The Senate approved the long time waiting extension of the Mortgage Debt Forgiveness Act , bringing home owners who did a short sale this year one step closer to tax relief. The bill, which passed the House of Representatives two weeks ago, is expected to be signed by President Barack Obama. The Senate approved the bill in a 76-16 vote.
The Mortgage Forgiveness Debt Relief Act of 2007 was created to help distressed homeowners; that were faced with taxes after a Principal reduction; however this law expired Dec. 31, 2013 making distressed home owners responsible for paying taxes on “phantom income” from the forgiven debt. The tax on a 2014 short sale or workout would have been due this coming April 15 had Congress not extended the measure.
The extension will only apply to short sales conducted in 2014. Any further extensions will have to be considered by the new Congress, which begins its 2015 session in January.
After losing their homes in the foreclosure crisis, boomerang buyers are back! Since the housing bubble burst, 4.8 million borrowers have lost their homes to foreclosure, and another2.2 million gave them up in short sales, according to Realty Trac.
How quickly someone can bounce back from a foreclosure or a short sale depends on the reasons for the past financial problems and on the person’s current credit score. A would-be borrower who had good credit history before a job loss, for instance, is more likely to qualify for a new mortgage than one who had bad credit and continues to demonstrate poor financial habits.
The FHA introduced a Back to Work loan program in 2013 to address the needs of individuals and families who lost their homes because of the housing crisis and recession. The program requires housing counseling before a new loan can be approved.
The borrowers need to be able to document the reason for the foreclosure or short sale and show that they’ve been responsible with their credit after they lost their home. A drop in credit score is okay as long as they can show they had good credit before the crisis.