News / Finance
How You May Qualify For a “Short Pay” Refinance
If you are upside down and have no lates on your mortgage, you may qualify for what is called a “Short Pay” refinance. Basically, what the Government is doing is reducing your principal balance to 90% of the current market value (writing down the principal balance). So if you owe $600,000 and your property is only worth $500,000, the Government will allow you to write down the principal balance to $450,000 (a $150,000 principal reduction). The tax rules will be very similar to a Short Sale (please consult with a CPA – sometimes it makes more sense to file BK and let your property go into Foreclosure). However, the government will participate in 50% of your future equity when you sell. The rules and guidelines are not quite out on this program, but it is effective October 1, 2008. Solomon Financial has options if you are upside down.
If you have enough equity to refinance, it may not make sense to do “short pay” refi. It might make more sense to do a FHA refi up to 97%. Call us & we can figure out which situation makes the most amount of sense for you. You will probably need to call your CPA as well.
Here is an example of a recent client's mortgage scenario:
"John and Mary" bought their home for $140,000 twenty years ago.
They currently owe about $800,000.
Their home is worth $750,000 after dropping in value about 35% over the last 18 months. They took out cash and used their home as a cash register.
They are going to have a capital gain when they sell.
A real estate agent suggested they do a short sale to protect their credit. I told them to talk to their CPA because, if the property sells for $750,000 and they bought it for $140,000, they will have a capital gain of approximately $610,000 minus any improvements and closing costs (real estate commissions, etc.). If you have a capital gain above $250,000 (single) and $500,000 (married), then you will have some tax ramifications unless you can prove insolvency if they end up doing a short sale (please consult with your CPA). There is also a 1099-C issue as well on a short sale that you don’t have on BK & Foreclosure (please consult with your CPA).
To get more information, contact:
Fred Solomon
Solomon Financial
(949) 421-3744
