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: ,

Tips for homebuyers and sellers

September 25, 2008 by Leave a Comment

Yesterday I was interviewed by Melinda Fulmer for a MSN Real Estate article.   Here were a few of my pointers (with some clarification) for buyers:

1.  Plan on having a down payment.  FHA allows for a reduced down payment which can be gifted or loaned by family members, as does USDA and VA. However I do like to see those shy on savings practice making mortgage payments to a savings account until they have at least 6 months of mortgage payments “in reserves”.   This account is not to be used for your down payment–it’s in case of an emergency.

2. Be picky when selecting your loan originator.  I do believe in getting referrals from people you financially respect.  You can also try “googling” their names to learn more about the loan originator and their qualifications.

Borrowers may be better off working with loan originators who have are able to provide FHA loans–even if they’re not considering FHA financing.  Many conventional loans are having to switch to FHA financing as the underwriting is more forgiving and rates may be better depending on mid-credit scores.

3. Get prequalified as soon as possible.  This is a good way to get to select your loan originator (this is not the same as a preapproval).  During this stage, you’ll be able to see how detailed oriented the LO is what their personality is like–what type of programs do they recommend.  A LO should provide you a Good Faith Estimate without any commitment from you.

4. Rate lock strategy.  Ask your LO what they can do if rates improve after you lock.  Right now, with the turbulent markets, many lenders are offering free rate float downs as long as the lock meets specific criteria.  This provides borrowers with the assurance that the rate will not be higher than the current rate lock and that should rates improve, they may have the opportunity to “float down” to that rate.  Do make sure to obtain a written lock confirmation.

For sellers, I suggest that they insist on a preapproval letter to be included with their offer.  They should also carefully read the letter, it should address the buyer’s credit, income/employment and where the down payment is coming from along with the type of loan they’re approved for. Preapproval letters are sadly not worth more than the paper they’re written on, however they can provide you with some clues about the lender the buyer is working with.  If a seller has two identical offers, the buyer’s lender can make a huge difference in whether or not the transaction closes smoothly.

Filed Under: First Time Home Buyer, Interviews, Residential Purchase Tagged With: , , ,

First Time Home Buyer Tax Credit

August 6, 2008 by 41 Comments

Update February 17, 2009:  The American Recovery and Reinvestment Act has modified this tax credit posted here.  If you're a first time home buyer who purchased January 1, 2009 – December 31, 2009; click here.  If you purchased from April 9, 2008 – December 31, 2008; this post still applies to you. 

Please check with your CPA or tax advisor to see how this impacts you.

With the recent passage of HR 3221, people who have not owned a home for the lastUnclesam  3 years may qualify for an interest free loan from Uncle Sam of up to $7,500. Here's a quick skinny on how this works:

First time home buyers may receive a tax credit of up to 10% of the purchase price of the home (not to exceed $7500).   This is a "tax credit" meaning that you receive the credit (if you want it) after you file your income taxes.   For example, this means that when you file your taxes in 2009 and you owe $5,000 to Uncle Sam and you qualify to have a tax credit in the amount of $7,500; you would receive a refund of $2,500.   However, this is a refundable credit (aka interest free loan) that must be paid back each year to the IRS (when you file your taxes) over the next 15 years.

If you sell your home before the tax credit is repaid to Uncle Sam, then the full amount is due or if your property that you received the tax credit for is no longer your primary residence (i.e. you convert your home to a rental).

This credit does not apply if the first time home buyer is buying a home from a relative.

This tax credit is only available for purchases made between April 9, 2008 and July 1, 2009 for adjusted gross incomes of up to $75,000 ($150,000, if married, filed jointly) and phases out up to $95,000 ($170,000, if married, filed jointly).

Should you take advantage of this opportunity? 

Sure!  Who wouldn't want a $7,500 interest free loan?  Two things I would consider using this credit for if I were a first time home buyer:

  • investing into an interest bearing savings account to build my "emergency fund".
  • pay off a nasty high interest credit card (freeing up a monthly cash flow).
  • fund your IRA.

Just understand that this is essentially an interest free loan.  This is not "down payment assistance".  You will be paying this back over the next 15 years (or sooner if you sell, rent out the property or convert it a second home)…but you just can't beat "interest free".

For more information, click here.

Friendly reminder:  I am not a tax professional, I am a Mortgage Planner assisting families who need mortgages in beautiful Washington State.   Always consult with your CPA, financial or tax advisor.

Watch for more posts on the effects of HR 3221.

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

Now is the time to buy a Seattle home

June 8, 2008 by Leave a Comment

Or at least haggle according to Aubrey Cohen’s front page article in Friday’s Seattle P-I.  Would I buy a home right now in Seattle if I were in the market?  Quite possibly…especially if it’s a home that I desire and if it’s priced fairly.   The article states these factors for reasons home buyers interested in Seattle (I would include Bellevue/Redmond as well) should get into the market now:

  • Gas Prices.  Homes located near where jobs are will have stronger values.  Fewer people are going to want to commute thanks to how much it is to fill the tank.   
  • Mortgage interest rates are rising.   Glenn Crellin, director of the Washington Center for Real Estate Research at WSU states "waiting for the prices to get to their absolute lowest point while interest rates are rising doesn’t mean that the purchasers are going to be saving much of anything on the monthly payments". 
  • High inventory.  There are a lot of homes to chose from at lower prices.

According to this article, home prices in Seattle are only down 2.7% from a year ago; King County is down 6.2%.  The further away from "the city" you look for homes, the more the values have been impacted.   

Here are some additional reasons (not in the article) to consider "getting into the market" as a home buyer. 

