Category Archives: Foreclosure

FHA Reduces Mortgage Insurance Premiums for FHA Loans

Scissors_Cutting_MoneyThe Federal Housing Administration recently announced that as of January 26, 2015, it will reduce the annual mortgage insurance premiums for FHA loans by .5%.  On average, the reduction could save an FHA loan borrower about $900 per year. (Learn more about FHA Loans.)

What Are FHA Mortgage Insurance Premiums?

If you get an FHA-insured loan you’ll have to pay mortgage insurance (mortgage insurance protects the lender in the event you default on loan payments). There are two types of mortgage insurance premiums (MIPs) that you must include in your FHA loan agreement:

  • Upfront premium. This is a one-time payment that you make when you first get the loan. It is currently 1.75% of the loan amount. The new FHA rules do not change this premium amount.
  • Annual premiums. Unless your loan-to-value rate is substantial, you’ll also be required to pay annual mortgage insurance premiums. Although called annual premiums, you pay them monthly. The amount you pay is based on the length of your loan, the amount you borrow, and your loan-to-value rate.

Reduction in FHA Annual Mortgage Insurance Premiums

The FHA’s new rules reduce the annual premium by .5% for loans that are greater than 15 years. While the total percentage that you must pay for annual premiums varies based on a number of factors, most people are currently paying 1.35% for loans greater than 15. The new rates for these loans will be .85%. (The MIP rates on loans that last less than 15 years will not change; those loans already have a rate lower than .85%.)

U.S. Department of Housing and Urban Development Secretary Julian Castro predicts the new rates will save the average FHA loan borrower about $900 per year.

When Does the Premium Reduction Go Into Effect?

The new rates will apply to loans made on or after January 26, 2015.

What If You Already Have a Loan With Higher Premiums?

The FHA announced two fixes if you already have a loan with higher premiums or if you are currently in the loan process.

Cancel loans in process. The FHA will allow lenders to cancel loan files already in process so that borrowers can start over and get the lower premium rate.

Refinance. If you have an FHA loan made after May 31, 2009, you can refinance in order to get a new loan with the lower premium. (Loans made prior to May 31, 2009 already have lower rates.)

President Signs Bill to Extend Mortgage Forgiveness Tax Break Through 2014

tax_cut_imageOn December 19, 2014 President Obama signed H.R. 5771, the Tax Increase Prevention Act. One of the provisions of that Act extends the tax break for homeowners who have had mortgage debt canceled or forgiven in 2014.

When Is Mortgage Debt Forgiven?

Thousands of financially struggling homeowners had mortgage debt forgiven by their lenders in the past year.  Mortgage debt forgiveness might happen as part of a mortgage modification – lenders often forgive part of the principle in order to make a loan more affordable. It also sometimes happens after foreclosure. If you go through a foreclosure and still owe money to your lender (because your mortgage was higher than the value of your home), the lender might forgive that debt (in some states and under some circumstances the lender must forgive the debt). Your mortgage lender might also agree to forgive any remaining mortgage debt after a short sale. (Learn more about tax consequences after foreclosure or short sale.)

Forgiven Mortgage Debt as Income for Tax Purposes

Prior to 2007, if your lender forgave or canceled mortgage debt, the IRS would treat that canceled debt as income. That means you’d have to pay taxes on it.  Ouch.

The Mortgage Forgiveness Debt Relief Act of 2007

Congress changed that when it passed the Mortgage Forgiveness Debt Relief Act of 2007. The Act allows homeowners to exclude up to $2 million of forgiven mortgage debt on their principal residence from their taxable income.  Congress initially limited this tax break to debt forgiven between 2007 and 2010. It later extended the time period through 2012, and then again through 2013. (There are other important conditions that you must meet in order to qualify for this exclusion. To learn more, see Canceled Mortgage Debt: What Happens at Tax Time?)

HR 5771 Extends the Tax Break Through 2014

Congress’ latest extension (in H.R. 5771) extends the tax break to debt forgiven in 2014.

Permanent Relief on the Horizon?

So what happens if some or all of your mortgage debt is forgiven in 2015? As it stands now, you’ll be out of luck. However, relief may be on the way. Representative Alan Grayson introduced H.R. 5785 into Congress on December 3, 2014. It is now in the House Ways and Means Committee. If enacted, H.R. 5785 would make permanent the tax break for forgiven mortgage debt. Stay tuned.