loan. Why is that?

[liverichly]

FHA doesn't require to pay off collections, but lenders can have policies/procedures that supercede FHA's guidelines. Perhaps the LO knows that the lender would want them to be paid off. There should be FHA lenders who wouldn't require them to be paid off, especially since they are medical collections.

[Lewis8739]

I have the same issue but my collections are all credit card related and I was just denied a refinance because of them. I'm on ARM right now and it's set to adjust next month and I 'm trying to refy from 10% to something lower. My broker said I couldn't get a FHA loan because of several derog's on my credit. What can I do? I went through a divorce three years ago and my credit is still healing from it. My scores are in the High 500's pushing 600.

[flacorps]

I have the same issue but my collections are all credit card related and I was just denied a refinance because of them. I'm on ARM right now and it's set to adjust next month and I 'm trying to refy from 10% to something lower. My broker said I couldn't get a FHA loan because of several derog's on my credit. What can I do? I went through a divorce three years ago and my credit is still healing from it. My scores are in the High 500's pushing 600.

What's SOL where you are? Once they're out of SOL you may be able to negotiate a PFD and pay 30%-50% of what they're demanding.

After that a re-fi might be a lot easier.

[ConfusedToo]

Some lenders don't know much about FHA loans because they don't do many. I had some old derogs they never questioned, plus a collection. The collection was the only thing that showed up on the final CR that was sent to the underwriter.

I went thru a credit union. Shop around, get a second opinion.

[firstsource]

And all FHA Underwriters are not the same. At our bank I have one that insists that old collections be paid, and the other one doesn't always insist. Just need an explaination, like medical bills-laid off of work a few years ago etc.

Keep trying.

Charles

[Lewis8739]

Flacorps-Now if I do that won't I have to pay taxs on a settlement?

Confusedtoo- Thanks I think I'll do that.

Firstsource-Thanks for the encouragement I really need it right now.

The way things are going I might have to re-fi in my wifes name until things get better on my credit. Some of the collections I have can be settled at a good price but I'm concerned about paying taxs on the adjusted amount. Is it a legitemit concern on my part or am I just mis-informed?

[firstsource]

I don't understand the comment about your taxes?

[amortgageman]

I don't understand the comment about your taxes?

I think he is referring to income taxes due for the difference of the amounts from debt settlement.

[jq26]

1099C. And yes, you may have to pay it. But not until the April of the year following the year of 1099c issuance (when you settle up with the IRs on your return). Could be up to a year from now- when you have the $.

[firstsource]

Are all creditors reporting this to the IRS as a gain now? I thought only sometimes on short sales and have heard that Discover Card will send a 1099?

Is there a tax expert in the group?

Thanks for the education.

Charles

[flacorps]

1099C. And yes, you may have to pay it. But not until the April of the year following the year of 1099c issuance (when you settle up with the IRs on your return). Could be up to a year from now- when you have the $.

You can always negotiate that the debt is doubtful and disputed

and that no 1099-c shall be issued because there is no forgiveness of indebtedness. Keep in mind that if they balk, you can just work out what it's going to cost you at your marginal rate and adjust your offer down to counteract the additional tax you'll have to pay. Or they can change their minds and give you the agreement not to issue the form.

The JDBs and OCs have been issuing these things on settlements and debts more frequently since the IRS began pushing them 2001 (it had been on the books for years and years before that happened--something about an administration changing around that time?) and they tried to fight it and lost (Debt Buyers Association v. Snow).

[flacorps]

Are all creditors reporting this to the IRS as a gain now? I thought only sometimes on short sales...

They just put through a relief act and there will be no forms 1099-c on short sales of primary residences.

[jq26]

Why would there ever be gain on a short sale anyway? For most, any gain on primary residences is exempt under the primary residence capital gain exclusion. So even if a short sale is the unfortunate way that gain is created, the cancellation of indebtedness should be covered as tax exempt (it is qualified deductible interest).

Is this "relief" just a red herring?

[flacorps]

Why would there ever be gain on a short sale anyway? For most, any gain on primary residences is exempt under the primary residence capital gain exclusion. So even if a short sale is the unfortunate way that gain is created, the cancellation of indebtedness should be covered as tax exempt (it is qualified deductible interest).

Is this "relief" just a red herring?

No, it's actual relief.

The "short sale" involved a reduction in principal by the bank ... the bank takes back less than it lent, and agrees not to pursue the deficiency against the borrower. There are probably a few states where the bank can't pursue the deficiency, but in most states they can pursue it ... and in states where you often hear that it can't be pursued what that really means is that the bank can't do it in the run-of-the-mill foreclosure just to get the house back. There is, however, an ability of the bank to notice up a second hearing in the same case to get a monetary judgment for the deficiency. Which in a rising market typicaly has not been necessary and has not been done and indeed many attorneys may not even be aware that it's available.

Anyway, the reduction in principal is what triggers cancellation of indebtedness (COD) income on the amount "forgiven". That income is itself being forgiven by the relief act, in order to assist taxpayers on the one hand and to make the real estate markets freer and more orderly on the other hand. In other words, for once the president and congress have put into legislation their realization that kicking someone when they're down doesn't do a whole lot of good.

[jq26]

Thanks for clarification. Hopefully, the looming phantom tax hurdle will help underwater homeowners finally capitulate and start clearing the excess inventory. The faster we work through this, the faster we can get back to some normalcy.

Looks like the real trigger is whether it is recourse or not, not if it is cap gain exclusion qualfiied. But now the relief law makes it a moot point.

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Recourse:

If the face amount of the recourse debt is $200,000, the FMV of the property is $170,000, and the adjusted basis is $120,000, you have $30,000 of COD income ($200,000 debt less $170,000 FMV) and $50,000 of gain ($170,000 FMV (amount realized) less $120,000 adjusted basis).

Non-recourse:

If your mortgage debt is nonrecourse, the debt is greater than the FMV of the house, and the house is foreclosed upon, your amount realized will be the face amount of the unpaid mortgage debt. Thus, if the amount of the nonrecourse debt is $200,000, the FMV of the property is $170,000, and the adjusted basis of the property is $120,000, your gain on foreclosure is $80,000 ($200,000 amount realized less $120,000 adjusted basis). No portion of the gain on property subject only to nonrecourse debt is COD income.