Tax Credit for Home Buyers who have Owned a Home

November 24, 2009 by Leave a Comment

I was asked this question by one of my friends on Facebook:

"I was listening to one of your videos from last Monday and you mentioned something about a tax credit for people who has owned their homes for the past 5 out of 8 years… Do you know what that is all about yet?"

When the first time home buyer tax credit was extended with the "Worker, Homeownership, and Business Assistance Act of 2009", Congress added a few goodies, including increasing the qualifying income limits and allowing folks who have owned a home out of the past 5 out of 8 years to participate with a tax credit of up to $6,500.   This tax credit has been pegged as one for a "move-up" home buyer, however it just needs to be a primary residence–it does not need to be larger or more expensive than the last residence.  In the Act, these home owners are referred to as "long-time residents of the same principal residence".

One does not have to sell their current residence in order to qualify, from the IRS:

If you meet all of the requirements for the credit, the law does not require you to sell or otherwise dispose of your current principal residence to qualify for a credit of up to $6,500 when you buy a replacement home to use as your principal residence.

The IRS uses this example for occupying your home in the last five out of eight years:

The requirements are that you must buy, or enter into a binding contract to buy, the replacement principal residence after Nov. 6, 2009, and on or before April 30, 2010, and close on the home by June 30, 2010. Additionally, you must have lived in the same principal residence for any five-consecutive-year period during the eight-year period that ended on the date the replacement home is purchased. For example, if you bought a home on Nov. 30, 2009, the eight-year period would run from Dec. 1, 2001, through Nov. 30, 2009.

The tax credit is only valid for homes priced under $800,000.   I'm not sure why they put this limit on the sales price when there are all ready income limits and limits to the amount of the tax credit in place.   The upper end of the housing market can really use some help.

Qualifying adjusted gross income limits have been raised for first time home buyers and repeat home buyers to $125,000 for single people an up to $225,000 for married couples for the full tax credit.

If after 36 months from purchasing the home, if it ceases to be the residence that you occupy (you've sold the home or converted it to a rental, for example), the tax credit may be required to be repaid.

I don't recommend buying a home just because of the tax credit.  There are costs to owning a home that will present themselves long you've enjoyed your $6,500.   If you are counting on receiving the tax credit, do visit the IRS's site and make sure you will actually qualify by completing the proper form.  I remember meeting with one of my clients who was buying her first home, when we reviewed the tax form together and she discovered she barely made too much money to qualify, she was disappointed.  She did go through with her purchase and she loves her home…but knew before getting too far into a purchase transaction that she was not going to qualify for the $8,000 first time home buyer tax credit (she would now with the increased income limits).

Check out this FAQ for the Repeat Homebuyer Tax Credit for more information. 

Filed Under: First Time Home Buyer, Legislation, Residential Purchase

What a Relief! The Home Buyer Tax Credit is Extended

November 7, 2009 by Leave a Comment

Whether you are for or against the tax credits created by our Congress and President Obama trying to recover our housing industry, you could hear a huge sigh of relief from professionals in the mortgage, escrow and real estate industry on Friday when President Obama signed the extension for the first time home buyer tax credit which was set to expire at the end of this month.

If you've been reading my posts for the last few months, you know I've been trying to warn potential home buyers eying that credit of what a short month November is for closing real estate transactions–with or without the tax credit.   The November 30th deadline did spur on some last minute transactions for first time home buyers.  Many mortgage companies issued memo's to borrowers regarding the tax credit stating they would not be held liable in the event the transaction did not close in time. Now, if the transaction closes on December 1, and the borrower qualifies for the credit, the home buyer won't be robbed of the credit…which could be up to $8,000.   Whew!

Speaking of relief, check out this vintage Alka Seltzer commerical singing about passing bills in Congress.  

Not only was the first time home buyer tax credit extended to April 30, 2010, Congress added a tax credit for existing "long time residents" (defined as owning a home during the last 5 out of 8 years) buying another home of up to $6500.  In addition, income limits for the tax credits have been dramatically increased. 

