Housing Industry Adapts to Not-So-Retiring Baby Boomers

Different types of collections can have different effects on your credit score. A collection for a $100 debt, unrelated to a mortgage or credit card, will not affect your credit score as much as a failure to pay a credit card debt, particularly if the credit card company moves against you to collect.

We bought a home in 1999 and lived in it until December 2007. We moved to a new home and, because it was winter, rented out our old home for three months and then put it on the market and sold it. Should we report the sale of the home to the IRS?

It's nice to hear about a home that actually sold relatively quickly in these troubled real estate times. Good for you! As for reporting it to the Internal Revenue Service, that depends on whether you are referring to the reporting requirement at the settlement or the closing of your sale, or upon filing your federal income tax return.

If your sale exceeded $500,000, your sale needs to be reported to the IRS, but that may have already happened at the closing. Almost always, the IRS form will be filed by the title company or closing agent.

In terms of reporting your profit or loss from the sale of your home, you would do that with the filing of your federal income tax return for the year in which the home sold.

You and your wife are able to keep up to $500,000 in profits (up to $250,000 if you were single) from the sale of your personal residence. Your house qualifies because you lived in it for two of the past five years and you rented it for only a short time.

If you're close or seem to be just over the $500,000 mark, make sure you've included all of your expenses in the calculation of your cost basis: Take the price you paid for the home, and add to it the costs of purchase, the costs of sale and the cost of any capital improvements (think structural improvements, not decorating) to the property. Then subtract that amount from the sales price of the property.

Depending on whether the title company or settlement agent reported your sale to the IRS, you may have to include additional information on your tax return even if you have no federal income tax to pay resulting from the sale.

For more details, consult your tax preparer.

I had a loan for more than 80 percent of the value of my home. My loan required me to purchase private mortgage insurance. I recently had to do a deed in lieu of foreclosure because I could no longer afford the increases in the adjustable-rate mortgage. Now the PMI company has come after me for the $43,000 they paid the lender due to the deed in lieu. Is the PMI company allowed to subrogate me and go after me for their loss? I thought the PMI was to get this coverage, and that the insurance was a calculated risk on their part.

Historically, one lender never would loan more than 80 percent to any borrower. It was too risky. They wanted to make sure they had a cushion of at least 20 percent equity in case something went wrong financially with the borrower. If the home went down in value, the borrower would suffer the loss first. Property prices would have to fall more than 20 percent before the lender would be affected.

But as housing became more expensive and saving a 20 percent down payment became more difficult, borrowers wanted a way to buy a house with less of a down payment. Lenders came up with the concept of having a mortgage insurance company insure the lender for any losses it might sustain for loans that were greater than the 80 percent of the home's value. But the mortgage insurance company needed to get paid for that risk. That payment came in the form of PMI. The more you borrow above the 80 percent mark, the greater the amount you pay in PMI.

What most borrowers don't realize is this: PMI is only for the lender's benefit. Your benefit (and the reason you paid the premium) was that without buying a PMI policy, you would not have been able to get a loan to buy the property.

Since PMI is for the lender's benefit, if you default on your loan and the property is sold off for less than the loan amount but more than the original loan-to-value ratio -- even if it's a deed in lieu -- your lender gets money from the PMI company. The PMI company is on the hook to your lender for the difference between the 80 percent mark and the amount you borrowed.

When you presented the lender with the deed in lieu, you effectively said to the lender, "Here are the keys to my property; take the keys and let me out of my loan." When the lender accepted the keys, it became the owner of the property.

The key question is whether the lender agreed to forgive the balance of the loan. If the lender agreed, the PMI company should not have the right to come after you.

You mentioned subrogation. That term is generally used in the context of insurance claims. If you have a claim against somebody and your insurance company makes you whole, your insurance company would have rights under that claim to recover the payment it made to you.

In your case, the lender lost out and the PMI company paid the lender money. The PMI company is now coming to you and is trying to recoup its loss.

However, if you simply gave the keys to the lender and the lender didn't have to go through the foreclosure process to get the title to the home, the lender would still have the right to go after you for any amount still owing on the loan. In this instance, the PMI company paid the lender and has the claim that the lender would have had against you.

The bottom line, and it is a point widely misunderstood by home buyers, is that the PMI company can go after you for any amount you still owe the lender, and it can settle that claim any way it wants. If it agrees to have you pay it over time, you can agree on a payment schedule. If it agrees to take a lump sum now for substantially less than the $43,000 you owe, you could agree to that. The PMI company may under certain hardship cases decide to forgo some or all of the amount you may owe.

The key to its claim is its belief that you have the ability and means to pay up. If you do, it will press to get paid. If you don't have the means to pay and go into bankruptcy, it will stand in line with your other creditors and get paid what it can through the bankruptcy proceeding.

Ilyce R. Glink is an author and nationally syndicated columnist. Her latest book is "100 Questions Every First-Time Home Buyer Should Ask." Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact them through Glink's Web sites, http://www.thinkglink.com and http://www.expertrealestatetips.net.

© 2008 Ilyce R. Glink and Samuel J. Tamkin

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