Did you know that debt forgiven during a short sale or debt-forgiveness program is subject to tax (since the IRS considers the amount of the forgiven debt as income)? Most people don’t – and that could result in significant financial stress come tax time.

Under normal circumstances, the amount of debt forgiven by a lender on the behalf of a homeowner is taxed under standard income tax rates by the IRS. For example, if the owner of a $250,000 home still owes $125,000, is facing foreclosure, and wants to work with the lender to forgive the remainder of the $125,000 loan amount, he or she would have that disparity taxed. For most homeowners, that amount would be significant and could result in anywhere from 15% to 35%.

Of course, thanks to the Mortgage Forgiveness Debt Relief Act of 2007, homeowners in this situation can exempt up to $2 million on a principal residence (or $1 million for someone who is married but filing separately). For most Americans who are in this situation or have been since the housing market took a steep nose-dive in 2007, that is a welcome relief.

Unfortunately, the very same law that was such a boon for so many homeowners is set to expire at the end of this year. Much like other propositions and laws at the federal level, there is no guarantee that the law will be extended, even though there would be much pressure from constituents and consumer advocacy groups to continue the legislation. After all, the wildly-popular First-Time Homebuyer Credit was not renewed even though it arguably led to a spike in home sales that was desperately needed at the time of its inception in 2009.

Homeowners who are considering entering into a short sale transaction as a way to stop foreclosure need to be mindful of the tax considerations involved in the property transfer – especially those considering principal reductions with their mortgage loans. Since loan modifications take months on average to complete – and many fall by the wayside and fail during that timespan – homeowners caught unawares could be penalized heavily at tax time with an unexpected bill.

Also consider the fact that a deed in lieu of foreclosure – another common alternative to foreclosure in addition to a short sale- may also result in a taxable income situation if the law should expire. Homeowners should consult a certified tax attorney for qualified legal advice.

Victims of the foreclosure crisis and underwater homeowners alike will be pleased to know that the federal government is extending the mandate for the Home Affordable Modification Program (HAMP) through 2013, and will also expand its role as the government continues to combat the housing crisis.

HAMP, originally created in 2009, was designed to help American homeowners avoid foreclosure by working with lenders to modify their mortgages. The theory behind the program was that homeowners could keep their properties – and stop foreclosure from creating more destructive home foreclosures in already-depressed markets – with lower, more-affordable monthly mortgage payments and principal reductions.

But, the $29 billion program has not been without its critics, who allege the program has been too limited, too underfunded, and too ineffective in preventing foreclosure properties from flooding the market.

Largely because of these criticisms, the Obama administration is seeking to fix these and other problems by offering additional financial incentives to lenders for principal reductions. This means thousands of American homeowners could see their monthly payments drop by having lower principal balances. Such a move could have a stimulating effect on the economy, especially since the administration will also offer financial incentives to Fannie Mae and Freddie Mac for modifications. Since the two programs account for the vast majority of mortgages currently owned, the impact could be significant.

Whatever the future impact, the past performance of HAMP has been less than desired. Out of roughly 1.7 million program applicants, only about 900,000 have had their mortgages permanently modified – and a significant percentage of those have fallen through since.

Some of this failure has been blamed on the nation’s largest lenders, including JPMorgan Chase, Wells Fargo, and Bank of America. Others point the finger at the mass of red tape and bureaucracy that has plagued the program’s administration.

Whatever the cause of the problem may be, the nation’s foreclosure rate – hovering around 3.51% as of October 2011 – is still far too high for a healthy housing market. Serious gains have yet to be made in removing foreclosure listings and having homeowners fill vacancies, primarily due to reluctance by big banks to lend to most prospective homebuyers. Loosening a still-tight credit market is one priority, as is an Obama initiative to sell blocks of distressed properties to private investors for rehabilitation and transformation into rental units.

At any rate, the besieged program has another year to perform before Washington becomes serious about pulling the plug.

