John Beckett's Real Estate Blog

If your primary goal is maintaining your credit scores, you should leave that extra card open — but not unused. Based on the list of cards in your wallet, I’d guess the card with zero activity is one you keep in case of emergencies. Having an emergency card is a smart move, since that plastic could come in handy when an unexpected event catches you without enough cash. Therefore, unless that extra card is causing legitimate problems – such as charging you an annual or inactivity fee, causing excessive temptation to spend or posing identity theft concerns – there probably isn’t a good reason to close that account. After all, a zero balance on a credit card account won’t hurt your FICO score, but closing an account could. If your card remains unused, however, the bank may cancel it for you. That’s because eventually the card issuer will close the account due to inactivity, because keeping the account open costs the lender money. In recent months, lenders have become eager to close accounts in an effort to protect their profits. Alternately, the card issuer could begin demanding that the consumer charge X amount to keep it open.Regardless of who closes an account, your credit scores may fall due to a change in a key credit scoring ratio. Closing an account causes you to lose the available credit limit associated with it. Your utilization rate, also called your balance-to-limit ratio, will increase as a result of closing the account. That may cause a temporary decline in your credit scores. That’s an important consideration if you’re about to apply for a loan. To get an idea of how your utilization ratio could be affected by closing an account, let’s say each of your four cards has a credit limit of $1,000, for a combined total of $4,000 in available credit. Let’s also say that across those four accounts, you’ve got a total debt burden of $2,000. Then your unused card gets closed, taking your available credit down to just $3,000. Now, instead of using 50% of your credit lines, you’re suddenly using 67% of your available credit. That higher proportion makes you appear to be a riskier borrower, because you’re that much closer to maxing out your available credit. Your credit scores will reflect such a change, although the actual scoring damage will vary from borrower to borrower. The FICO score assesses all the information on your credit report. So the score impact from any one action, such as closing an account, will depend on what other information is present on the credit report. Luckily, using that emergency card even semiregularly could prevent its closure by the bank  and could help your credit scores in the process. For example, you could charge a recurring subscription fee, such as Netflix, or a monthly cost, such as your cell phone bill, to your emergency card. By putting such regular charges on your plastic, you won’t be actually taking on additional debt but should keep the card alive. Just be sure you always pay your bills on time and in full, since those two steps are necessary for building good credit. Keeping the account open, using it to make small purchases and paying the balance in full each month is a good way to maintain your credit scores and might help improve them, especially if you’ve had recent credit problems. If you’ve been a responsible borrower, it’s unlikely that an account closure would have much impact. Because the most important steps for good credit involve making payments on time, not carrying excessive debt and applying for new loans only when necessary, closing one card is much less likely to affect your FICO score.

Read at: http://articles.moneycentral.msn.com/Banking/YourCreditRating/unused-credit-cards-can-hurt-you.aspx

You are two months late on your mortgage. You no longer have a grace period (usually 15 days), so your next payment is probably due on the first of the month. Once you are 90 days late, most lenders will not accept a partial payment. You usually need to pay the entire three months plus any fees, or the lender will start the foreclosure process. You have also recently gone through a Chapter 7 bankruptcy. Under the current bankruptcy law, you can’t refile for a Chapter 7 for the next eight years or a Chapter 13 for four years. Because of this fact, trying to save your home by using any unsecured or consumer credit lines (such as a personal line of credit or cash advances from a credit card) is risky if you find yourself unable to keep up with those payments. It is suggested that you contact Homeownership Preservation Foundation — a group partnered with NeighborWorks America, a national nonprofit created by Congress — by calling (888) 995-HOPE  at once. For the quickest service, call rather than e-mail or visit an office. A counselor will review your financial situation, make recommendations for a course of action that best fits your needs and help communicate with your mortgage lender to work out a plan. When you call, ask about a forbearance to temporarily modify or eliminate payments to be made up at the end of the forbearance period. Another alternative may be a permanent loan modification of the terms of the original mortgage in a way that addresses your specific needs. Such changes may include adding delinquent payments and other costs to the loan balance, changing interest rates or recalculating the loan. If all else fails, you may have two more options: selling your home in a short sale if you have no equity left, or a pre-foreclosure sale if the value of the house still exceeds the remainder of the mortgage. A pre-foreclosure sale arrangement allows you to defer mortgage payments that you can’t afford while you sell your house. This also keeps late payments off your credit report. These options are generally cheaper for the bank and less stressful for the homeowner than a foreclosure. Being late on your mortgage or having a loan modification on your credit report may set you up for a hike in your credit card interest rates under universal default rules. Review the default provisions of the credit cards on which you carry a balance and consider closing those accounts that have universal default provisions before they raise your rates. Once the accounts are closed, your rates should stay the same during your repayment period.

