Contra Costa, California Real Estate

The Mortgage Debt Relief Act of 2007 will save some homeowners facing short-sales or foreclosures from paying federal taxes on the forgiven debt.   There are very specific requirements:

The mortgage is for the homeowners principal residence.  The relief does not apply to any debt forgiveness for any vacation or investment home.

Forgiveness is only for the "acquisition indebtedness" of the principal residence.  Acquisition Indebtedness is defined as "the debt used to acquire, construct or rehabilitate the home". 

No relief is available for cash-out mortgages whether the cash-out takes the form of a refinanced first mortgage, a second mortgage, a home equity line of credit or a similar arrangement.

Exception:  If the cash-out was specifically used to improve the home and the homeowner has adequate records to prove it.

Important note: This bill relieves these specific homeowner of their federal tax liability but does NOT relieve the homeowner of their state income tax liability.   California must enact its own legislation to relieve homeowners of their state tax liability.  Pending legislation, Senate Bill 1055, will provided modified conformity to the federal legislation.  This legislation can be tracked at http://www.ftb.ca.gov/, click on "law and legislation" for updates.

Many potential home buyers are waiting to purchase a home when the market "hits bottom".  Unfortunately, even if you time the bottom of the market perfectly, you may ultimately miss it for lack of advance preparation.

If you are contemplating a home purchase sometime in the future, now is the time to prepare for your future purchase and mortgage financing. 

Choose your mortgage lender.  Your mortgage is typically your largest debt so your choice of loan officer and the caliber of their financial advice will impact your entire financial future.  More immediately, their level of expertise will impact the ease with which your purchase transaction closes.  For more information about shopping for a mortgage, visit Shopping For A Mortgage.

Meet with your mortgage loan officer. 

Submit your financial documentation:  W-2's for the most recent 2 years, Paystubs reflecting year-to-date earnings, two months asset statements - all pages - for your checking, savings, investment and retirement accounts, as applicable.

Discuss your financial goals.  Structuring the appropriate mortgage depends entirely on your personal situation. 

 

Review your credit report and credit scores.  Credit scores are critical and have a significant impact on the interest rate and terms you will receive but 79% of credit reports contain errors that will impact your credit score.  Correcting your credit report requires an average of 90 days.

Determine if your funds available for the down-payment, closing costs and reserves will be sufficient for your desired purchase price.  If not, advance preparation will allow you to:

Restructure debt to increase savings

Review alternate sources of funds.  This could include a seller credit (must be negotiated with the offer to purchase) 401k loan or withdrawal, gift funds from a family member (specific guidelines apply), sale of an asset, etc.

Compare your current and post-purchase, after-tax cash-flow.  This is often a pleasant surprise for many home buyers.  Increased income tax deductions offset a portion of the increased housing expense resulting in a monthly cash-flow better than expected. 

Update the household budget based on the proposed housing expense and proposed after-tax cash-flow.    

With this advance preparation, you will be able to act quickly when you feel the timing is right.  If you wait until the timing is right to start this process, you may lose your window of opportunity as you work through the credit and financial details.