  • The Conforming-Jumbo and FHA jumbo loan limits are only effective through the end of this year.   On January 1, 2009, the conforming limit will roll back to $417,000 and FHA (for King County) will be $362,950.  (Unless Congress passes an extension to the loan limits, which they may do at a reduced amount.  The fact is, at this time, we only know that the current loan limits are valid until December 31, 2008).   If you want a "non-jumbo" rate and your loan amount is $417,001-$567,500…your time is limited.
  • Underwriting guidelines continue to get tougher with lenders and private mortgage insurance companies.   Plus, the possibility of having your area declared a declining market will make financing even more challenging.
  • If you’re sitting on the fence, you are not alone.  There are many home buyers who are getting preapproved waiting for prices to reach their "price point".  As prices lower, more and more will be hopping off the fence and jumping into the market which will also prevent in-city home prices from declining as much as other areas.
  • Sellers are contributing towards closing costs.  I’m seeing more offers with sellers contributing towards closing costs for the buyer.  Buyers can use the funds to buy down their rate are reduce their closing costs.

If you are considering buying a home within the next 6 months, I strongly encourage you to begin the preapproval process now.  The more time you have to prepare, the better position you’ll be in to make an offer.   Plus, I’ve heard that some in-city homes, when priced right, are having multiple offers–buyers should be armed with a preapproval letter to present a stronger offer. 

It’s also very important to work with an experienced real estate agent who will look out for your best interest (I do not recommend going directly to the listing agent for any home you wish to buy…they represent the sellers interest–not yours).   If you need a referral to a real estate agent in King, Pierce or Snohomish counties, contact me, I’m happy to help.

PS:  I help Washington State home buyers with preapprovals and mortgage planning, too!  (My husband thinks I should remind my readers of this point more often…and I like to keep him happy).

Just for grins, here is a lesson in how to haggle (if you work with a professional real estate agent, you can leave the haggling to them), compliments of Monty Python, The Life of Brian.

Filed Under: First Time Home Buyer, Mortgage Insurance, Residential Purchase

It’s Official: Zero Down is Gone

March 21, 2008 by 6 Comments

Iceage_2Unless you’re eligible for VA financing within the conforming loan limits, 100% LTV financing (aka "zero down") is no longer available in the conforming mortgage markets.   

The following products are extinct:

  • Fannie Mae Flex 100
  • Freddie Mac 100
  • My Community Mortgage 100
  • Home Possible 100

If you are short on down payment with credit scores below 680, you should consider FHA financing, which is not as credit score sensitive as conventional programs.  Fannie Mae Flex 97 is still available as well as Home Possible 97.  Both conforming programs allow for 3% down.

Home buyers should also plan on having "reserves" after closing.  The amount of reserves may vary depending on the program from 2 – 6 months of proposed mortgage payments for owner occupied when it’s said and done.   Real estate agents, your first time home buyers may need help with closing costs from Sellers…if they’re willing…in order to meet the reserve account conditions. 

We’re rolling back the underwriting guidelines…not all the way back to the ice age…but close!

If you’re considering buying a home or refinancing, meet with your Mortgage Professional sooner than later so you have time review your credit and consider your options.

Filed Under: Credit Scores and Reporting, Current Affairs, FHA, First Time Home Buyer, Residential Purchase

Second Mortgages and “Low Down” Mortgages

February 28, 2008 by Leave a Comment

SunTrust Bank, one of the lenders we work with, is joining the ranks of other lenders who are eliminating or shelving their second mortgage products, including their combos where they have the first and second mortgage (such as an 80/10/10).  Where we once had several options for second mortgages and HELOCs, we are down to just a few.

Another bank that is still offering second mortgages (fixed and HELOCs) are limiting the total loan to value to 80% if your mid-credit score is 680-699.  A 700 credit score will allow you to go up to 85% total loan to value.

We do have another option for second mortgages that will go to a higher loan to value with lower credit scores…you pay the price with rates up to 3 points higher than what the other bank offers (with the lower loan to value).

What are your alternatives if you do not have 20 or 15% down? 

  • Seller financing for a second mortgage (private deed of trust subject to approval with underwriting).
  • Private mortgage insurance.  Upfront, monthly or lender paid.
  • FHA insured mortgages (subject to loan limits which will be changing soon)
  • VA insured mortgages

If you are currently preapproved to purchase a home and you are using an 80/10/10 or 80/15/5, I urge you to contact your Mortgage Professional to confirm your preapproval is still valid and to develop a "Plan B" for your home purchase strategy.   Some private mortgage insurance companies are also pulling back on higher loan to value mortgages (this includes lpmi and Fannie Flex); if you’re using less than 10% down with a pmi scenario–check with your Mortgage Professional for "Plan B" as well.

Filed Under: FHA, First Time Home Buyer, Home Equity Loans & Second Mortgages, Mortgage Insurance, Residential Purchase

Picking your next mortgage by rate shopping? You might as well be playing Liar’s Poker.

October 23, 2007 by 8 Comments

Poker_2

Rate shopping to select who will be assisting you with your next mortgage is similar to playing “liars poker”.  The Loan Originator who is the most successful at bluffing wins.  The fact is, unless you’re locking in the rate at the moment you’re shopping, you don’t have that rate.  It’s a rate quote–that’s all. Mortgage rates change throughout the day.  They are based on mortgage backed securities: bonds.   Some lenders I work with offer “live pricing” and others issue rate sheets; sometimes we can have several rate sheets offered by a lender during one day.

[Read more…]

Filed Under: Financial Planning, First Time Home Buyer, Interest Rates, Mortgage, Predatory Lending, Refinance, Residential Purchase
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