I will be providing more details soon about both of these tax credits for home buyers at Mortgage Porter soon!

Filed Under: First Time Home Buyer, Legislation, Residential Purchase

Count Down to November 30th and the First Time Home Buyer Tax Credit

October 26, 2009 by Leave a Comment

You may be surprised to see how many days are available to close a transaction by November 30, 2009 in King County when you factor holidays and furloughs.  

Filed Under: Current Affairs, First Time Home Buyer

Mortgage Companies are Protecting Themselves from December 1, 2009 Closings

October 19, 2009 by Leave a Comment

I am seeing disclosures from wholesale lenders advising that they will not be held responsible for transactions that do not close in time for the first time home buyers tax credit which is currently set to expire on November 30, 2009.   Here’s an example from a memo I received this morning from one of the lenders we work with:

Currently, the American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.  For purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner.

“Wholesale Bank” is providing this notice to our Correspondents and Brokers that “Wholesale Bank” cannot guarantee that the mortgage closing will take place prior to December 1, 2009 and therefore it is possible that your Borrower(s) will not qualify for the first-time homebuyers tax credit because of the date of purchase deadline.

“Wholesale Bank” strongly recommends that you use the attached form, or any similar from that includes this information to inform your Borrower(s) of the tax credit guideline…

In anticipation of the deadline nearing and the recent increase in loan volume, please plan ahead and get your loans in underwriting, closing and funding in ample time to meet the above deadline.

“Wholesale Bank” will not be responsible or liable for the purchase of the home failing to meet the deadline requirements of the first-time home buyer’s tax credit program.

Mortgage Master has adopted a similar disclosure which is being provided on our purchase transactions. 

 

As I’ve mentioned several times here at Mortgage Porter, if you’re counting on receiving the $8,000 First Time Homebuyer Tax Credit, and if you’re buying a home in the Seattle/King County area, please try to close no later than mid-November due to the holidays and county closures due to the furlough dates (and the increased volumes of transactions). 

 

Don’t risk closing the day after November 30, 2009.

Filed Under: Current Affairs, First Time Home Buyer

How Much Home Can I Afford?

October 8, 2009 by 2 Comments

This is a common question from first time home buyers.  When working with home buyers who are just beginning the process, after discussing credit and other information, I like to ask in return:

  • What type of monthly mortgage payment would you be comfortable making?
  • How much money are you planning on using for a down payment and closing costs.

To me, it’s better to solve for your potential sales price rather than finding a home or getting your heart set on a certain sales price first before knowing what you actually qualify for.

For example, Seattle Sally has saved up $75,000 and would like to use $40,000 towards a home purchase.  She has been paying anywhere from $2,200 – $2,000 a month for rent and would like to keep her payment around $2000. 

NOTE: Rates quoted below are from October 2009 and are outdated. If you would like a current mortgage rate quote for your home located in Washington, please contact me.

Beginning with a conventional scenario, a payment of $2038 (principal, interest, estimated property taxes, estimated home owners insurance and private mortgage insurance) with about $40,000 for down payment and closing costs would produce a sales price of $325,000.  This is based on a 30 year fixed rate of 4.625%* (apr 4.790).

A sales price of $365,000 with a 10% down payment and the sellers contributing towards closing costs would produce a payment of about $2283.

The only issue I would have with the conventional financing is that private mortgage insurance is that these days, pmi underwriters are picking all mortgages to pieces.

FHA would provide a total payment of $2076 with about $40,000 for down payment and closing costs and a sales price of $325,000.  This is based on a rate of 4.875% (apr 5.400).

If we have the seller pay most of the closing costs and prepaids, a payment of $2287 would produce a sales price of $365,000 with Sally bringing in approx. $38,000 for down payment and closing.

One thing to consider, beyond more forgiving underwriting, with FHA is that your mortgage will be assumable.  Imagine having a rate of 4.875% a few years from now when rates will most likely be much higher.  If you are a seller competing with other similar home on the market, and you can offer an assumable mortgage at a tempting rate–this will be a serious advantage.   Once inflation happens, mortgage rates will be much higher.

