09.13.10
Posted in Home Buyers Education at 1:52 pm by Administrator
Recently FHA announced significant changes to strengthen its capital reserves, while enabling the agency to continue to fulfill its mission to provide access to homeownership for underserved communities. These changes are the latest in a series of efforts we have undertaken to better position FHA to manage its risk while continuing to support the nation’s housing market recovery.
Striking the right balance between managing risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important to FHA. When combined with the risk management measures announced in September of last year, these changes are among the most significant steps to address risk in the agency’s history.
By continuing to provide affordable, sustainable mortgage products, FHA will continue to support the housing market’s recovery. Importantly, FHA will remain the largest source of home purchase financing for underserved communities.
Let me take a moment to provide more details on these policy changes:
1. Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending
o The initial up-front MIP increase is included in Mortgagee Letter 2010-02, which was published on January 21st and will go into effect April 5, 2010.
o The first step will be to raise the up-front MIP by 50 basis points to 2.25% and request legislative authority to increase the maximum annual MIP that FHA can charge so we shift some of the premium increase from the up-front MIP to the annual MIP.
o This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing.
2. Update the combination of credit scores and down payment requirements for new borrowers
o New borrowers will now be required to have a minimum credit score of 580 to qualify for maximum financing. New borrowers with less than a 580 credit score will be limited to a 90% loan-to-value ratio.
o This allows FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
3. Reduce allowable seller concessions
o FHA borrowers will be limited to 3% seller concessions.
o The current level exposes FHA to excess risk by creating incentives to inflate appraised value. This modification will bring FHA into conformity with industry standards on seller concessions.
o This change will be posted in the Federal Register shortly, and after a 30-day notice and comment period, would go into effect in the summer.
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09.09.10
Posted in Home Buyers Education, Home Sellers Education at 12:48 pm by Administrator
FHA LAUNCHES SHORT REFI OPPORTUNITY FOR UNDERWATER HOMEOWNERS
Effort designed to encourage principal write-downs for responsible borrowers.
WASHINGTON – In an effort to help responsible homeowners who owe more on their mortgage than the value of their property, the U.S. Department of Housing and Urban Development today provided details on the adjustment to its refinance program which was announced earlier this year that will enable lenders to provide additional refinancing options to homeowners who owe more than their home is worth. Starting September 7, 2010, the Federal Housing Administration (FHA) will offer certain ‘underwater’ non-FHA borrowers who are current on their existing mortgage and whose lenders agree to write off at least ten percent of the unpaid principal balance of the first mortgage, the opportunity to qualify for a new FHA-insured mortgage.
The FHA Short Refinance option is targeted to help people who owe more on their mortgage than their home is worth – or ‘underwater’ – because their local markets saw large declines in home values. Originally announced in March, these changes and other programs that have been put in place will help the Administration meet its goal of stabilizing housing markets by offering a second chance to up to 3 to 4 million struggling homeowners through the end of 2012.
“We’re throwing a life line out to those families who are current on their mortgage and are experiencing financial hardships because property values in their community have declined,” said FHA Commissioner David H. Stevens. “This is another tool to help overcome the negative equity problem facing many responsible homeowners who are looking to refinance into a safer, more secure mortgage product.”
Today, FHA published a mortgagee letter to provide guidance to lenders on how to implement this new enhancement. Participation in FHA’s refinance program is voluntary and requires the consent of all lien holders. To be eligible for a new loan, the homeowner must owe more on their mortgage than their home is worth and be current on their existing mortgage. The homeowner must qualify for the new loan under standard FHA underwriting requirements and have a credit score equal to or greater than 500. The property must be the homeowner’s primary residence. And the borrower’s existing first lien holder must agree to write off at least 10% of their unpaid principal balance, bringing that borrower’s combined loan-to-value ratio to no greater than 115%.
In addition, the existing loan to be refinanced must not be an FHA-insured loan, and the refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent. Interested homeowners should contact their lenders to determine if they are eligible and whether the lender agrees the write down a portion of the unpaid principal.
To facilitate the refinancing of new FHA-insured loans under this program, the U.S. Department of Treasury will provide incentives to existing second lien holders who agree to full or partial extinguishment of the liens. To be eligible, servicers must execute a Servicer Participation Agreement (SPA) with Fannie Mae, in its capacity as financial agent for the United States, on or before October 3, 2010.