For those wanting to buy a home, finding lending can be tough. These days, private lenders are very tight with their purse-strings and are reluctant to lend at rates even remotely approaching pre-2006 levels. This can easily leave you in a bind as you try to find some way to purchase a home, be it a traditional home or a foreclosure.

Fortunately, the federal government has several avenues that you can take to obtain a loan from a private lender. Note that the federal government is not in the business of issuing primary loans. It does, however, guarantee loans issued by private lenders, which basically helps to make it far easier for you to obtain a private loan if you qualify for the federal program.

Types of Government Home Loans Available

There is a myriad of government home loans available to you, both at the state and federal level. State programs vary, so here we will discuss the federal options that you may qualify for when purchasing a new home.

Basic Federal Housing Administration (FHA) Insured Home Mortgage

This mortgage loan, sponsored by the Department of Housing and Urban Development (HUD), helps families purchase a single home for residency. You can apply through FHA-certified lenders, which involves almost all major lenders and most community lenders. First-time homebuyers can obtain an FHA loan with a down payment as low as 3.5% and receive up to 6% toward closing costs for the home loan.

Department of Veterans Affairs Mortgage Loan (VA Loan)

The VA loan is offered to eligible veterans and spouses and allows these individuals to purchase a home up to a certain limit with 0% down and a small funding fee of 0 to 3.15% of the loan amount. This means that qualified veterans could potentially buy a home without paying a down payment or closing costs.

U.S. Department of Agriculture Section 502 Loan

A Section 502 loan is a direct loan for low-income individuals buy homes in rural areas in the U.S. (as defined by the USDA). Applicants generally need to have no greater than 80% of the area median income (AMI) for the county in which they live. Those who have up to 115% of the AMI can qualify for a guaranteed home loan that is created with a private lender.

Indian Home Loan Guarantee

For those individuals who are of American Indian or Alaska Native descent, HUD offers a Section 184 home mortgage loan for those residing on or off of tribally designated housing entities, tribes, villages, and other lands.

Incentives for Pursuing Government Loans

One of the main incentives for obtaining a government home loan for your mortgage is the prospect of actually being able to buy a home, versus being declined by a private lender for a variety of reasons. Many people are ineligible without these home loan guarantees because they do not make enough money, or can’t put down a large down payment, or have poor credit or other negative circumstances. Since lending is tight, private lenders need some kind of reassurance that can only be provided by the government in most cases.

Another incentive is the prospect of obtaining a home loan with a very low or non-existent down payment. Typically, lenders like to see 10-20% of the loan amount paid down at the beginning, with 20% quickly becoming the norm as it once was. Not many people have 20% of a home loan saved up. With an FHA loan, for example, you can buy a home with just 3.5% down. A VA loan could potentially give you a 0% down payment.

Additionally, you can use government home loans to purchase a variety of homes that otherwise you would not be able to buy, including foreclosed properties. The allure of these properties – steep price discounts and widespread availability – means that they are affordable. But, private lenders do not always want you to buy a home foreclosure. Getting government guarantee for a loan could enable you to go to a foreclosure listing service, like ForeclosureDeals.com, and find a cheap home for sale.

Finally, you can use government funds to rehabilitate a fixer upper home, or even to rebuild a home that has been destroyed by a natural disaster. Did you know, for example, that the Section 203(k) program administered by HUD will give you money to not only buy a home, but to also rehabilitate it? It’s true – and that is something useful for homebuyers and investors alike.

Qualifying for These Government Loans

Qualifying for a federal loan involves more paperwork than a conventional, private home loan, but the benefits are worth it. You will need to provide, at a minimum:

- Proof of income for you and your co-signers, typically in gross monthly income format

- Addresses for your past and present places of residence (last two years)

- Social Security numbers

- Names and locations of your past employers (last two years)

- Financial info for your current checking and savings loans

- Financial info for any assets you have (stocks, bonds, real estate, etc.)

