Short Sale Update

Everyone who has heard the nightmare scenarios about how long it takes to close on a short sale, and avoided them, can take heart in the new guidelines set by the Treasury for the Home Affordable Foreclosure Alternatives Program. Participating banks (and there are plenty of incentives for them to participate) are now required to give a response to an offer within 10 days.

For more info about this boon for home buyers, and the incentives for distressed home owners and lenders alike, I recommend the Treasury Department guidelines: Introduction of Home Affordable Foreclosure Alternatives (PDF).

Home owners, if the economy or circumstance has put you at risk of foreclosure, read the article! Read my posts for Mar 12 and May 24 as well. Don't risk foreclosure! A short sale may not be the miracle you might pray for, but it's a good bit better than the alternative.

Home Buyer Tax Credit Update

Some of the highlights of the new Home Buyer Tax Credit that differentiate it from earlier bills are:

• Move-up buyers who have owned a principle residence for 5 of the last eight years are eligible.
• The maximum amount of the tax credit is $6,500 (or 10%)
  
• Qualifying modified adjusted gross income (MAGI) limits have been increased from $75,000 for individual taxpayers and $150,000 for joint filers to $125,000 and $225,000 to claim the full tax credit, respectively. Like the earlier bill, the credit phases out for individuals with over $125,000 to $145,000, and joint filers who earn $225,000 to $245,000.

The information on the IRS Web site lays out most of the provisions of the extended Home Buyer Tax credit fairly well, so I'll just address a few questions which they do not sufficiently clarify:

• If you are a move-up buyer and you are wondering whether you qualify if your home purchase closes after November 6, 2009, but before December 1—you can stop wondering. Yes, you do. The new law went into effect when President Obama signed it, and home buyers, just like each of the earlier home buyer tax credits, can be claimed any time after the final settlement date (closing of the sale).
• The term move-up buyer is misleading. To claim the tax, buyers DO NOT need to buy a higher price home. Any single-family home or duplex bought as a primary residence qualifies.
  

Download this FAQ (PDF) from the National Association of REALTORS for more good insights to the Home Buyer Tax Credit.

The Extended Home Buyer Tax Credit

If you are waiting for lobbying efforts to expand the first-time home buyer credit to $15,000, don't! It appears unlikely that anything that generous will happen. There is hope however for move-up buyers though and first-timers who have tarried.

There should be little doubt that the single most potent element in the recent spate of economic stimulus programs has been the first-time home buyer tax credit. According to the Treasury Department, it has brought over 1.2 million first-time buyers into the market who have claimed only $8.5 billion of the $13.6 billion set aside for the homebuyer tax credits this year.

At the urging of industry participants to prevent home sales from declining further as the economy struggles to recover from the current housing industry lead decline, Senate Majority Leader Harry Reid announced this week that he has scheduled a vote on November 2, and Congress could approve extensions of an $8,000 first-time home-buyer tax credit as soon as November 3. The bill would also extend benefits to move-up buyers with higher income limits and include an extension of unemployment benefits.

The legislation, which had been delayed by Republican demands for votes on several amendments--including amendments aimed at the community activist group ACORN, immigration and another to remove Geithner’s ability to extend the financial bailout program beyond its expiration at the end of the year--would extend benefits to home-buyers who have lived in their current home for at least five years to receive a credit of $6,500. It also increases income levels, allowing couples earning as much as much as $225,000 and individuals earning up to $125,000 to qualify, while the income limits for first-time buyers would remain at $75,000 limit for individuals and $150,000 for couples.

Like the original tax credit, the extension is available only to owner occupied properties, and requires those receiving the tax credit to remain in their new home for three years. Otherwise, they would have to repay the credit. The bill also limits the tax credit to the purchase of homes valued at less than $800,000.

The Senate proposal would also provide $2.4 billion to extend unemployment benefits by 14 weeks nation-wide, and by 20 weeks in states with the highest jobless rates.

The proposed bill, which has the Obama administration's approval, has provisions intended to make it budget deficit neutral. The Joint Committee on Taxation estimated that the cost of extending the tax credit, $10.8 billion over 10 years, would be absorbed by provisions delaying a tax break for multinational companies scheduled to take effect next year, while the extension of unemployment benefits would be offset by extending an employer payroll surtax that is slated to expire this year.

All this has come at a time when most were deferring their first home purchase for better times, and the addition of provisions for move-up buyers is certain to help further strengthen financial industry ledgers.

Foreclosure Alternatives Program

The profit motive is the driving force in our economy, but cutting their losses is sometimes the motivating force when business is faced with a hopeless cycle of lost revenue. When the media reports "glimmers of hope" for our ailing economy, the glimmers associated with foreclosure are reported as reductions in the rate of foreclosure. Recently, President Obama's administration provided further incentive to both lenders and borrowers to seek an alternative to foreclosure. The alternatives are not new, but the incentives offered by the program are.