For more information on FHA Short Refinance option, read FHA’s mortgagee letter.
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HUD’s mission is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD is working to strengthen the housing market to bolster the economy and protect consumers; meet the need for quality affordable rental homes: utilize housing as a platform for improving quality of life; build inclusive and sustainable communities free from discrimination; and transform the way HUD does business. More information about HUD and its programs is available on the Internet at www.hud.gov and espanol.hud.gov.
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03.15.10
Posted in Home Buyers Education, Home Sellers Education at 3:19 pm by Administrator
From The Los Angeles Times Many borrowers in default stay put as lenders delay evictions. Throughout the country, people continue to default on their home loans — but lenders have backed off on forced evictions, allowing many to remain in their homes, essentially rent-free.
Several factors are driving the trend, industry experts say, including government pressure on banks to modify loans and keep people in their homes. And with a glut of inventory in places like Southern California’s Inland Empire, Nevada and Arizona, lenders are loath to depress housing prices further by dumping more properties into a weak market. Finally, allowing borrowers to stay in their homes helps protect the bank’s investment as it negotiates with the homeowners, said Gary Kirshner, a spokesman for Chase bank, a major lender. “If the person’s in the property, there’s less chance for vandalism, and they’re probably maintaining the house,” he said. Economists say the situation won’t last forever, but in the meantime the “amnesty” may allow at least some homeowners to regain their financial footing and avoid eviction. Amnesty…that’s an interesting choice of words…I suspect we’re going to start hearing it more and more as 2010 progresses.
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03.09.10
Posted in Home Sellers Education at 5:20 pm by Administrator
Once upon a time…
The California real estate market was filled with the joy of standard home sales. Homeowners sold their houses willingly, confident that at the end of the transaction they would receive a very large profit for their investment. Home buyers purchased homes even more confident that their investment would reap huge rewards. Realtor such as myself enjoyed the fruits of our labor as home buyers and sellers kept our industry vibrant and full of activity. In 2007, the national real market started to change. House values began to slow down from their rapid pace upward. For the first time, in a long time, my client was in need of a Short Sale transaction.
Since 2007 I began to develop a unique talent for understanding and navigating through the often crazy world of Short Sale transactions. Working with various banks and loan service providers I learned what it took to successfully close a Short Sale transaction. Specifically, consistent follow-up and follow through, but most importantly, clear and concise documentation. Now more than ever, banks are changing the Short Sale transaction to make it faster and far easier for homeowners to sell their home for its current market value or less. Because of this, I have witnessed the positive affects of a Short Sale transaction for the home buyer and seller. The buyer receives a home in quality condition and can finance their purchase through various loan programs including VA, FHA, Conventional, and City loan programs. Furthermore, the seller regains their financial independence, can begin the process of moving forward with their new lives without the fear of foreclosure, as well save their credit report from a home foreclosure account. Above all, the Short Sale transaction allows the seller to maintain the process of selling their home with dignity and respect.
The Short Sale transaction requires an informed homeowner, a willing buyer, and a Realtor with the expertise to process the transaction. I have the experience and the intimate knowledge. Over the past three years I have developed positive relationships with all of the major banks and loan service providers. I have completed many hours of research on the Short Sale transaction and have written about the subject in my blog. I have listed and sold many homes that were ultimately sold through a Short Sale transaction. Most importantly, I have developed the necessary empathy to protect the homeowner from their own fear, their bank’s crazy maze of red tape, and unqualified buyers. Now, in 2010 I can say with confidence and conviction, I am the Short Sale Specialist.
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03.01.10
Posted in Home Sellers Education, Peer to Peer Shop Talk at 6:02 pm by Administrator
In early 2009, the National Association of REALTORS® (NAR) urged the U.S. Treasury Department, the Federal Housing Finance Agency, Fannie Mae and Freddie Mac to improve the short sales process.
NAR’s concerns were first addressed on May 14, 2009, when the Obama Administration announced the outline of a program to provide incentives and uniform procedures for short sales and deeds-in-lieu (DIL) of foreclosure under the Making Home Affordable Program.