- Approximate value of your personal property

- Check stubs and W-2 forms (last two years)

- Info for any other current loans or debts

For VA loans, applicants will need to provide two things:

- Certificate of Eligibility (obtained from the Department of Veterans Affairs from their website)

- DD-214 (the official discharge paperwork from the military)

For additional requirements, you will need to talk to the appropriate loan official or representative for the specific loan you desire.

Quick Steps to Obtaining Government Loans

If you want to try for a government home loan to purchase a property, you are in luck. The federal government has made the process easier over the last few years as a way to give people an incentive to buy homes.

One of the best ways to get a great start is to assemble your paperwork completely and thoroughly. Take time to collect a total package, like the one outlined above. Then, do your research on the loan itself. What are the requirements? What are the loan limits? How much is a down payment? What specific things could disqualify you?

Next, make sure you contact the right lender. Not every lender is qualified to originate an FHA loan, for example. Use an online search to find an FHA-certified home loan originator. It further increases your chances if the lender manually underwrites its own loans, as opposed to having them automatically underwritten. That means the lender has a bit more discretion (or “wiggle room”) in who qualifies, and can work with you to get a loan accomplished.

Also, consider multiple lenders and shop around. Even if they are offering the same type of government loan, they could still offer various incentives that differ.

Finally, take some time to repair and boost your credit score if it is low. Those with scores below 500 do not qualify for FHA loans, and you really should have at least a 580 score. The higher, the better. Those who have at least a 620 score stand a much better chance of obtaining a government home loan than those with sub-par scores. Talk to a credit counselor. Pay off past debts, consolidate debt, and take on a second job if needed to boost your income. Sometimes, waiting a few months to boost your score is a great idea.

Government home loans are out there for the taking. With this guide, you hopefully will be one step closer to obtaining one and buying a home of your own.

This is one of the most frequently-asked questions involving real estate that prospective homebuyers ask, especially in today’s environment of tight lending standards. Banks use a variety of factors to determine one’s eligibility for a loan, some of which are proprietary and not readily available. The general process, however, is similar across the industry.

Knowing the process and what factors are involved can help you when pursuing a loan for your next home purchase.

Credit, Credit, Credit

Credit is the first word most people utter when discussing mortgage loans and obtaining approval from the bank.

One’s credit score is not the be-all, end-all in terms of getting loan approval, of course – there are other factors in play – but by and large, your credit score plays a massive role in the process.

What factors play into your overall credit score, and which are of particular interest to banks when they sift through your financial record? They typically look at:

• Your overall available credit and the percentage of your available credit that you are currently using (called your credit utilization ratio, or debt-to-credit ratio). Today, if you are above 50%, you are in risky territory as far as a lender is concerned.
• The length of your credit history. If you have only had a few credit sources open for a few months, you will be penalized a lot more than if you have a couple of sources that have been in good standing for years.
• What types of credit you use. Do you just use credit cards and retail credit cards? Or, have you taken out vehicle loans and have a line of credit with another lender or entity? Bank credit cards are superior to retail credit cards, as are any other secured type of credit.
• Payment history. Have you been late on your payments? If so, expect a significant penalty – payment history is 35% of your score, according to most.

What is considered a minimum credit score and a “good” credit score for getting a mortgage loan approved? As far as the Federal Housing Administration is concerned, 580 is the minimum – and is by no means “good”. Good for most lenders is above 620. The best rates are given to people who have scores higher than 770, but anything over 700 is pretty good in this day and age.

What You Bring to the Table

There are other factors to consider, of course, and these are more heavily scrutinized than they have ever been. Formerly, you could obtain a mortgage loan with a good credit score and a signature. Now, you need to show proof of income – a big, big deal these days – and even some collateral or a significant down payment to secure approval.

