Surviving the Mortgage Crisis

Yes, the days of easy money are over. While zero-down loans were all the rage in the hot housing market, they carry significant risk to the lender and the borrower in today's environment. If a borrower has to sell her home and the value has declined since she purchased it, she will likely sell at a loss. With no money down, even after the sale, she will still owe the lender money -- putting both the lender and the buyer in a compromising financial position. That said, with the rapid rise in foreclosures this year, it will be difficult to find a private lender willing to offer you a mortgage without a down payment of at least 5 percent -- and if your credit score is not stellar, you will probably have to pony up an even bigger amount.

In addition to lenders being more stringent about who they lend to, you say it is going to be more expensive to borrow. What impact will that have on would-be buyers?

Ultimately, higher interest rates mean higher monthly mortgage payments. So, the amount of home you could afford a few months ago will likely need to be reevaluated and lowered. The borrowers who will feel the most pain are those looking for jumbo loans -- mortgages of more than $417,000 -- as troubles with these loans have been a big contributor to the crisis in the mortgage market, making them an unappealing business proposition for many lenders at this moment in time. While rates have not shot up dramatically in the conforming mortgage market (i.e., those loans under $417,000), they have risen a bit over the past several months. And, as you will see, every little bit matters.

Mellody's Math: Last week, a homeowner with a $417,000 mortgage, on average, could have secured a jumbo 30-year fixed rate of 7.4 percent -- higher than the average 30-year fixed rate of 6.58 percent. What's the difference? The jumbo mortgage payment would be $2,887 a month instead of $2,657, a difference of $230 a month. Additionally, over the life of the loan, the total interest paid would be approximately $621,256 instead of $538,832, which is a difference of more than $82,000.

Lastly, for those homeowners whose homes have been foreclosed on, you say the IRS may be lurking?

Foreclosures are up 9 percent in July compared with June, and a whopping 93 percent from a year ago, according to RealtyTrac. In fact, one in every 693 households in the country was facing foreclosure in July, with Nevada, Georgia, Michigan, California and Colorado having the highest rates of foreclosure per household.

And, unfortunately the IRS does not issue a pass on foreclosed property. If you have already gone through foreclosure, the IRS may continue to wreak havoc on your shaky financial situation. If your lender forgives your debt through foreclosure, the IRS views this as income (even if you have no money to show for it) and you may owe income taxes on the amount forgiven, as well as any potential penalties and late fees. The exception is if your debt is canceled through bankruptcy. That said, before resorting to filing for bankruptcy, you should appeal to the IRS to determine if a lower, or potentially no payment, can be negotiated. For example, if you can prove you are insolvent, essentially that your debts far outweigh your assets, the IRS does not treat the forgiveness of debt as income.

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