Deep River

Lending answer:

The only source for the correct answer is the Internal Revenue Service. Prior to 2007, any forgiven debt - mortgage or otherwise - must be reported as taxable income. However, the Mortgage Forgiveness Debt Relief Act of 2007 modifies the rules under which a forgiven debt must be reported as income. This covers mortgage debt (under certain conditions) forgiven in 2007, 2008, or 2009.

Here is a link to the Mortgage Forgiveness Debt Relief Act of 2007 information page at the IRS:
http://www.irs.gov/individuals/article/0,,id=179414,00.html

The IRS's web site is simple to use and written in plain language. Alternatively, borrowers may call the IRS for consultation.

Never rely on ANY claims from the lender that a debt will not be reported as income. First, the employees who answer the telephones at the lender don't have a clue - and may not even live in the United States (such as Countrywide's call centers - all located in India). Quite literally, the people answering such a question over the phone and the people who will actually make the decision may be on opposite sides of the planet.

Second, it isn't the lender's decision. The lender must comply with the tax code. There are certain circumstances when a forgiven debt might not be reported as income - a deficiency judgment or an unsecured note for repayment are two examples that come to mind. - Sat Nov 8 2008, 10:55

Take a look at this thread:

http://www.trulia.com/voices/Foreclosure/Is_there_a_differen… - Thu Nov 6 2008, 13:30

If you're looking for an FHA loan or plan to work with a lender which sells its loans to Fannie Mae, you won't be able to count the rental income towards your qualifying income unless you can prove 30% equity in the home to be rented.

Without the 30% equity, you will be required to prove 6 months' worth of reserves for mortgage payment, property axes, home owner's insurance and association fees (if applicable) for both houses.

This is a result of FHA's and Fannie's policy to prevent "Buy & Bail" tactics by home sellers. - Wed Oct 29 2008, 11:52

Lending answer:

It's difficult to say without knowing personal details of your situation. However, as a general rule, I would advise that a reverse mortgage may not be your best option, and probably the worst option to borrow funds for just a year or so.

First, reverse mortgages come with additional fees not found with other mortgages. Your FHA insurance premium will be 2% of the loan amount. You will also pay a servicing fee to the bank that can run several thousand dollars depending upon the loan amount. Bottom line: reverse mortgages are among the most expensive in closing costs. The shorter the term you hold the reverse mortgage the greater will be the cost of funds you borrowed.

Second, HUD just announced yesterday guidance to lenders on the new reverse mortgage purchase loan. Lenders will soon offer the new loan to customers. Essentially, you may use a reverse mortgage to purchase the home, but you will be required to make a down payment from your own funds (cash on hand or proceeds from the sale of your current home) equal to the difference between the amount of reverse mortgage you would qualify for on the new home and the purchase price. The down payment will be substantial, but if you qualify now for a reverse mortgage, using a reverse mortgage to buy your next home might be a better choice. Again, the costs of a reverse mortgage run significantly higher thana regular foward mortgage.

I recommend speaking with your bank about both options so you may obtain a precise estimate of your maximum claim amount, closing costs, and possibility of using the purchase option. Your bank may also suggest other, lower costs ways to finance your next purchase.

About 20% of the loans I write are reverse mortgages. Generally, I find about 2 out of 3 prospective customers would be better served by something other than a reverse (which means I'm referring them back to their banks). The closing costs (even with my el cheapo fee), negative amortization, and other concerns mean that reverse mortgages aren't for everyone... despite the fact that Robert Wagner is pitching them fast and earnestly on TV with the mansion and Jaguar in the background.

Note: HUD permits banks to charge up to 2% of your home's value as their fee. There is much, much less underwriting work in a reverse mortgage than a forward mortgage. Banks are collecting such enormous fees relative to the amount of work performed that HUD had to revise their rules to cap the fee. If you decide that a reverse mortgage is best for you... negotiate that fee aggressively.

Good luck! - Wed Oct 29 2008, 08:32

You should call your plan administrator to get the correct answer. There should be a telephone number for customer service in your quarterly statement.

If you plan to borrow from your retirement plan for down payment and finance the rest, the mortgage underwriter will require a copy of the terms of the loan, repayment schedule, and if the payments will be deducted from yuor paycheck. Just a heads-up if that is your intent... it's easier to plan to have those documents when you take out the loan rather than trying to chase them down later when underwriting makes the request. Your plan administrator should know what is required... it's a common request - Tue Oct 28 2008, 13:29