When it comes to getting a mortgage loan, homebuyers have fewer options than they did even a couple of years ago. In the days of the real estate boom, lenders were much more willing to float exotic loans based on risky terms, but recently they have returned to safe and sensible home financing.
Fixed-interest mortgage
With a fixed-rate home loan, your interest rate remains the same for the life of the loan and the payment is split into equal monthly payments for the duration. In other words, it is amortized over the life of the loan.
The interest payments are front-loaded, however, so that during the first few years of the loan term, only a small portion of the payment pays off the principal. To see an example of an amortization schedule, plug in some hypothetical numbers in Bankrate's mortgage calculator.
Most commonly taken as a 30-year loan, fixed-rate mortgages can be shorter in duration or, more rarely, longer.
"Fixed-rate home loans can be 10 years, 15 years or 20, but most popular is the 30-year because that makes your payment the lowest," says Floyd Walters, owner of BWA Mortgage in La Canada Flintridge, Calif.
During the height of the real estate bubble, news broke about even longer loan terms, with some mortgages being offered for a long as 50 years. Those may have been more of an urban myth than reality, says Walters.
"To be honest, I never saw a real offering for a 50-year mortgage. I did see just a few lenders offering a 40-year mortgage," he says.
An extremely long mortgage term offers few advantages to consumers.
"On a fully amortized 30-year fixed-rate loan at 5.25 percent for $250,000, the payments would be $1,380 per month. Take that same loan out another 10 years to a 40-year note and the payments drop but only to $1,247 per month. You save $133 per month but it adds 10 years to your note with a net cost of an additional $100,000 or so," Walters says.
Adjustable-rate mortgage
Unlike a fixed-rate home loan, which sports a static interest rate over the life of the loan, the interest rate on an adjustable-rate mortgage, or ARM, changes every year.
ARMs come in various permutations. For instance, a hybrid ARM features aspects of both adjustable and fixed-rate mortgages.
"Hybrid mortgages can be anything from a three-year, five-year, seven-year or 10-year fixed interest rate period," says Mark Klein, president of Pacific Coast Lending in Agoura Hills, Calif. After the fixed-rate period, the loan is amortized over the balance of the term with a rate that adjusts annually.
Conversely a one-year ARM has no fixed-rate period. Though they are still available, they're not widely offered, says Walters.
"It's hard to believe there are very many people taking a one-year. I haven't done one for years and years. It's just not a product that feels right," he says.
One circumstance when they might be appropriate would be in a high fixed-rate environment.
"If I could take a one-year ARM that was 1 or 2 percentage points below what I could get as a fixed-rate mortgage, and if I could get some interest rate caps built in, I would analyze it. If we were in a high fixed-rate environment, it might appear more attractive," Walters says.
Unlike a plain-vanilla fixed-rate mortgage, ARMs come with more jargon than most people would care to know. But it's vital to understand the index on which the rates are based, the margin amount and any interest rate caps (provisions in the contract that limit rate increases).
Index -- An index is a published measure of the cost of money. Lenders price home loans based on the index to which the loan will be tied. There are several different indexes lenders use to calculate the rate on ARMs. Some commonly used indexes are the one-year Treasury Constant Maturity, the London Interbank Offered Rate, or Libor, or the 11th District Cost of Funds Index, or COFI.
After the initial fixed-interest period, the rate will adjust based on predetermined agreements in your note.
"The lender will say, 'We will fix your interest rate at 4 percent for the next five years. At the end of five years, we will go out and find the value of one-year Treasury bills and add a margin to that and we will fix your interest rate on the loan for a year at a time based on that (index and margin),'" says Walters.
Margin -- The margin is a set amount that will be added to the index to determine the interest rate.
Cap -- The interest rate will adjust regularly, but there is a limit to the amount it can change. Typically, there will be a cap on the initial interest rate reset that is higher than all of the subsequent rate adjustments, and a cap on the amount the rate can change over the life of the loan.
"On the first adjustment with a lot of lenders, there is a 5 percent cap on the first reset and then it goes to 2 percent a year every year, with a lifetime cap of 5 percent over the starting interest rate," says Walters.
Interest-only loan
For those buyers who need a rock-bottom payment for several years, the interest-only mortgage product, as its name implies, allows them the option of paying only the interest for the first few years of the loan.
"You can pay principal if you wish; interest-only is an option," says Walters.
Interest-only loans are structured like an adjustable-rate mortgage.
"The most common one is the five-year fixed 30-year loan," says Klein. "The payment and interest rate are fixed for five years and the payment could be based on only the interest payment, so you're not paying down the principal. When it resets your payments can go up pretty significantly, even if the interest rate doesn't change that much."
An interest-only loan may be appropriate for homebuyers who believe their income will increase in the coming years -- for instance, young families or a professional just starting out at the bottom of a potentially lucrative field such as law or medicine.
"Who they are not good for is someone who is stretching every dollar to get into a house and whose income is going to be relatively flat," says Walters.
No matter what kind of loan gets you into a home, do your homework beforehand and make sure there are no details about the mortgage loan you don't understand.
Friday, March 19, 2010
Tips on Buying a Home from CNN Money
1. Don't buy if you can't stay put.
If you can't commit to remaining in one place for at least a few years, then owning is probably not for you, at least not yet. With the transaction costs of buying and selling a home, you may end up losing money if you sell any sooner - even in a rising market. When prices are falling, it's an even worse proposition.
2. Start by shoring up your credit.
Since you most likely will need to get a mortgage to buy a house, you must make sure your credit history is as clean as possible. A few months before you start house hunting, get copies of your credit report. Make sure the facts are correct, and fix any problems you discover.