First, proof of income. Banks need to know that you have the financial means to pay off the loan. It’s a big purchase, after all – and a big risk. You need to verify that you have a good annual income – for many lenders, that is at least 40% of the mortgage. Plus, you also need to show that this income is stable. Even high-income earners with unstable job security (like those who work multiple jobs) are being turned down by some lenders. Be prepared to show federal and state tax records, pay stubs, and other supporting materials.

Collateral and down payments are additional factors that you can bring to the table for consideration. Do you have any other non-cash, liquid or illiquid assets that can be used as collateral to help secure the loan? The more the merrier – and if you can make a good-sized down payment of 20% or more, you will improve your chance. Gone are the days in which any lender will sign off on a loan with 0% down, except in uncommon cases with certain types of loans (like a VA loan). A 20% down payment is again the norm.

All of these factors play into the decision-making process banks use to determine who is qualified for a loan and who isn’t. While some of it may seem unfair and unduly complicated or unnecessary, keep patient; getting qualified and owning a home is worth the effort.

In an effort to provide some relief to struggling and unemployed homeowners, the federal government provided $1 billion in funding to assist homeowners that lost their jobs and have been unable to find a new source of income. Homeowners that met the criteria were to apply for funding and would receive interest-free loans to help them keep their homes and get back on their feet. Over 100,000 applied with only between 10,000 and 15,000 meeting the eligibility criteria. As a result, the program definitely fell below the bar.

The federal program was designed to assist homeowners that were unable to utilize mortgage modifications to keep their homes; however, it appears as though the requirements were too strict to meet many homeowners that are in need. As a result, the interest-free loan program modeled after a successful Pennsylvania program was nowhere near as successful as expected.

Of the $1 billion allotted to help needy homeowners, only approximately half of the funding will be distributed due to the high restrictions. The restriction problems apparently originated from a formula used by the United States Department of Housing and Urban Development (HUD). As a result, half of the individuals that could have been assisted by this program will now go without help.

The failure of the $1 billion program does not only infuriate homeowners that were counting on that money to save their homes to avoid homelessness, but also individuals that were opposed to cutting home loan counseling programs designed to help homebuyers make smart investments that decrease delinquency rates. Now we are not only lacking free counseling programs for homebuyers and homeowners in need, but we are also resting on $500 million that could have been used to keep homeowners in their houses—all due to a faulty formula.

The unemployment rate remains at 9.1% and people across the country are struggling to make ends meet, with many of them losing their homes to foreclosure. With this program off the market and $500 million of the funding not being utilized due to an error on behalf of HUD, unemployed homeowners are now left with nowhere to turn with the exception of the “Hope Hotline.”

Something has to be done to help alleviate the burden of unemployed homeowners trying to keep their homes amidst a rocky job market and unstable United States economy. Maybe the Obama job plan will help alleviate some of the burden by putting many Americans back to work. One thing is certain, this program was far from a success and $500 million in funding is being returned when it should have been utilized to help struggling homeowners.

A recent report indicates that the National Association of Realtors spent over $7 million in the second quarter alone in lobbying efforts. From Congress to the Federal Communications Commission and Veterans Affairs, the National Association of Realtors targeted a wide variety or government organizations in their lobbying initiatives that focused on everything from foreclosures and taxes to industry regulation.

One of the focuses of the National Association of Realtors involves the maximum loan sizes that Fannie Mae and Freddie Mac, as well as the Federal Housing Administration will guarantee. Currently, the maximum loan size is $729,750. However, as of October 1st that number is set to drop to $625,500. Although this may not seem like a big deal to states with relatively low home prices; however, for areas with higher cost of living, such as New York, a fall like this could mean that many people could not receive loans for their homes.

With the continuous battles between the Democrats and Republicans, it is no wonder that the lobbyists are not having a hard time getting anything passed in Congress. With the continuous struggles over raising the debt ceiling that led to a decline in the United States financial scores across the world, raising the loan limit with a Republican led House may be nearly impossible. However, even Obama is willing to allow the limit to fall.