If Seattle Sally’s credit score comes in lower than expected (this is all based on very preliminary information) FHA may become a better option as well.  

*rates quotes are as of 1:30pm on October 8, 2009 and are based on mid credit scores of 740 or higher.  Rates can and do change often.  Follow me on Twitter to see live rate quotes.

For your personal rate quote on a home located anywhere in Washington, click here.

Filed Under: Fannie, Freddie and FHFA, FHA, First Time Home Buyer, Mortgage Insurance, Residential Purchase Tagged With: , , , , ,

Quick Video on November’s Real Estate Closings in King County

August 28, 2009 by Leave a Comment

In the Seattle area, many home buyers may be trying to purchase their first home before the tax credit expires.  I highly recommend not waiting until the end of November to do so.  Here's why…

Click here for a larger image of this video. 

For King, Snohomish and Pierce County Recorder's office closures, click here.

Filed Under: Escrow and closing, First Time Home Buyer

HUD Approves First Time Home Buyers Using Tax Credit Advance for FHA Loans

May 30, 2009 by 1 Comment

There's been a lot of rumbling about whether or not first time home buyers would be able to access the tax credit created by The American Recovery and Reinvestment Act of 2009 towards the purchase of their new home.  From HUD's announcement yesterday:

Current law does not permit approved lenders to monetize the tax credit to meet the required 3.5 percent minimum down payment, but, under the terms of today's announcement, lenders can now monetize the tax credit for use as additional down payment, or for other closing costs, which can help achieve a lower interest rate. Buyers financing through state Housing Finance Agencies and certain non-profits will be able to use the tax credit for their downpayments via secondary financing provided by the HFA or non-profit. In addition to the borrower's own cash investment, FHA allows parents, employers and other governmental entities to contribute towards the downpayment. Today's action permits the first-time homebuyer's anticipated tax credit under the Recovery Act to be applied toward the family's home purchase right away.

Here are some important points for you to know regarding using the tax credit towards a home purchase:

  • The tax credit advance loan cannot be used towards the mandetory 3.5% down payment.  (Update: unless it is through a State Housing Financing Agency).
  • The tax credit advance loan may not exceed the anticipated tax credit due to the home buyer based on the computations of form IRS 5405. 
  • The borrower will need to provide a copy of their tax refund and/or form IRS 5405.
  • Borrower cannot have unsettled obligations with the IRS.
  • If the tax advance is in the form of a loan with payments, the borrower must qualify with that payment (unless the payments are deferred for at least 36 months).

Reminders about the First Time Home Buyer Tax Credit…

You can claim the tax credit if:

  • You purchased your main home after April 8, 2008 (who picked that day?) and before December 1, 2009.
  • You (and your spouse, if married) did not own any other main home during the 3 year period ending on the date of purchase.

The IRS defines "main home" as the one you live in most of the time.  It can be a house, hosueboat, housetrailer, cooperative apartment, condominium, or other type of residence.

You cannot claim the tax credit if:

  • Your modified adjusted gross income is $95,000 or more ($170,000 or more if married filed jointly).
  • Your home financing comes from tax-exempt mortgage revenue bonds.
  • You are a nonresident alien.
  • You aquired your home by gift or inheritance.
  • You acquired your home from a related person.

You must repay the tax credit if your home ceases to be your main home within the 36 month period beginning on the purchase date.  

HUD warns that homebuyers should beware of mortgage scams and carefullly compare benefits and costs when seeking out tax credit monetization services.

Don't forget, Mortgage Master is a direct endorsed HUD lender.  If you're buying a home in Washington State and are interested in an FHA loan, I'm happy to help you.