It's sad to think that significant numbers of borrowers do not find incentive enough in the alternatives to foreclosure, but the number of foreclosures testifies that they are willing to endure greater hardship than necessary when they fall into hard times. Now, under the new program, borrowers will also be giving up financial aid if they do not take advantage of the alternatives. Additionally, this is especially good news for borrowers who took advantage of the alternatives under the Making Home Affordable Loan Modification Program, but fall into further financial difficulty and are unable to keep their home.

On May 14, 2009, President Obama's administration responded to the call from the National Association of REALTORS®, and announced incentives and uniform procedures for short sales under what is termed the Foreclosure Alternatives Program (FAP). Under the program, a lender may consider a short sale or a deed-in-lieu of foreclosure if the home does not sell. Participating lenders who sign on to the program must comply with its requirements so long as they do not conflict with contractual agreements with investors. Thus far, the leading lenders who hold 75% of the outstanding mortgage debt have signed on with the program.

The principal features of the program are:

• Financially stressed borrowers (homeowners) qualify under the FAP if they meet minimum eligibility requirements for the Home Affordable Modification program but don’t qualify for a modification or do not successfully complete the three month trial period.
• Before proceeding with a foreclosure, lenders must determine if a short sale is feasible.
• Incentives include:
  
• $1,000 for lenders on successful completion of a short sale or deed-in-lieu of foreclosure;
• $1,500 for borrowers/homeowners to help with relocation expenses; and
  
• $1,000 toward the cost of paying junior lien holders to release their liens (one dollar from the government for every $2 paid by the investors to the second lien holders).
• The program will include:
• Standardized documents which are simplified, including a Short Sale Agreement and an Offer Acceptance Letter.
• Property Valuation by Appraisal or Broker's Price Opinion issued no more than 120 days before the date of the short sale agreement. Lenders will independently establish the property value and minimum acceptable net return, in accordance with investor requirements.
  
• In the Short Sale Agreement, lenders must give borrowers up to one year, but no less than 90 days to sell the property, depending on market conditions. Lenders have the option to grant extensions of the time period specified in the agreement.
  
•  No foreclosure may take place during the marketing period
• The property must be listed with a licensed real estate professional with experience in the neighborhood.
• The Short Sale Agreement must specify the reasonable and customary real estate commissions and costs that may be deducted from the sales price. The servicer must agree not to negotiate a lower commission after an offer has been received.
• Lenders may not charge fees to borrowers for participating in the program.
• Lenders have the option to require the borrower to agree to deed the property to the servicer in exchange for a release from the debt if the property does not sell within the time specified in the Short Sale Agreement.
  
• The program is in effect through 2012.

As limited as the alternatives to foreclosure are—they may not be win-win—they are better than losing everything. The Monopoly board game suggests the only other alternative to taking advantage of the program, inaction: Go to foreclosure. Do not pass Go. Do not salvage what you can of your credit. Do not collect your $1,500.

American Recovery and Reinvestment Act of 2009

Would-be home buyers who have been holding off buying a home have little reason to continue to wait—assuming that they feel reasonably secure in their jobs. The American Recovery and Reinvestment Act of 2009 now offers first-time home buyers—defined as anyone who has not owned or held an interest in real estate over the past three years—an $8,000 tax credit. This time, it is an actual tax credit, and not just an interest-free loan. The following bulleted list reviews the features of the tax credit.

First-Time Homebuyer Tax Credit

• Effective Dates--Available on homes bought between January 1, 2009 and December 31, 2009.
  
  
• Eligible Persons--First-time home buyers (must not own or have owned an interest in a home in the past three years.


• Refundable--The unused amount of the tax credit above the amount due to be refunded payable to the beneficiary.
  
  
• Amount of Credit--10% of purchase price up to a maximum of $8,000.


• Eligible Property--Any principal residence.


• Income Limit
• Single--Adjusted gross income of $75,000


• Married, filing a joint return--Adjusted gross income of $150,000


• Phases out above $95,000 and $170,000, respectively


• Revenue Bond Financing--Credit available to buyers who use state/local bond funding


• Recapture--If home is sold within three years, the entire amount of the tax credit must be repaid on sale.
  
  
• No Repayment

When considering the other benefits of home ownership, and the significant discounts and buyer incentives many sellers will concede in the negotiations, this truly is a good time to buy a home.

The act also offers new incentives to lenders to refinance homes that are in jeopardy of foreclosure. While this feature of the act offers little hope to home owners who bought significantly over-priced homes in speculative markets. The majority of home owners who are having difficulty meeting their mortgage payment can benefit from this feature of the act. Just as before the incentive to restructure the mortgage debt was offered, it is up to the home owner to contact their lender to determine just what the lender will do for them.

To find out how to claim your due as a first-time home owner, read the IRS guidelines for claiming your $8,000 tax credit.

