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Underwater? Will you be swimming with the sharks at tax time?

We have been reading about a rule change adopted by Fannie Mae. The rule addresses "derogatory events" on a mortgage applicant's credit report. Derogatory events are things like bankruptcy and foreclosure.

For Fannie Mae, if the event were the result of a unique financial setback -- a "nonrecurring event" that results in "a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations" -- the borrower may be eligible for a new loan sooner than expected. And by "sooner," we mean half the time.

Along with foreclosures, short sales and deeds in lieu of foreclosure qualify as derogatory events. Now, according to CoreLogic Inc., less than 1 percent of Georgia's mortgaged homes were in foreclosure in September. We are doing better than the nation as a whole, and we are doing much better than the most troubled state. New Jersey came in at 5.7 percent; the national number was 1.6 percent.

But there are still homes in foreclosure. CoreLogic also reports that 4.1 percent of those home loans are seriously delinquent. Not everyone is out of the woods yet -- thousands of homeowners are weighing their options: foreclosure, short sale, deed in lieu?

The thing is, these homeowners need to understand that there may be tax implications if they go for a short sale, a mortgage reduction, a deed in lieu or any other type of loan forgiveness. They need to take the tax bill into consideration, or they'll end up owing more than they can pay.

We just realized that we haven't discussed this since 2012 (see Cancelled Debt Can Result In Taxable Income parts one and two), and things have changed since then. Was it a big change, you may ask?

Remember the fiscal cliff?

We'll explain in our next post.


Fannie Mae Selling Guide, Sec. B3-5.3-07: Significant Derogatory Credit Events — Waiting Periods and Re-establishing Credit, July 29, 2014, "Short sale can have grave tax implications," Ilyce R. Glink, Nov. 16, 2014

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