Filed Under: FHA, First Time Home Buyer, Residential Purchase

Game plan for preparing to buy a home when you’re credit score is low

October 28, 2008 by 2 Comments

I don’t blame anyone for wanting to own a home.  Sometimes when I meet with clients and review their current scenario, a game plan needs to be created so they can work on getting themselves into a better position to buy a home.  The last thing anyone wants is to cram themselves into a mortgage they cannot afford or to commit to a long term payment when they don’t have a great track record of making payments on time. Some times a plan may take 6 months or a year or longer before someone is ready to buy a home.

I have someone with low credit scores who wants to buy a home.   She knows she will probably be a candidate for FHA financing because she has little down payment and her credit.  Although FHA is not as persnickety about credits scores as conventional financing, they scrutinize credit history: especially the last 12 months.

This person has a few late payments this year, the last one being as recent as August.  FHA financing is most likely out of the question for her until August next year assuming she does not make any other late payments between now and then. She can work on her credit for the next 10-12 months (until she has 12 months since her last late payment).   She doesn’t have any collections but she does have a few small accounts that are “maxed out”. 

  • Credit card “A” with a balance of $477 and a limit of $500.
  • Credit card “B” with a balance of $323 and a limit of $300.
  • Credit card “C” with a balance of $215 and a limit of $300.
  1. The first thing she should do is focus on getting card “B” under the limit of $300.  She’s getting whammo’d with her credit scores for being extended beyond what her credit limit is with this account (in addition to being maxed out).   She should at least pay it down enough to make sure that her interest fees won’t keep popping her over her limit.
  2. Next she should select one of her two smallest cards to pay down to at least just below 50% of her card limit.   Card “C” would only take about $65 to bring her debt down to 50% of the line limit (300 x 50% = $150).
  3. Then pay down the next card to at least 50% of the limit.  “Card B” will take $150 (assuming she’s paid the extra $23 that has pushed her over the limit) to be at 50% of the credit line limit.
  4. Credit card “A” will take a little extra cash at $227. (500 limit x 50% = $250.  477 – 250 = 227).

She needs to keep her credit below 50% of the credit line at the very minimum.  I know I said FHA is not as picky as conventional.  However, you do want your credit scores above 600 in order to receive better pricing (620 and higher is even better).

Not only will this help her with qualifying for FHA financing, she’s probably also paying higher insurance rates due to her current credit scores. 

She has a decent income and no savings.   She needs to use this time of working on her credit to also build up her reserves.  Not only for what the lender will require (3.5% minimum down payment for FHA as of January 1, 2009); but for her sake should her income change or issues arise, she should have a minimum of 6 months worth of living expenses saved (FHA does not require this, I’m suggesting it).

She has been considering homes priced around $275,000.  FHA’s minimum required investment for this home next year will be $9,625.  The seller can pay the remaining closing costs and prepaids as long as she has met the above requirement (which can be a gift or loan from family members)–this would need to be negotiated in the purchase and sale agreement. 

The proposed mortgage payment would be around $2,000 (including taxes, home owners insurance and mortgage insurance).  This is $700 more per month than what she is currently paying for rent.  Once she has corrected her credit, she should practice making a $2000 mortgage payment by paying the difference ($700) into a savings account that she leaves untouched for her down payment and to hopefully create a savings cushion.  $12,000 in savings would be ideal (6 months of mortgage payment) but not required.   If she has no savings, it will take her just over a year to pay $700 per month to come up with the down payment (9625 divided by 700 = 13.75).  Another 17 months to have a savings cushion of $12,000. 

I know this isn’t instant gratification.  It is developing responsible financial habits.  There are expenses to owning a home beyond renting.  One of my last homes required a new roof just months after moving in to the tune of $15,000.  Savings has always been important and it’s even more true in our current economy.

She’s all ready moving in the right direction by contacting a Mortgage Professional who is interested in her long term financial well-being and is willing to help her create a game plan.

Check out my related article:  Getting on Track to Buy Your First Home. 

Filed Under: Credit Scores and Reporting, Debt Restructuring, Economy, FHA, Financial Planning, First Time Home Buyer, Residential Purchase Tagged With: ,
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