If your home is currently worth significantly less than you owe on it, MHA’s Principal Reduction Alternative was designed to help you by encouraging mortgage servicers and investors to reduce the amount you owe on your home.
You may be eligible for Principal Reduction Alternative if:
•Your mortgage is not owned or guaranteed by Fannie Mae or Freddie Mac.
•You owe more than your home is worth.
•You occupy the house as your primary residence.
•You obtained your mortgage on or before January 1, 2009.
•Your mortgage payment is more than 31 percent of your gross (pre-tax) monthly income.
•You owe up to $729,750 on your 1st mortgage.
•You have a financial hardship and are either delinquent or in danger of falling behind.
•You have sufficient, documented income to support the modified payment.
•You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.*Eligibility criteria are for guidance only. Contact your mortgage servicer to see if you are eligible for PRA.
If your first mortgage was permanently modified under Home Affordable Modification Program and you have a second mortgage on the same property, you may be eligible for a modification or principal reduction on your second mortgage as well, through MHA’s Second Lien Modification Program. Second Lien Modification Program works in tandem with HAMP to provide comprehensive solutions for homeowners with second mortgages to increase long-term affordability and sustainability. If the servicer of your second mortgage is participating, they can evaluate you for a second lien modification.
If a Lender writes off debt in a short sale, it’s a “taxable event,” and the lender tells the IRS about the transaction by submitting a “Form 1099-C, Cancellation of Debt” at the end of the year. Home sellers must acknowledge the amount when they fill out their federal taxes. Through December 31, 2012, however, the federal government forgives any tax liability associated with forgiveness of a mortgage loan of your homestead property.
The IRS generally considers forgiven debt to be income. If a seller has taken out a mortgage in the amount of $300,000 mortgage and the lender accepts $150,000 in satisfaction of the mortgage in a short sale transaction, for example, the seller received the equivalent of $150,000 in free money by government estimates. As a result, the IRS taxes the $150,000 forgiveness. For now and for tax year 2012, however, the government still forgives the debthowever in 2013, it might not.
The tax amount can be significant. On a debt of $150,000, a short-sale seller in the 25 percent tax bracket could end up owing $37,500 in income taxes.
Since short sales can take months and even fall through, homeowners considering a short sale may want to start the process sooner rather than later. Also it is imperative that you contact a Certified Public Accountant in order to ascertain the tax consequences of short sale.
Ray Garcia, Esq.
Board Certified in Real Estate Law
by the Florida Bar