NAR kept in contact with the various agencies and departments during 2009 to keep them apprised of the problems REALTORS® were having with short sales and urged them to implement the program as quickly as possible.
Finally, on November 30, 2009, the Obama Administration released guidelines and uniform forms for its Home Affordable Foreclosure Alternatives Program (HAFA). Modified HAFA rules for loans owned or guaranteed by Fannie Mae or Freddie Mac will be issued in coming weeks. HAFA does not apply to FHA or VA loans.
About HAFA
HAFA, which will help homeowners who are unable to retain their home under the Home Affordable Modification Program (HAMP), provides incentives in connection with short sales and deeds-in-lieu of foreclosure.
The program:
• Complements HAMP by providing a viable alternative for borrowers (the current homeowners) who are HAMP eligible but nevertheless unable to keep their home.
• Uses borrower financial and hardship information already collected under HAMP.
• Allows borrowers to receive pre-approved short sales terms before listing the property (including the minimum acceptable net proceeds).
• Prohibits the servicers from requiring a reduction in the real estate commission agreed upon in the listing agreement (up to 6%).
• Requires borrowers to be fully released from future liability for the first mortgage debt and, if the subordinate lien holder receives an incentive under HAFA, that debt as well (no cash contribution, promissory note, or deficiency judgment is allowed).
• Uses a standard process, uniform documents, and timeframes/deadlines.
• Provides financial incentives: $1,500 for borrower relocation assistance; $1,000 for servicers to cover administrative and processing costs; and up to a $1,000 match for investors for allowing a total of up to $3,000 in short sale proceeds to be distributed to subordinate lien holders.
• Requires all servicers participating in HAMP to implement HAFA in accordance with their own written policy, consistent with investor guidelines. The policy may include factors such as the severity of the potential loss, local markets, timing of pending foreclosure actions, and borrower motivation and cooperation.
• Does not take effect until April 5, 2010, but servicers may implement it before then if they meet certain requirements. The program sunsets on December 31, 2012.
TIMELINE
If a servicer has not already discussed a short sale or DIL with the borrower, it must notify the borrower in writing of these options and give the borrower 14 calendar days to respond, orally or in writing. If the borrower does not respond, that ends the servicer’s duty to give a HAFA offer.
Servicers must consider HAMP-eligible borrowers for HAFA within 30 days after the borrower does at least one of the following:
• Does not qualify for a HAMP trial period plan
• Does not successfully complete a HAMP trial period plan
• Is delinquent on a HAMP modification (misses at least 2 consecutive payments)
• Requests a short sale or DIL
The borrower has 14 calendar days from the date of the Short Sale Agreement (SSA) to sign and return it to the servicer. The SSA must give the borrower an initial period of 120 days to sell the house (extensions permitted up to a total of 12 months).
Within 3 business days of receiving an executed purchase offer, the borrower (or agent) must submit a completed Request for Approval of Short Sale (RASS) to the servicer, including
• A copy of the sale contract and all addenda
• Buyer documentation of funds or pre-approval/commitment letter from a lender
• All information on the status of subordinate liens and/or negotiations with subordinate lien holders.
Within 10 business days after the servicer receives the RASS and all required attachments, the servicer must approve or deny the request and advise the borrower.
The servicer may require the closing to take place within a reasonable period after it approves the RASS, but not sooner than 45 days from the date of the sales contract unless the borrower agrees.
The servicer must release its first mortgage lien within 10 business days (or earlier if required by state or local law) after receipt of sales proceed from a short sale or delivery of the deed in the case of a DIL. Investor must waive rights to seek deficiency judgments and may not require a promissory note for any deficiency.
FAQs
HAFA is a complex program with 43 pages of guidelines and forms. To help you better understand the process, NAR has prepared some frequently asked questions that address the basics.
Who is eligible for HAFA?
The borrower must meet the basic eligibility criteria for HAMP:
• Principal residence
• First lien originated before 2009
• Mortgage delinquent or default is reasonably foreseeable
• Unpaid principal balance no more than $729,750 (higher limits for two- to four-unit dwellings)
• Borrower’s total monthly payment exceeds 31% of gross income
How is the program being implemented?
Supplemental Directive 09-09 (November 30, 2009) gives servicers guidance for carrying out the program. A short sale agreement (SSA) will be sent by the servicer to the borrower after determining the borrower is interested in a short sale and the property qualifies. It informs the borrower how the program works and the conditions that apply.