3. Aim for a home you can really afford.
The rule of thumb is that you can buy housing that runs about two-and-one-half times your annual salary. But you'll do better to use one of many calculators available online to get a better handle on how your income, debts, and expenses affect what you can afford.
4. If you can't put down the usual 20 percent, you may still qualify for a loan.
There are a variety of public and private lenders who, if you qualify, offer low-interest mortgages that require a down payment as small as 3 percent of the purchase price.
5. Buy in a district with good schools.
In most areas, this advice applies even if you don't have school-age children. Reason: When it comes time to sell, you'll learn that strong school districts are a top priority for many home buyers, thus helping to boost property values.
6. Get professional help.
Even though the Internet gives buyers unprecedented access to home listings, most new buyers (and many more experienced ones) are better off using a professional agent. Look for an exclusive buyer agent, if possible, who will have your interests at heart and can help you with strategies during the bidding process.
7. Choose carefully between points and rate.
When picking a mortgage, you usually have the option of paying additional points -- a portion of the interest that you pay at closing -- in exchange for a lower interest rate. If you stay in the house for a long time -- say three to five years or more -- it's usually a better deal to take the points. The lower interest rate will save you more in the long run.
8. Before house hunting, get pre-approved.
Getting pre-approved will you save yourself the grief of looking at houses you can't afford and put you in a better position to make a serious offer when you do find the right house. Not to be confused with pre-qualification, which is based on a cursory review of your finances, pre-approval from a lender is based on your actual income, debt and credit history.
9. Do your homework before bidding.
Your opening bid should be based on the sales trend of similar homes in the neighborhood. So before making it, consider sales of similar homes in the last three months. If homes have recently sold at 5 percent less than the asking price, you should make a bid that's about eight to 10 percent lower than what the seller is asking.
10. Hire a home inspector.
Sure, your lender will require a home appraisal anyway. But that's just the bank's way of determining whether the house is worth the price you've agreed to pay. Separately, you should hire your own home inspector, preferably an engineer with experience in doing home surveys in the area where you are buying. His or her job will be to point out potential problems that could require costly repairs down the road.
If you can't commit to remaining in one place for at least a few years, then owning is probably not for you, at least not yet. With the transaction costs of buying and selling a home, you may end up losing money if you sell any sooner - even in a rising market. When prices are falling, it's an even worse proposition.
2. Start by shoring up your credit.
Since you most likely will need to get a mortgage to buy a house, you must make sure your credit history is as clean as possible. A few months before you start house hunting, get copies of your credit report. Make sure the facts are correct, and fix any problems you discover.
3. Aim for a home you can really afford.
The rule of thumb is that you can buy housing that runs about two-and-one-half times your annual salary. But you'll do better to use one of many calculators available online to get a better handle on how your income, debts, and expenses affect what you can afford.
4. If you can't put down the usual 20 percent, you may still qualify for a loan.
There are a variety of public and private lenders who, if you qualify, offer low-interest mortgages that require a down payment as small as 3 percent of the purchase price.
5. Buy in a district with good schools.
In most areas, this advice applies even if you don't have school-age children. Reason: When it comes time to sell, you'll learn that strong school districts are a top priority for many home buyers, thus helping to boost property values.
6. Get professional help.
Even though the Internet gives buyers unprecedented access to home listings, most new buyers (and many more experienced ones) are better off using a professional agent. Look for an exclusive buyer agent, if possible, who will have your interests at heart and can help you with strategies during the bidding process.
7. Choose carefully between points and rate.
When picking a mortgage, you usually have the option of paying additional points -- a portion of the interest that you pay at closing -- in exchange for a lower interest rate. If you stay in the house for a long time -- say three to five years or more -- it's usually a better deal to take the points. The lower interest rate will save you more in the long run.
8. Before house hunting, get pre-approved.
Getting pre-approved will you save yourself the grief of looking at houses you can't afford and put you in a better position to make a serious offer when you do find the right house. Not to be confused with pre-qualification, which is based on a cursory review of your finances, pre-approval from a lender is based on your actual income, debt and credit history.
9. Do your homework before bidding.
Your opening bid should be based on the sales trend of similar homes in the neighborhood. So before making it, consider sales of similar homes in the last three months. If homes have recently sold at 5 percent less than the asking price, you should make a bid that's about eight to 10 percent lower than what the seller is asking.
10. Hire a home inspector.
Sure, your lender will require a home appraisal anyway. But that's just the bank's way of determining whether the house is worth the price you've agreed to pay. Separately, you should hire your own home inspector, preferably an engineer with experience in doing home surveys in the area where you are buying. His or her job will be to point out potential problems that could require costly repairs down the road.
Monday, November 23, 2009
Existing home sales at highest level since 2007
NEW YORK (CNNMoney.com) -- Existing home sales surged in October to the highest level in more than 2-1/2 years, according to a real estate industry report issued Monday.
The National Association of Realtors reported that existing home sales rose 10.1% last month to a seasonally adjusted annual rate of 6.1 million units, up from the downwardly revised rate of 5.54 million in September.
The sales beat forecasts of 5.7 million annual units, according to a consensus estimate of analysts compiled by Briefing.com, and were 23.5% above the 4.94 million-unit pace of 12 months ago.
Sales activity is the highest since February 2007, when the annual rate was 6.55 million.
The gain was likely due to an influx of buyers looking to take advantage of an $8,000 tax credit that the Obama administration made available for qualified first-time home buyers, the report said.
The tax credit was scheduled to expire at the end of November, but it has been extended to April 30 and expanded to include more home buyers.