So the questions is—are organizations like the National Association of Realtors wasting their money in lobbying efforts with such a divided Congress? The answer could very well be "yes" If something as simple as raising the debt ceiling has a hard time passing Congress, how can key real estate initiatives even have a shot?

Either way, props to the National Association of Realtors for doing their part in trying to pass key initiatives to help homeowners and the real estate industry in such a pivotal real estate market. Hopefully their lobbying efforts will pay off and everyone in the country will reap the benefits.

Let’s face it—anything the Obama Administration does is going to be controversial, especially if something as simple as raising the debt ceiling caused such a rift between Democrats and Republicans. But how was the Obama job plan that will require $447 billion in stimulus spending received? In short—as expected.

Yesterday the President proposed his job plan to Congress and delivered a rather lengthy speech on the plan that Obama feels should not be something that Republicans and Democrats have any problems passing. However, before Obama even made his speech and presented the job plan to Congress, there are already words of disagreement on the plan dubbed the American Jobs Act. We suspect that something that should pass easily will actually become the next debt ceiling debate once Congress gets its hands on the matter.

However, if the bill does pass, what does it mean for real estate?

Everybody agrees that the 9.1% unemployment rate is placing a damper on our economy. With such a high number of unemployed citizens throughout our country (many of which who have been unemployed for over a year), the real estate market is bound to suffer. Therefore, the job plan that will do everything from provide tax breaks for employees and small business owners to create jobs for veterans and the unemployed is certain to spark some recovery in the real estate arena.

We all know that if stimulus money is provided to Americans the first thing they do is pay off debt and/or put that money immediately back into the economy by spending it on everything from groceries to luxury items. Part of Obama’s reasoning behind this stimulus package is to do just that—fuel the economy. The question is will the proposed stimulus be enough?

Economists understand that this stimulus package will definitely help put Americans back to work and firmly believe the tax incentive for small businesses will be one of the driving forces behind this plan. However, even these economists wonder if this stimulus package will do enough to help the economy reach stabilization.

It is given that the lower the unemployment rate and the stronger the economy becomes then the real estate market will have better chances of recovery. Currently, mortgage application rates are down despite the decline in mortgage rates. Why? Because people do not have the money to purchase a new home due to unemployment. Therefore, creating jobs—as this plan is designed to do—will spark real estate market recovery and growth.

In the end, there are two questions at hand. First, is this stimulus package enough to reach economic stability? Second, will this bill be able to gain approval with the battling Republican and Democratic parties?

All eyes are on Congress to see how the plan is received and if real estate market recovery will start to occur or if we have to continue to suffer due to the inability for Congress to agree on any measure proposed by either party.

If you keep up with real estate and the current issues surrounding major banks throughout the country, then you are familiar with our country’s issues with banks. Now, however, these issues seem to be expanding and affecting more than just the United States.

The Federal Housing Finance Agency (FHFA) has started a lawsuit against 17 banks. The reason for the lawsuit? Misrepresentation.

Apparently these banks are being accused of misrepresenting some of the mortgages they sold to Fannie Mae and Freddie Mac, totaling close to $200 billion. The specific amount FHFA desires to obtain has yet to be determined and will be announced as the legal procedures get underway.

With the United States already providing $150 billion (of taxpayer money) to assist Fannie Mae and Freddie Mac, they are clearly seeking to obtain some of that money back to cut the losses.

Of the 17 banks being accused of misrepresentation, not all of the banks are merely willing to sit aside and take the hit. Instead, the Royal Bank of Scotland is preparing for battle and is ready to take on the U.S. allegations.

Unfortunately, the announcement of these banks facing a lawsuit has led to declining shares for European and U.K. banks associated with the dilemma.

In the end, the U.S. continues to suffer from the effects of actions and inactions by major banks across the world. This battle specifically is geared at obtaining as much money as possible of the near $200 billion of mortgages sold to Fannie Mae and Freddie Mac—mortgages that led to significant losses when the housing crisis occurred.