After the borrower contracts to sell the property, the borrower submits a “request for approval of short sale” (RASS) to the servicer within 3 business days for approval. If the borrower already has an executed sales contract and asks the servicer to approve it before an SSA is executed, the Alternative RASS is used instead. The servicer must still consider the borrower for a loan modification.
What are the steps for evaluating a loan to see if it is a candidate for HAFA?
1. Borrower solicitation and response
2. Assess expected recovery through foreclosure and disposition compared to a HAFA short sale or deed in lieu of foreclosure (DIL)
3. Use of borrower financial information from HAMP
4. Property valuation
5. Review of title
6. Borrower notice if short sale or DIL not available (to borrowers that have expressed interest in HAFA).
What are the HAFA rules regarding real estate commissions?
The guidance states that a servicer may not require a reduction in the real estate commission below the amount stated in the SSA, up to 6%. However, if the servicer has retained a vendor to assist the listing broker, the vendor must be paid a specified amount from the commission.
• The deal must be “arms length.” Borrowers can’t list the property or sell it to a relative or anyone else with whom they have a close personal or business relationship.
• The amount of debt forgiven might be treated as income for tax purposes. Under a law expiring at the end of 2012, however, forgiven debt will not be taxed if the amount does not exceed the debt that was used for acquisition, construction, or rehabilitation of a principal residence. Check with a tax advisor.
• The servicer will report to the credit reporting agencies that the mortgage was settled for less than full payment, which may hurt credit scores.
• Buyers may not re-convey the property for 90 days.
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10.19.09
Posted in Home Buyers Education, Home Sellers Education at 3:22 pm by Administrator
Administration unveils new effort to provide mortgage financing for state housing agencies
By Alan Zibel, AP Real Estate Writer
On 4:11 pm EDT, Monday October 19, 2009
WASHINGTON (AP) — The Obama administration on Monday unveiled a new program to support state and local housing finance agencies. The plan will help the agencies finance mortgages for first-time homebuyers and develop rental housing.
The agencies have had a hard time raising money because of the housing crisis and credit crunch. This year, the agencies have sold about $4 billion in tax-exempt bonds — one-fourth the amount in a typical year. That reduction is limiting the number of loans they can make.
The new program uses mortgage finance companies Fannie Mae and Freddie Mac to help fix the financing crunch. The two companies will package mortgages made by the housing agencies and sell them as bonds to the Treasury Department.
“It’s an additional layer of assistance to borrowers who are seeking a mortgage at a time when credit is scarce,” said Howard Glaser, a mortgage industry consultant in Washington. “It doesn’t solve all the problems of the housing market, but every little bit helps.”
Officials declined to place a dollar value on the size of the bond program, saying it will be based on demand.
Fannie and Freddie also will help to provide short-term financing for the housing finance agencies, with backing from the Treasury. State and local finance housing finance agencies have pressed for federal help for months.
Treasury Department officials said any losses from loan defaults will be entirely covered by fees paid by the state agencies.
“The expected cost to the federal government is zero,” said Michael Barr, an assistant treasury secretary.
The agencies play a relatively small role in the mortgage market, aiding about 100,000 to 200,000 first-time borrowers a year.
AP Economics Writer Martin Crutsinger contributed to this report.
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10.14.09
Posted in Home Buyers Education, Home Sellers Education at 12:46 pm by Administrator
For the past two years we have gotten accustomed to saying, “It’s a Buyer’s Market”. For those who don’t know, the definition of a Buyer’s Market is when there are more homes available than qualified buyers. Most of us who watch the evening news go along with this assessment of the market not realizing that CNN, MSNBC, and Fox News are reporting the National View of the Real Estate Market.
California historically has and will always be totally different than the rest of the nation as it relates to real estate. Primarily because California has the most stable weather in the nation, we have a very strong economy, a liberal culture, and plenty of open space and natural landscaping. California is a beautiful place to live.