"Many buyers have been rushing to beat the deadline ... and similarly robust sales may be occurring in November," NAR chief economist Lawrence Yun said in a statement.
Make money in 2010: Your home
But such a spike means December and early 2010 will probably see a "measurable decline before another surge in spring and early summer," Yun said.
Adam York, economist at Wells Fargo, agreed that "it's really a story of the tax credit, and a payback is inevitable."
Still, October's 10.1% gain "was a big, big jump," York said, and he expects only a 5% decline in the coming months.
"We will certainly will see some pickup into first part of next year," York said. "The expansion of the tax credit could bring in a whole new segment of people to the market."
Price and inventory. The median price of homes sold in October was $173,100, a 7.1% year-over-year drop. Distressed properties comprised 30% of the houses sold during the month.
Buy a foreclosure: 7 tips
The sales increase helped reduce some of the supply of homes on the market. Total housing inventory fell 3.7% to 3.57 million existing homes for sale. That's a 7-month supply, down from an 8-month supply in September.
Sales by property type. Single-family home sales rose 9.7% to a seasonally adjusted annual rate of 5.33 million in October from a pace of 4.86 million in September, and are 21.4% above the pace 12 months ago.
Condominium and co-op sales jumped 13.2% to a seasonally adjusted annual rate of 770,000 units, from 680,000 in September, and are 40.8% above October 2008's rate.
Sales by region. Total existing home sales rose the most in the Midwest, surging 14.4% in October to a pace of 1.43 million. That's 28.8% above a year ago.
In the Northeast, sales rose 11.6% to an annual level of 1.06 million; sales in the South jumped 12.7% to 2.30 million; and the West saw the smallest increase, up 1.6% to 1.31 million.
Source: CNN Money
The National Association of Realtors reported that existing home sales rose 10.1% last month to a seasonally adjusted annual rate of 6.1 million units, up from the downwardly revised rate of 5.54 million in September.
The sales beat forecasts of 5.7 million annual units, according to a consensus estimate of analysts compiled by Briefing.com, and were 23.5% above the 4.94 million-unit pace of 12 months ago.
Sales activity is the highest since February 2007, when the annual rate was 6.55 million.
The gain was likely due to an influx of buyers looking to take advantage of an $8,000 tax credit that the Obama administration made available for qualified first-time home buyers, the report said.
The tax credit was scheduled to expire at the end of November, but it has been extended to April 30 and expanded to include more home buyers.
"Many buyers have been rushing to beat the deadline ... and similarly robust sales may be occurring in November," NAR chief economist Lawrence Yun said in a statement.
Make money in 2010: Your home
But such a spike means December and early 2010 will probably see a "measurable decline before another surge in spring and early summer," Yun said.
Adam York, economist at Wells Fargo, agreed that "it's really a story of the tax credit, and a payback is inevitable."
Still, October's 10.1% gain "was a big, big jump," York said, and he expects only a 5% decline in the coming months.
"We will certainly will see some pickup into first part of next year," York said. "The expansion of the tax credit could bring in a whole new segment of people to the market."
Price and inventory. The median price of homes sold in October was $173,100, a 7.1% year-over-year drop. Distressed properties comprised 30% of the houses sold during the month.
Buy a foreclosure: 7 tips
The sales increase helped reduce some of the supply of homes on the market. Total housing inventory fell 3.7% to 3.57 million existing homes for sale. That's a 7-month supply, down from an 8-month supply in September.
Sales by property type. Single-family home sales rose 9.7% to a seasonally adjusted annual rate of 5.33 million in October from a pace of 4.86 million in September, and are 21.4% above the pace 12 months ago.
Condominium and co-op sales jumped 13.2% to a seasonally adjusted annual rate of 770,000 units, from 680,000 in September, and are 40.8% above October 2008's rate.
Sales by region. Total existing home sales rose the most in the Midwest, surging 14.4% in October to a pace of 1.43 million. That's 28.8% above a year ago.
In the Northeast, sales rose 11.6% to an annual level of 1.06 million; sales in the South jumped 12.7% to 2.30 million; and the West saw the smallest increase, up 1.6% to 1.31 million.
Source: CNN Money
Monday, November 16, 2009
Homes: About to get much cheaper
If you thought home prices were bottoming out, you may be wrong. They're expected to head a lot lower.
Home values are predicted to drop in 342 out of 381 markets during the next year, according to a new forecast of real estate prices.
Overall, the national median home price is predicted to drop 11.3% by June 30, 2010, according to Fiserv, a financial information and analysis firm. For the following year, the firm anticipates some stabilization with prices rising 3.6%.
In the past, Fiserv anticipated the rapid decline in home-sale prices over the past few years -- though it underestimated the scope.
Mark Zandi, chief economist with Moody's Economy.com, agreed with Fiserv's current assessments. "I think more price declines are coming because the foreclosure crisis is not over," he said.
In fact, those areas with high concentrations of foreclosure sales will experience the steepest drops, according to Fiserv. Miami, for example, is expected to be the biggest loser. Prices are forecast to plunge 29.9% by next June -- after having already fallen a whopping 48% during the past three years.
If Fiserv's forecast holds, Miami real median home price will tumble to $142,000 by June 2011.
In Orlando, Fla., the second-worst performing market, Fiserv anticipates a 27% price collapse by June 2010, followed by a less severe drop the following year. In Hanford, Calif., prices are estimated to drop 26.9% and continue falling 9.5% in 2011; in Naples, Fla., they're expected to fall 26.8% and then flatten out.