The Right Time to Buy A Home

The confusion caused by the way the media has reported the issues affecting the housing and credit markets has resulted in far too many people who want to buy a home deciding to wait. Others are sitting it out because they believe their credit rating is too low. Most could not be making a more egregious mistake. Those who live in markets beset by declining home values may have been justified in waiting, but market values are beginning to stabilize and the other factors that make waiting at this time a mistake are rapidly approaching their deadline.

Among the greatest advantages to home buyers is the fact that it's a buyer's market. Increasingly, home sellers are agreeing to pay a buyer's closing costs, or shaving higher percentages of the price from the top.

You don't need sterling credit to borrow for a home loan. The fact is that prospective buyers with FICO scores of 580 or higher can obtain financing. For that matter, a buyer with a score of 560 or lower may be able to obtain financing if they can demonstrate that they have been able to manage their finances over the past year.

One deadline has in fact already passed. As of October 1, 2008, the up-front FHA Mortgage Insurance Premium for FHA loans with the minimum down payment has risen from 1.5% to 1.75%, and the monthly premium has gone up to .5% to .55%. These are marginal increases that amount to pennies per month compared to what follows.

The next deadline that will affect those who wait are the new HUD regulations affecting buyer contributions for FHA loans. On January 1, 2009, the amount of the sales price that a buyer will need to pay from their saved funds will increase from 3% to 3.5%.

Finally, the $7,500 first time home buyer tax credit will only be available until July 1, 2009. Don't wait until June 1! To take advantage of this one, a buyer will need to have closed the sale by July 1. If a buyer does not have a working contract by May 15 or so, and is not pre-approved for the loan, they are risking loosing out on this.

Waiting now could not only result in loosing significant bargaining power, lower cost to buy and lower payments, and the opportunity to take advantage of $7,500 of interest free money over 15 years—with a built in mechanism to make sure your can repay it, the tax advantages of home ownership—it could also postpone many another vehicle available to assure a secure financial future.

What are you waiting for?

The New $7,500 Tax Credit

Just what is the new first-time buyer $7,500 tax credit, and how beneficial is it? It is part of the Housing and Economic Recovery Act of 2008, and was included to provide benefit to the consumer to offset the appearance of the bill as being nothing but a bail-out for financial institutions. Calling it a tax credit is also something of a misnomer, because it is in actuality an interest free 15 year loan. This is not to say that it has no benefit to those who may be eligible for it. In fact, the benefits can be significant, and those who take advantage of it have a built-in repayment plan.

A summary of the tax credit:

• The credit is available to first time home buyers (single family residences, condos and coops). By definition, a first time home buyer is anyone who has not owned an interest in a home within the three years preceding the purchase of a qualifying home.
• The income limit for eligibility is no more than $75,000 (individuals) or $150,000 (married couples filing jointly).
• The amount of the credit and eligibility for it is 10% of the purchase price of a home bought and closed between April 9, 2008, and July 1, 2009.
• The maximum credit is $7,500.
  
• The credit is not automatic. The credit will need to be claimed at tax time in the year following the purchase (April 2009 and April 2010).
• The credit (loan) will need to be repaid yearly at tax time at a rate of $500 per year (or 6.67% of the actual), or repaid in full (the out-standing balance) upon sale of the residence used to qualify for the credit.

One last feature that should be clarified is that the amount of the credit will be applied first to the tax liability of the claimant. Anyone claiming the credit who owes taxes above what they paid in will therefore reduce the amount due when they file their taxes or receive only that part of the credit above their taxes due. On the other hand, tax payers who are due a refund on over-payment of their taxes will receive the full amount of the credit for which they qualify.

Before jumping into this and claiming the tax credit, everyone should crunch their own numbers. The potential benefits for most appear to be worth taking the credit though. In example, consider a scenario wherein a qualifying couple with a child bought their first home for $120,000. The couple received a tax refund of $1,200 in the year before they bought their home and expects at the same in the coming year. They also maintain credit card debt balance of $8,000 at 12% interest, which they are repaying at the minimum each month. Without crunching the numbers, it should be pretty clear that paying off the credit card debt with the $8,700 refund check will benefit them significantly.

Remember, the tax credit is an interest-free loan over 15 years. Assuming that they can expect similar refunds during the 15 years during which they must repay the "credit," the repayment should not create additional problems. Moreover, they are now home owners—and the tax benefits of home ownership will afford them with an even greater reduction in their tax liability over the years to come.

Everyone's finances are not likely to fit this scenario, so the decision to claim the tax credit needs to be analyzed individually. Take the same young family in example, and assume that they did not maintain so large a credit card debt. Since their total debt was relatively low and manageable, they decide to take the tax credit and invest the $8,700 refund check as seed money in a college fund for their child.

There are scenarios in which taking the tax credit could become a liability. Make no mistake about that. Self employed individuals who routinely under estimate their taxes and must pay additional taxes each year will need to plan for the additional repayment of the tax credit. But the fact remains that money has value over time, and the majority of people who qualify for the new tax credit are likely to realize significant returns in an interest free loan over the next 15 years.