The current state of the California real estate market has changed. Call it official; we are in a Seller’s Market. The definition of a Seller’s market is when you have more qualified buyers than available homes. Over the past two years, buyers have had their pick of short sale and foreclosed homes. On any one block you had 3 to 4 homes to choose from. Now, a buyer will find themselves very qualified and submitting an offer for a home that already has 5 to 6 offers. I see this in places like Palmdale, Moreno Valley, Los Angeles, Long Beach, Carson, and Torrance. There are literally more qualified buyers than available homes.
What does this mean?
If you are a home owner and you were waiting for the right moment to sell your home, now is the time to get an evaluation. Let’s find out if you have enough equity to sell your home and purchase a new one. Why now? Why not wait until the prices go higher? That sounds great. But if you are up-sizing, the house you want is going up in value faster than your house is going up in value. If you make an extra $50,0000, the house you want may go up in value $80,000.
If you are a potential buyer on the fence; get off the fence and buy now!! The loan guidelines are changing every month and you may find yourself left out in the cold, yet again due to higher home prices or guideline changes.
As always, I am available to you for advice, evaluations, and debates about the market. Feel free to contact me for all of your real estate needs.
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08.26.09
Posted in Home Buyers Education at 9:38 am by Administrator
DOWN PAYMENT ASSISTANCE IS BACK!!
For about a year I have blogged and blogged about the return of the Real Estate market. Most people don’t realize how important Real Estate is to the American economy. The Federal Government as well as the leading financial institutions are working diligently to restore confidence back in the national real estate market. The first sign that lenders are going to start making it easier for buyers to purchase homes is the CAL Access Program. This program once only allowed in the city of Palmdale is now available everywhere within the state of California. This program is very simple to understand. Here are the guidelines:
Cal Access works in conjunction with a standard FHA 96.5% Home Loan.
Minimum FICO Score needed is 620.
2 Years of Income limited to $75,000.00 and below (Los Angeles County).
The Seller can pay all of your closing cost.
Buyer only needs .5% Down (That’s One Half of a Percentage).
The benefits to this type of program are numerous but the most important one is this program allows those buyers who have saved money for their down payment to now keep their money and maintain their savings. This alone will go a long way to reestablish consumer confidence in the real estate market.
There will be those who may try to compare this program to the 80/20 loans of the very recent past. I have to disagree with their analogy. The 80/20 loans were first and foremost uninsured loans so lenders had no protections against foreclosure therefore the risk was higher. This risk pushed the interest rates high. Secondly this program uses the current FHA guidelines to qualify the buyers for this loan program. FHA Home Loans are fully documented loan programs that ensure the buyer has adequate ability to repay the home loan. Again, this will be the best factor in securing the real estate market and attracting more investors, lenders, and buyers.
I would strongly recommend that you speak with your mortgage broker and take advantage of this program. Certainly a byproduct of this program will be increased home prices within the next two years. You don’t want to get left out of this exciting new program.
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08.03.09
Posted in Home Buyers Education, Home Sellers Education at 3:03 pm by Administrator
I received a very interesting email today. Apparently there is a new loan program that will assist buyers with 3% of their down payment. That means you will only have to bring in .5% as your down payment.
Let me restate this… Currently FHA loan guidelines require that buyers pay 3.5% down on their purchase. 3.5% is a very small amount but buyers are still a little hesitant about purchasing a new home. Honestly, I have been eagerly waiting for the return of Down Payment Assistance programs or a Down Payment Financing program. There is a segment of our society and the Real Estate industry that do not feel these types of programs are of any benefit to the buyer. I don’t agree with this assessment. Most industries try to create ways to better market, promote, and increase the value of their products. In order for houses to increase in value the real estate lenders have to create loan guidelines that allow good people to purchase homes. The more potential buyers lenders create, the more homes will be in demand, which will then increase their value. Those who participate in a timely manner will benefit the most. As in most cases, it is best to be on time.
I haven’t utilized this program as of yet. I have a couple of clients who will be my guinea pigs. Once I get more information about this program I will let you know how effectively this program serviced my clients.
More information in days to come…
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07.21.09
Posted in Home Buyers Education at 11:11 am by Administrator
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.
The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.
1. Who is eligible to claim the tax credit?First-time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and before December 1, 2009. For the 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.
2. What is the definition of a first-time home buyer?
The law defines “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.
3. How is the amount of the tax credit determined?
The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
4. Are there any income limits for claiming the tax credit?
Yes. The income limit for single taxpayers is $75,000; the limit is $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.