Other notable losers include Las Vegas, where prices have already fallen 54.6% and are expected to lose another 23.9% by June 2010. In Phoenix values have already collapsed by 54% and could fall another 23.4%. In both cities, Fiserv anticipates the losses to continue into 2011, but they will be less than 5%.
Prices had stabilized
The latest forecast is at odds with the past few months of the S&P/Case-Shiller Home Price index. That report has given hope that most housing markets may have already stabilized because the composite index of 20 cities rose in May, June and July. Nationally, it found that home prices have gained 3.6%.
Brad Hunter, chief economist for Metrostudy, which provides housing market information to the industry, however, expects a change in fortunes, however.
"I'm afraid Case-Shiller may be just a temporary reprieve," he said.
He pointed out that the tax credit for first-time home buyers helped support prices during the three months of Case-Shiller gains. By the end of November, the credit will have been used by 1.8 million homebuyers, at least 355,000 of whom would not have bought a house without the tax break, according to estimates by the National Association of Realtors. But the market assistance ends when the credit expires on Dec. 1.
Hunter also sees a new wave of foreclosure problems coming from higher priced loans and prime mortgages. He expects a high failure rate for option ARM loans that were issued to prime customers so they could buy homes in bubble markets, such as California and Florida. In those areas, prices for even modest homes had skyrocketed.
Winners
A handful of metro areas will buck the trend, according to Fiserv. Six markets will remain flat, and 33 will actually post gains. The biggest winner will be the Kennewick, Wash., metro area, where home prices have ramped up 8.9% over the past three years and are expected to increase another 3.4% by June 2010.
Fairbanks, Alaska, prices are anticipated to rise 2.5%, while Anchorage will climb 2.1%. Elmira, N.Y., prices may inch up 1.8%.
The nation's biggest metro area, New York City, will underperform the nation as a whole over the next two years, according to Fiserv. Prices, which have already fallen 21.7% to a median of $375,000, are expected to fall 17.4% by June 2011.
Home values in the nation's second largest city, Los Angeles, have fallen 43.3% since June 2006 to a median of $313,000. They are expected to dive another 20.2% over by June 2010, and then start to climb in 2011. Chicago prices, which have fallen 25.2% to $227,000, will drop only 4.1% over the next 12 months and then starting to climb.
The Detroit metro area now has the dubious distinction of having the lowest home prices in the country. Prices have dropped 51.7% to a median of $50,000. They're expected to fall another 9.1% and then stabilize.
Source: Yahoo! Finance
Home values are predicted to drop in 342 out of 381 markets during the next year, according to a new forecast of real estate prices.
Overall, the national median home price is predicted to drop 11.3% by June 30, 2010, according to Fiserv, a financial information and analysis firm. For the following year, the firm anticipates some stabilization with prices rising 3.6%.
In the past, Fiserv anticipated the rapid decline in home-sale prices over the past few years -- though it underestimated the scope.
Mark Zandi, chief economist with Moody's Economy.com, agreed with Fiserv's current assessments. "I think more price declines are coming because the foreclosure crisis is not over," he said.
In fact, those areas with high concentrations of foreclosure sales will experience the steepest drops, according to Fiserv. Miami, for example, is expected to be the biggest loser. Prices are forecast to plunge 29.9% by next June -- after having already fallen a whopping 48% during the past three years.
If Fiserv's forecast holds, Miami real median home price will tumble to $142,000 by June 2011.
In Orlando, Fla., the second-worst performing market, Fiserv anticipates a 27% price collapse by June 2010, followed by a less severe drop the following year. In Hanford, Calif., prices are estimated to drop 26.9% and continue falling 9.5% in 2011; in Naples, Fla., they're expected to fall 26.8% and then flatten out.
Other notable losers include Las Vegas, where prices have already fallen 54.6% and are expected to lose another 23.9% by June 2010. In Phoenix values have already collapsed by 54% and could fall another 23.4%. In both cities, Fiserv anticipates the losses to continue into 2011, but they will be less than 5%.
Prices had stabilized
The latest forecast is at odds with the past few months of the S&P/Case-Shiller Home Price index. That report has given hope that most housing markets may have already stabilized because the composite index of 20 cities rose in May, June and July. Nationally, it found that home prices have gained 3.6%.
Brad Hunter, chief economist for Metrostudy, which provides housing market information to the industry, however, expects a change in fortunes, however.
"I'm afraid Case-Shiller may be just a temporary reprieve," he said.
He pointed out that the tax credit for first-time home buyers helped support prices during the three months of Case-Shiller gains. By the end of November, the credit will have been used by 1.8 million homebuyers, at least 355,000 of whom would not have bought a house without the tax break, according to estimates by the National Association of Realtors. But the market assistance ends when the credit expires on Dec. 1.
Hunter also sees a new wave of foreclosure problems coming from higher priced loans and prime mortgages. He expects a high failure rate for option ARM loans that were issued to prime customers so they could buy homes in bubble markets, such as California and Florida. In those areas, prices for even modest homes had skyrocketed.
Winners
A handful of metro areas will buck the trend, according to Fiserv. Six markets will remain flat, and 33 will actually post gains. The biggest winner will be the Kennewick, Wash., metro area, where home prices have ramped up 8.9% over the past three years and are expected to increase another 3.4% by June 2010.
Fairbanks, Alaska, prices are anticipated to rise 2.5%, while Anchorage will climb 2.1%. Elmira, N.Y., prices may inch up 1.8%.
The nation's biggest metro area, New York City, will underperform the nation as a whole over the next two years, according to Fiserv. Prices, which have already fallen 21.7% to a median of $375,000, are expected to fall 17.4% by June 2011.