All eyes are on this case to determine if FHFA will be successful in their attempt to receive some money back for these bad mortgages.

It is not a secret that the United States is currently on rocky financial grounds with a very high unemployment rate, low home prices, and low interest rates. However, where do we currently stand on these matters and how does it relate to the real estate market?

The United States Department of Labor released a report today that indicates that the unemployment rate remains at 9.1% and shows a complete lack of job growth throughout August. In fact, these numbers are staggeringly low and have not been seen since this time last year.

According to a recent survey, approximately ¾ of the unemployed have been unemployed for over 6 months, with ½ of them being unable to find work for over 2 years. Even those that are still employed are cutting back on many aspects of life to make up for the rising cost of healthcare due to ridiculously high health insurance rates.

As a result of high unemployment rates, consumers are showing a complete lack of confidence that is further deflating our economy. Plus, foreclosures are continuing to occur as homeowners are simply unable to find jobs that allow them to pay their mortgage payments.

Fortunately, President Obama plans to meet with Congress in the very near future to stimulate economic growth by finding ways to add jobs across the country.

But where exactly does all of this leave the real estate market? A prime investment opportunity!

It is essential to note that there are incredible investment opportunities throughout the real estate market and across the country. With foreclosure auctions, short sales, and bank-owned homes being sold at ridiculously low prices—the investment potential for real estate is unmatched. With the current real estate market, you can obtain incredible bargains on homes that were two to three times as much in 2006.

But what, exactly, should you do with these investment properties? Rent them out of course!

Obviously the real estate market will pick back up in the near future allowing you to return to your real estate flipping techniques; however, in the mean time you can rent out these properties and receive monthly income that will more than make up for mortgage (if you even have a mortgage payment with these great deals).

As the job market starts to return to normal these great investment opportunities will become harder to find. If you want to invest in real estate now is the time! Take advantage of the unstable United States economy and increase your potential earnings for your future.

The federal government’s forays into the real estate market have met with mixed results. Loan modification programs that cost billions haven’t had the impact many expected, and the (justified) investigation of fraudulent foreclosure practices with several big-name lenders has run into quicksand.

Then again, the federal government scored a home run with its first-time homebuyer’s tax credit in 2010 that led to a spike in new and existing home sales and temporarily propped up the housing market, so maybe a new venture – one involving mortgage loan refinancing – is a good idea after all.

According to news released today, the federal government is considering a plan to refinance mortgages at today’s lower rates – around 4% – through Fannie Mae and Freddie Mac, thereby potentially saving millions of Americans a lot of money on their home loans.

This could have a stimulating effect on the economy because lower interest rates equal lower monthly payments – which equals more money in the pockets of Americans to save or, more likely, spend.

Of course, such a plan, if fully implemented, would likely cost an obscene amount of money – which might not fly if the deficit-obsessed Congress has anything to say about it. The inevitable conflict over spending could be postponed if the administration uses funds that have already been appropriated; otherwise, any new appropriations for the program would likely run into a massive roadblock with the Republican-dominated House of Representatives.

This plan is likely part of a larger plan to stimulate the economy and spur job growth, and might be a key component of Obama’s much-speculated jobs plan that he plans to unveil in September.

What impact would this have on the market, and how are investors, homebuyers, and homeowners impacted? In theory, homeowners would benefit the most because they would directly save money on their mortgages that were taken out when the interest rate was much higher. Mortgages that date from 2005 at the latest would particularly be impacted, but even relatively-new mortgages would benefit and save money – provided there is no means-based testing of eligibility for the program.

Investors and homebuyers could also benefit, though, because one perceived benefit – stability – would help the real estate market ultimately recover. This means higher home values – which means more profit for investors and homebuyers who lock in their upside potential by buying relatively soon.

In the end, this plan is mostly built on educated speculation and is not a sure thing. With that being said, it is exciting to see what comes of it – and how the real estate market will respond if it does indeed come into play.