5. What is “modified adjusted gross income”?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine “adjusted gross income” or AGI. AGI is total income for a year minus certain deductions (known as “adjustments” or “above-the-line deductions”), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.
To determine modified adjusted gross income (MAGI), add to AGI certain amounts of foreign-earned income. See IRS Form 5405 for more details.
6. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits.
7. Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by the phaseout range of $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000.
Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by the phaseout range of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800.
Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.
8. How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008?The most significant difference is that this tax credit does not have to be repaid. Because it had to be repaid, the previous “credit” was essentially an interest-free loan. This tax incentive is a true tax credit. However, home buyers must use the residence as a principal residence for at least three years or face recapture of the tax credit amount. Certain exceptions apply.
9. How do I claim the tax credit? Do I need to complete a form or application?
Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on line 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns). No other applications or forms are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and first-time home buyer tests. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase.
10. What types of homes will qualify for the tax credit?
Any home that will be used as a principal residence will qualify for the credit. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.
It is important to note that you cannot purchase a home from your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse. Please consult with your tax advisor for more information. Also see IRS Form 5405.
11. I read that the tax credit is “refundable.” What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.
For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed).
12. I purchased a home in early 2009 and have already filed to receive the $7,500 tax credit on my 2008 tax returns. How can I claim the new $8,000 tax credit instead?
Home buyers in this situation may file an amended 2008 tax return with a 1040X form. You should consult with a tax advisor to ensure you file this return properly.
13. Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been “purchased” on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after January 1, 2009 and before December 1, 2009.
In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.
14. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
Yes. The tax credit can be combined with the MRB home buyer program. Note that first-time home buyers who purchased a home in 2008 may not claim the tax credit if they are participating in an MRB program.
15. I live in the District of Columbia. Can I claim both the Washington, D.C. first-time home buyer credit and this new credit?
No. You can claim only one.
16. I am not a U.S. citizen. Can I claim the tax credit?
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of “nonresident alien” in IRS Publication 519.
17. Is a tax credit the same as a tax deduction?
No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS.
A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,200 (15 percent of $8,000), or lowered from $8,000 to $6,800.
18. I bought a home in 2008. Do I qualify for this credit?
No, but if you purchased your first home between April 9, 2008 and January 1, 2009, you may qualify for a different tax credit. Please consult with your tax advisor for more information.
19. Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 tax return?
Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment.
Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.
In addition, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. As a result, some state housing finance agencies have introduced programs that provide short-term second mortgage loans that may be used to fund a downpayment. Prospective home buyers should check with their state housing finance agency to see if such a program is available in their community. To date, 14 state agencies have announced tax credit assistance programs, and more are expected to follow suit. The National Council of State Housing Agencies (NCSHA) has compiled a list of such programs, which can be found here.
20. The Secretary of Housing and Urban Development has announced that HUD will allow “monetization” of the tax credit. What does that mean?
It means that HUD will allow buyers using FHA-insured mortgages to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 income taxes to receive a refund. These funds may be used for certain downpayment and closing cost expenses.
Under the guidelines announced by HUD, non-profits and FHA-approved lenders will be allowed to give home buyers short-term loans of up to $8,000.
The guidelines also allow government agencies, such as state housing finance agencies, to facilitate home sales by providing longer term loans secured by second mortgages.
Housing finance agencies and other government entities may also issue tax credit loans, which home buyers may use to satisfy the FHA 3.5 percent downpayment requirement.
In addition, approved FHA lenders will also be able to purchase a home buyer’s anticipated tax credit to pay closing costs and downpayment costs above the 3.5 percent downpayment that is required for FHA-insured homes.
More information about the guidelines is available on the NAHB web site. Read the HUD mortgagee letter (pdf) and an explanation of the FHA Mortgagee Letter on Tax Credit Monetization (pdf). An FAQ about monetization (pdf) is available at the NAHB web site.
21. If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
Yes. The law allows taxpayers to choose (“elect”) to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.
Taxpayers buying a home who wish to claim it on their 2008 tax return, but who have already submitted their 2008 return to the IRS, may file an amended 2008 return claiming the tax credit. You should consult with a tax professional to determine how to arrange this.
22. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.
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