Home values in the nation's second largest city, Los Angeles, have fallen 43.3% since June 2006 to a median of $313,000. They are expected to dive another 20.2% over by June 2010, and then start to climb in 2011. Chicago prices, which have fallen 25.2% to $227,000, will drop only 4.1% over the next 12 months and then starting to climb.
The Detroit metro area now has the dubious distinction of having the lowest home prices in the country. Prices have dropped 51.7% to a median of $50,000. They're expected to fall another 9.1% and then stabilize.
Source: Yahoo! Finance
Saturday, November 14, 2009
Has The Real Estate Market Bottomed?
Some positive housing statistics have come out recently. The Case-Shiller index, which tracks changes in the values of residences in 20 metropolitan areas in the U.S., is up 2.9% in the second quarter. The previous quarter it was down 7.9%. The consumer confidence index was 54.5 in August, up from 47.4 in July. But does this data mean the market is turning around? Housing experts say in certain areas yes, while in others not so much.
According to the index, Charlotte, Cleveland and Las Vegas were the only areas that had higher declines in housing value month to month from July to August with 0.4%, 0.5% and 0.3% declines respectively. Minneapolis had the greatest monthly increase in values; it's up 3.2%, followed closely by San Francisco at 2.8%.
As many real estate market watchers note, real estate markets need to be analyzed locally as each market functions differently. Paul Brigandi, portfolio manager at Direxion Funds, says locales with a lot of foreclosures will snap back faster than the rest of the market because of the demand for low-priced housing. Foreclosures went up 5% in the third quarter to 937,840 properties, according to RealtyTrac. Nevada, Arizona and California had the top foreclosure rates statewide. One in 23 houses got a foreclosure filing last quarter in Nevada, which is six times the national average, according to RealtyTrac.
Nationally speaking, Mickey Cargile, managing partner of Cargile Investments, says that the bottom is in place for housing prices and they will start to go up in a year to 18 months.
The commercial real estate market will probably continue to see falling property prices for the next year, as the commercial real estate market usually lags the residential one by a year, says Michael Stubben, senior vice president of Cole Real Estate Investments. The office and industrial commercial real estate properties are tough to price now because of a high number of vacancies, he says, which will take two years to flush out of the system.
Martin Weiss, chairman of the Weiss Group, sees many reasons for a positive long-term outlook. "There are a lot of forces that were driving housing prices lower. Those have been mitigated to a great degree," he says. But that positive outlook could be changed by another recession or a surge in interest rates, he adds.
Vahan Janjigian, Forbes chief investment strategist, is concerned the government is propping up the real estate market. "They've artificially driven down the mortgage rates, and they're offering this big incentive to first time buyers," Janjigian says of the first-time home buyer tax credit of $8,000. Because of this potentially lift from the government, it's hard to tell how the market would have done otherwise and will do in the future, he says.
Sherry Chris, chief executive officer of Better Homes and Gardens real estate, saw a busy housing market in the early fall largely because of the home buyer tax credit. She is working to have the credit extended beyond its Dec. 1 deadline. "I see housing sales falling off in the later part of this year and into 2010 if there is no extension," she says. Approximately 1.4 million people have used that tax credit so far, Chris says.
"There is legitimate demand because prices have come down, there are a lot of people who were taking advantage of the tax credit and the low mortgage rates," says Ken Shubin Stein, founder of Spencer Capital Management. He adds that this demand seems like an "alphabet soup" created almost entirely by the government.
Though the government tax cuts have helped firm up housing prices and demand in the short-term, Janjigian is concerned that long-term the real estate market can't recover until unemployment comes down substantially. The unemployment rate is currently 9.8%.
Apart from buying houses themselves, there are other attractive real estate investments. Brigandi says within the next several years home builder stocks, such as D.R. Holton and Hovnanian Enterprises, will be good buys as more risk appetite and demand comes back to the market. His firm also manages two leveraged exchange-traded funds that investors can use depending on their views of the real estate market. These funds are the Direxion Daily Real Estate Bull 3X (DRN), which is three times leveraged to the MSCI real estate investment trust index, and the Direxion Daily Real Estate Bear 3X (DRV), which is tied to the MSCI real estate index.
According to the index, Charlotte, Cleveland and Las Vegas were the only areas that had higher declines in housing value month to month from July to August with 0.4%, 0.5% and 0.3% declines respectively. Minneapolis had the greatest monthly increase in values; it's up 3.2%, followed closely by San Francisco at 2.8%.
As many real estate market watchers note, real estate markets need to be analyzed locally as each market functions differently. Paul Brigandi, portfolio manager at Direxion Funds, says locales with a lot of foreclosures will snap back faster than the rest of the market because of the demand for low-priced housing. Foreclosures went up 5% in the third quarter to 937,840 properties, according to RealtyTrac. Nevada, Arizona and California had the top foreclosure rates statewide. One in 23 houses got a foreclosure filing last quarter in Nevada, which is six times the national average, according to RealtyTrac.
Nationally speaking, Mickey Cargile, managing partner of Cargile Investments, says that the bottom is in place for housing prices and they will start to go up in a year to 18 months.
The commercial real estate market will probably continue to see falling property prices for the next year, as the commercial real estate market usually lags the residential one by a year, says Michael Stubben, senior vice president of Cole Real Estate Investments. The office and industrial commercial real estate properties are tough to price now because of a high number of vacancies, he says, which will take two years to flush out of the system.
Martin Weiss, chairman of the Weiss Group, sees many reasons for a positive long-term outlook. "There are a lot of forces that were driving housing prices lower. Those have been mitigated to a great degree," he says. But that positive outlook could be changed by another recession or a surge in interest rates, he adds.