Read entire story at: http://realestate.msn.com/article.aspx?cp-documentid=13107755

The basic tax rule on debt discharge is simple: If a lender cancels your debt, that’s taxable income to you, and you and the Internal Revenue Service will get a 1099-C form, and you will have to pay tax on that forgiveness. But Congress gave homeowners a big gift with the Mortgage Forgiveness Debt Relief Act of 2007. It excludes as much as $2 million in debt relief from income taxes through 2012. It applies, however, only to debt on primary residences. If you had a mortgage canceled on your vacation beach condo, you could get stuck. And you’ll still have to pay tax on relief from auto loans, credit cards and similar debts.There are two other exceptions that can affect homeowners: First, if your mortgage — even the mortgage on your beach condo — is discharged in a bankruptcy, none of the debt cancellation is taxable. There’s a trickier issue if you can prove you are insolvent when you get a debt forgiven. Let’s say you have $120,000 in liabilities and $100,000 in assets. You’re insolvent to the extent of $20,000. So, up to $20,000 in debt-discharge income would escape taxes. Any excess would be taxable as ordinary income. Here’s how it’ll hurt: Let’s say you have a $90,000 mortgage and $30,000 in credit card debt, and the credit card companies forgive all of that $30,000. But that’s $10,000 more than you’re allowed, and you’ll have to pay tax on that amount.

Loss of property-tax and interest deductions

There’s no escaping these potential problems. So if you think you may be losing your home, you need to adjust your tax planning. If you lose your house, you also lose future itemized deductions for interest and real-estate taxes. You can deduct the interest on as much as $1 million in principal borrowed to acquire a home, plus the interest on an additional $100,000 in home equity borrowing. There’s no limit on the deduction for real-estate taxes. If you’re paying $12,000 a year in interest plus an additional $8,000 in property taxes, that’s $20,000 in deductions you’ve just lost. In you’re in the 25% bracket, that’s an additional $5,000 you will have to pay in tax. If you couldn’t even pay your mortgage, getting $5,000 more for the IRS is going to be difficult.

The hit from homebuyer credits

The Housing and Economic Recovery Act of 2008 gave first-time homebuyers a refundable credit of 10% of the purchase price, up to $7,500. It was an interest-free loan from the IRS that had to be paid back over 15 years, starting with 2010. The American Recovery and Reinvestment Act of 2009 upped the ante to as much as $8,000 that never has to be repaid — if you stay in the home at least three years. In both cases, you’d qualify as a first-time homebuyer if neither you nor your spouse had had an ownership interest in a principal residence in the previous three years. If you didn’t qualify for the first-time-homebuyer credit, you might qualify for a $6,500 credit. This applies to so-called move-up buyers — those who have owned and lived in their current home for a consecutive five out of the past eight years. The credit does have income limits: $125,000 for singles, $225,000 for married taxpayers filing jointly.But if your home were foreclosed on within 15 years (for a home bought in 2008) or within three years (for a home bought in 2009 or early 2010), it would cease to be your principal residence. The credits would have to be repaid. Remember the extra $5,000 that your taxes went up when you lost your deductions in the earlier example? If you lost your $8,000 homebuyer credit, too, you’d have to find an additional $13,000 for Uncle Sam on top of your normal taxes.  If you qualify as a first-time homebuyer and didn’t buy a house in 2009, start shopping. If you can sign a contract by April 30, 2010, and close by June 30, you can still get the 2009 credit. But please make sure you can make the payments.

State and local tax problems

Lastly, don’t neglect the effect of the foreclosure on state and local taxes. For example, property owners in New Jersey can deduct as much as $10,000 in real-estate taxes from their state tax returns. If you lose your home, you lose that deduction as well.

Read at: http://articles.moneycentral.msn.com/Taxes/TaxShelters/losing-a-home-a-tax-bite-may-be-next.aspx?GT1=33009