Vahan Janjigian, Forbes chief investment strategist, is concerned the government is propping up the real estate market. "They've artificially driven down the mortgage rates, and they're offering this big incentive to first time buyers," Janjigian says of the first-time home buyer tax credit of $8,000. Because of this potentially lift from the government, it's hard to tell how the market would have done otherwise and will do in the future, he says.
Sherry Chris, chief executive officer of Better Homes and Gardens real estate, saw a busy housing market in the early fall largely because of the home buyer tax credit. She is working to have the credit extended beyond its Dec. 1 deadline. "I see housing sales falling off in the later part of this year and into 2010 if there is no extension," she says. Approximately 1.4 million people have used that tax credit so far, Chris says.
"There is legitimate demand because prices have come down, there are a lot of people who were taking advantage of the tax credit and the low mortgage rates," says Ken Shubin Stein, founder of Spencer Capital Management. He adds that this demand seems like an "alphabet soup" created almost entirely by the government.
Though the government tax cuts have helped firm up housing prices and demand in the short-term, Janjigian is concerned that long-term the real estate market can't recover until unemployment comes down substantially. The unemployment rate is currently 9.8%.
Apart from buying houses themselves, there are other attractive real estate investments. Brigandi says within the next several years home builder stocks, such as D.R. Holton and Hovnanian Enterprises, will be good buys as more risk appetite and demand comes back to the market. His firm also manages two leveraged exchange-traded funds that investors can use depending on their views of the real estate market. These funds are the Direxion Daily Real Estate Bull 3X (DRN), which is three times leveraged to the MSCI real estate investment trust index, and the Direxion Daily Real Estate Bear 3X (DRV), which is tied to the MSCI real estate index.
Frequently Asked Questions About the First Time Home Buyer Tax Credit
The Worker, Homeownership, and Business Assistance Act of 2009 has extended the tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence. The tax credit now applies to sales occurring on or after January 1, 2009 and on or before April 30, 2010. However, in cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will qualify.
For sales occurring after November 6, 2009, the Act establishes income limits of $125,000 for single taxpayers and $225,000 for married couples filing joint returns.
The income limits for sales occurring on or after January 1, 2009 and on or before November 6, 2009, are $75,000 for single taxpayers and $150,000 for married taxpayers filing joint returns.
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 $8,000 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 on or before April 30, 2010. 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. A limited exception exists for certain contract for deed purchases and installment sale purchases. See the IRS website for more detail.
However, the law also allows home sales occurring by June 30, 2010 to qualify, provided they are due to a binding sales contract in force on or before April 30, 2010.
Persons who are claimed as dependents by other taxpayers or who are under age 18 are not qualified for the tax credit program.
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, IRS Notice 2009-12 allows unmarried joint purchasers to 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. For sales occuring after November 6, 2009, the income limit for single taxpayers is $125,000; the limit is $225,000 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 $125,000 for single taxpayers and $225,000 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 $145,000 (single) or $245,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.
5.The income limits for claiming the tax credit were raised when the tax credit was extended. Are the higher limits retroactive?
No. The new income limits are only applicable to purchases occurring after November 6, 2009.
The income limits for sales occuring on or after January 1, 2009 and on or before November 6, 2009 are $75,000 for single taxpayers and $150,000 for married couples filing jointly.
6.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.
7.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.
8.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 $235,000. The applicable phaseout to qualify for the tax credit is $225,000, 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 $138,000. The buyer’s income exceeds $125,000 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.
9.How is this home buyer tax credit different from the tax credit that Congress enacted in early 2009?
The tax credit’s income limits were increased, the documentation requirements were tightened, and the program's deadlines were extended.
10.How do I claim the tax credit? Do I need to complete a form or application? Are there documentation requirements?
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 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. Home buyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed home purchase.
11.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, provided the home is purchased for a price less than or equal to $800,000. 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, among other family members, your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse or your spouse’s family members. Please consult with your tax advisor for more information. Also see IRS Form 5405.
12.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).
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 on or before April 30, 2010 (or by June 30, 2010, provided a binding sales contract was in force by April, 30, 2010).
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 an 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 a way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 or 2010 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, 18 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.HUD is now allowing "monetization" of the tax credit. What does that mean?
It means that HUD allows buyers using FHA-insured mortgages to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 or 2010 income taxes to receive a refund. These funds may be used for certain downpayment and closing cost expenses.
Under HUD’s guidelines, non-profits and FHA-approved lenders are 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 can 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 (or 2010), can I apply the tax credit against my 2008 (or 2009) tax return?
Yes. The law allows taxpayers to choose (“elect”) to treat qualified home purchases in 2009 (or 2010) as if the purchase occurred on December 31, 2008 (or if in 2010, December 31, 2009). This means that the previous year’s income limit (MAGI) applies and the election accelerates when the credit can be claimed. A benefit of this election is that a home buyer in 2009 or 2010 will know their prior year 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 prior year tax return, but who have already submitted their tax return to the IRS, may file an amended return claiming the tax credit using Form 1040X. You should consult with a tax professional to determine how to arrange this.
22.For a home purchase in 2009 or 2010, can I choose whether to treat the purchase as occurring in the prior or present year, 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 the present year and a larger credit would be available using the prior year MAGI amounts, then you can choose the year that yields the largest credit amount.
For sales occurring after November 6, 2009, the Act establishes income limits of $125,000 for single taxpayers and $225,000 for married couples filing joint returns.
The income limits for sales occurring on or after January 1, 2009 and on or before November 6, 2009, are $75,000 for single taxpayers and $150,000 for married taxpayers filing joint returns.
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 $8,000 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 on or before April 30, 2010. 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. A limited exception exists for certain contract for deed purchases and installment sale purchases. See the IRS website for more detail.
However, the law also allows home sales occurring by June 30, 2010 to qualify, provided they are due to a binding sales contract in force on or before April 30, 2010.
Persons who are claimed as dependents by other taxpayers or who are under age 18 are not qualified for the tax credit program.
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, IRS Notice 2009-12 allows unmarried joint purchasers to 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. For sales occuring after November 6, 2009, the income limit for single taxpayers is $125,000; the limit is $225,000 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 $125,000 for single taxpayers and $225,000 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 $145,000 (single) or $245,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.
5.The income limits for claiming the tax credit were raised when the tax credit was extended. Are the higher limits retroactive?
No. The new income limits are only applicable to purchases occurring after November 6, 2009.
The income limits for sales occuring on or after January 1, 2009 and on or before November 6, 2009 are $75,000 for single taxpayers and $150,000 for married couples filing jointly.
6.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.
7.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.
8.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 $235,000. The applicable phaseout to qualify for the tax credit is $225,000, 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 $138,000. The buyer’s income exceeds $125,000 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.
9.How is this home buyer tax credit different from the tax credit that Congress enacted in early 2009?
The tax credit’s income limits were increased, the documentation requirements were tightened, and the program's deadlines were extended.
10.How do I claim the tax credit? Do I need to complete a form or application? Are there documentation requirements?
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 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. Home buyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed home purchase.
11.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, provided the home is purchased for a price less than or equal to $800,000. 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, among other family members, your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse or your spouse’s family members. Please consult with your tax advisor for more information. Also see IRS Form 5405.
12.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).
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 on or before April 30, 2010 (or by June 30, 2010, provided a binding sales contract was in force by April, 30, 2010).
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 an 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 a way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 or 2010 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, 18 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.HUD is now allowing "monetization" of the tax credit. What does that mean?
It means that HUD allows buyers using FHA-insured mortgages to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 or 2010 income taxes to receive a refund. These funds may be used for certain downpayment and closing cost expenses.
Under HUD’s guidelines, non-profits and FHA-approved lenders are 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 can 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 (or 2010), can I apply the tax credit against my 2008 (or 2009) tax return?
Yes. The law allows taxpayers to choose (“elect”) to treat qualified home purchases in 2009 (or 2010) as if the purchase occurred on December 31, 2008 (or if in 2010, December 31, 2009). This means that the previous year’s income limit (MAGI) applies and the election accelerates when the credit can be claimed. A benefit of this election is that a home buyer in 2009 or 2010 will know their prior year 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 prior year tax return, but who have already submitted their tax return to the IRS, may file an amended return claiming the tax credit using Form 1040X. You should consult with a tax professional to determine how to arrange this.
22.For a home purchase in 2009 or 2010, can I choose whether to treat the purchase as occurring in the prior or present year, 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 the present year and a larger credit would be available using the prior year MAGI amounts, then you can choose the year that yields the largest credit amount.
Monday, March 30, 2009
More on the $6,000 Utah Housing Grant
I've had a few people/clients inquire about this grant in the past few days and thought I should post all the information I have about it here. Now...GO GET YOUR MONEY!
What is the $6,000 Home Run grant?
The Home Run Grant is a mortgage assistance program that grants $6,000 to home buyers who purchase a newly constructed, never-occupied primary residence in Utah. The Home Run Grant is funded by the Housing Relief Restricted Special Revenue Fund, established by Utah Gov. Jon Huntsman, the Utah State Legislature and Utah Housing Corporation.
When is the Home Run program being launched?
The governor has signed the bill into law and the program is now launched.
Who is eligible to receive a 6,000 Home Run grant?
The Home Run grant is available to any Utah home buyer who meets the following qualifications:o Single person, income not to exceed $75,000. o Married couple, income not to exceed $150,000.o If more than one unmarried person is taking title to the eligible home, each such single person is subject to the $75,000 income limit.
Home buyers must occupy the purchased home as a primary, permanent residence no later than 30 days after closing.
If home buyers need a mortgage loan to purchase the home, the loan must be a fixed interest rate, amortizing mortgage loan with a term of 30 years or less. Cash buyers can also qualify by contacting Utah Housing Corporation directly.
How does a home buyer get the Home Run funds?
To get a first-come, first-served written commitment for the grant, home buyers must:
o Enter into a written contract to purchase a newly constructed home. o Contact a lender to obtain final underwriting approval for any needed financing. o Have their mortgage lender furnish required documentation to Utah Housing Corporation for the grant. o Utah Housing will reserve the $6,000 grant for 30 days.
What homes can be purchased with the $6,000 Home Run grant?
Homes must be recently constructed, single-family residences that have a certificate of occupancy or a final inspection. They cannot be previously occupied. Eligible property types include single-family detached homes, condominiums, planned unit developments (PUD), twin homes, town homes and manufactured homes permanently affixed to a foundation.
Do I have to be a first-time buyer to get a Home Run grant?
No. Home Run Grants are available to all home buyers who meet the income restrictions of $75,000 for singles, $150,000 for couples and, if more than one single person takes title, the $75,000 limit applies to each such single person.
How does a buyer apply for a 6,000 Home Run grant?
Mortgage lenders are the key link between the home buyer and the Home Run grant. The mortgage lender assists the home buyer to provide necessary information to secure the grant from Utah Housing Corporation. The home buyer does not work directly with Utah Housing Corporation (unless it is a cash buyer).
What type of loan can home buyers use to purchase a home?
If home buyers need a mortgage loan, it must be a fixed interest rate loan with a term of 30 years or less. Loans may be obtained from any lender qualified to make mortgage loans under Utah law.. Examples of qualifying loans include:o Conventionalo FHA, VA or Rural Housingo Utah Housing Corporation's FirstHome and FirstHome Plus
What mortgage lenders can assist home buyers to secure a $6,000 Home Run grant?
Any mortgage lender qualified to make mortgage loans under Utah law can assist home buyers to secure the Home Run grant. Click here to see Utah Housing Corporation's list of currently approved lenders.
Can the $6,000 Home Run grant be combined with new the federal $8,000 tax credit?
Yes, if a home buyer is a first-time home buyer and meets the independent criteria of both the federal and Home Run programs, they may take advantage of both. The $6,000 Home Run Grant is available to both those who are first-time home buyers as well as those who previously owned a home. The $8,000 federal tax credit is available only to first-time home buyers.
How many Home Run grants are available to home buyers?
A total of approximately 1,600 grants are available. Each grant is $6,000. Only one grant can be used for the purchase of each home. Home Run Grants are distributed on a first-come, first-served basis to qualified home buyers. The approximate number of remaining grants will be posted on the UHC Web page at http://www.utahhousingcorp.org./
Is the Home Run grant taxable?
The Home Run Grant may be taxable as income under federal and state tax laws. UHC has requested a ruling from the Internal Revenue Service (IRS) about whether or not a Home Run Grant will be taxable. UHC does not give tax advice and home buyers should review the ruling and other pertinent tax information in connection with the preparation of their 2009 tax returns.
If I have additional questions who do I contact?
Contact an approved Home Run lender.
What is the $6,000 Home Run grant?
The Home Run Grant is a mortgage assistance program that grants $6,000 to home buyers who purchase a newly constructed, never-occupied primary residence in Utah. The Home Run Grant is funded by the Housing Relief Restricted Special Revenue Fund, established by Utah Gov. Jon Huntsman, the Utah State Legislature and Utah Housing Corporation.
When is the Home Run program being launched?
The governor has signed the bill into law and the program is now launched.
Who is eligible to receive a 6,000 Home Run grant?
The Home Run grant is available to any Utah home buyer who meets the following qualifications:o Single person, income not to exceed $75,000. o Married couple, income not to exceed $150,000.o If more than one unmarried person is taking title to the eligible home, each such single person is subject to the $75,000 income limit.
Home buyers must occupy the purchased home as a primary, permanent residence no later than 30 days after closing.
If home buyers need a mortgage loan to purchase the home, the loan must be a fixed interest rate, amortizing mortgage loan with a term of 30 years or less. Cash buyers can also qualify by contacting Utah Housing Corporation directly.
How does a home buyer get the Home Run funds?
To get a first-come, first-served written commitment for the grant, home buyers must:
o Enter into a written contract to purchase a newly constructed home. o Contact a lender to obtain final underwriting approval for any needed financing. o Have their mortgage lender furnish required documentation to Utah Housing Corporation for the grant. o Utah Housing will reserve the $6,000 grant for 30 days.
What homes can be purchased with the $6,000 Home Run grant?
Homes must be recently constructed, single-family residences that have a certificate of occupancy or a final inspection. They cannot be previously occupied. Eligible property types include single-family detached homes, condominiums, planned unit developments (PUD), twin homes, town homes and manufactured homes permanently affixed to a foundation.
Do I have to be a first-time buyer to get a Home Run grant?
No. Home Run Grants are available to all home buyers who meet the income restrictions of $75,000 for singles, $150,000 for couples and, if more than one single person takes title, the $75,000 limit applies to each such single person.
How does a buyer apply for a 6,000 Home Run grant?
Mortgage lenders are the key link between the home buyer and the Home Run grant. The mortgage lender assists the home buyer to provide necessary information to secure the grant from Utah Housing Corporation. The home buyer does not work directly with Utah Housing Corporation (unless it is a cash buyer).
What type of loan can home buyers use to purchase a home?
If home buyers need a mortgage loan, it must be a fixed interest rate loan with a term of 30 years or less. Loans may be obtained from any lender qualified to make mortgage loans under Utah law.. Examples of qualifying loans include:o Conventionalo FHA, VA or Rural Housingo Utah Housing Corporation's FirstHome and FirstHome Plus
What mortgage lenders can assist home buyers to secure a $6,000 Home Run grant?
Any mortgage lender qualified to make mortgage loans under Utah law can assist home buyers to secure the Home Run grant. Click here to see Utah Housing Corporation's list of currently approved lenders.
Can the $6,000 Home Run grant be combined with new the federal $8,000 tax credit?
Yes, if a home buyer is a first-time home buyer and meets the independent criteria of both the federal and Home Run programs, they may take advantage of both. The $6,000 Home Run Grant is available to both those who are first-time home buyers as well as those who previously owned a home. The $8,000 federal tax credit is available only to first-time home buyers.
How many Home Run grants are available to home buyers?
A total of approximately 1,600 grants are available. Each grant is $6,000. Only one grant can be used for the purchase of each home. Home Run Grants are distributed on a first-come, first-served basis to qualified home buyers. The approximate number of remaining grants will be posted on the UHC Web page at http://www.utahhousingcorp.org./
Is the Home Run grant taxable?
The Home Run Grant may be taxable as income under federal and state tax laws. UHC has requested a ruling from the Internal Revenue Service (IRS) about whether or not a Home Run Grant will be taxable. UHC does not give tax advice and home buyers should review the ruling and other pertinent tax information in connection with the preparation of their 2009 tax returns.
If I have additional questions who do I contact?
Contact an approved Home Run lender.
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