Nicole Lahti, Austin Texas Mortgage

Update: Please see highlighted sections for further clarifcation regarding the $8,000 tax credit. I'll be making updates as more interpretation of the bill emerges.

Signed, Sealed, Delivered I'm Yours....is not just Stevie Wonder's 1970 Motown classic, but our $787 Billion (yes, with a B) stimulus plan with various tax cuts and spending programs aimed at reviving our economy. This is our country's largest anti-recession effort since WW2.

Part of the stimulus included a revision to last year's repayable tax credit to an $8,000 tax credit that does NOT need to be repaid.

Be advised, not all tax preparers are aware of all of the provisions of the new tax credit. I had a client call me from Jackson Hewett saying they would not apply the $8,000 tax credit for a house she purchased in 2009 to her 2008 tax year. This is not correct, see When Can the Credit be Claimed below.

So here's a breakdown of the new $8,000 tax credit:

All first-time homebuyers who purchase a home between January 1, 2009 and November 30 , 2009 may be eligible for a tax credit of $8,000 or 10% of the purchase price, whichever is lower. Unlike its $7,500 predecessor, the $8,000 does not need to be repaid.

Tax Credit vs. Tax Deduction

This is a tax credit, not a tax deduction, meaning its a dollar-for-dollar decrease to your tax liability. Also, the tax credit is refundable, meaning you can receive the full value of the credit even if you do not have an $8,000 tax liability.

Phase-Out

The tax credit phases-out for individuals making $75,000 or over modified adjusted gross income (MAGI), and couples making $150,000 or over MAGI. Below are examples of how the phase-out will apply to the two different scenarios.

Individual Making $75,000 or Over

Assume that an individual homebuyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by $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.

Couple Making $150,000 or Over

Assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $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 homebuyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000.

I'm not sure of the $20,000 significance, other than it's defined as the factor to use on pgs. 615-616 of HR 3221.

Who Cannot Take the Tax Credit

If any of the following apply, you cannot take the tax credit:

1. Individuals making $95,000 or over MAGI, and couples making $170,000 or over MAGI; meaning you receive no tax credit if your income is this much or more a year.

2. You buy your home from a close relative, including: parent, sibling, spouse, grandparent, child, etc.

3. You sell your home within the first three years of purchasing it. If this occurs, the tax credit must be repaid.

4. You are a non-resident alien

5. If home ceases to be your primary residence within first year of purchase. In other words, if you purchase a home in 2009, and move-out or sell in 2009, then you can't take the tax credit on your 2009 tax return. I'm assuming you are subject to recapture if you purchase the home in 2009, take the credit on your 2008 tax return, and move-out or sell in 2009.

First-time Homebuyer Definition

A first-time homebuyer is defined as someone who has not owned a home within the last three years. If married filing jointly, both spouses must meet the first-time homebuyer definition to take the tax credit.

The bill states both spouses must be first-time hombuyers to qualify for the credit. There doesn't seem to be an exception to this rule if filing separately. However, I'd consult your tax preparer.

Recapture Period

If you dispose of the primary residence or it ceases to be your primary residence during the first three years of purchase, the tax credit is recaptured. In doing my research, there seems to be conflicting opinions on whether you're subject to recapture if the home "ceases" to be your primary residence during the first three years of purchase. The National Association of Realtors seems to believe recapture only applies to selling your home. However, it seems to me that moving out of the property within three years would also make you subject to recapture. I'd recommend reading the bill's verbiage for yourself (carries over from HR 3221, pg 619) and consulting your tax preparer. The section reads:

ACCELERATION OF RECAPTURE.—If a taxpayer disposes of the principal residence with respect to which a credit was allowed under subsection (a) (or such residence ceases to be the principal residence of the taxpayer (and, if married, the taxpayer’s 20 spouse)) before the end of the recapture period.

When Can the Tax Credit be Claimed?

The $8,000 tax credit can be claimed for your 2008 tax year (filed by April 15th 2009), 2008 amended return or 2009 tax year.

Homes That Qualify

The tax credit is applicable to any home that will be used as a principle residence. Based on that guideline, qualifying homes include single-family detached homes, as well as attached homes such as townhouses and condominiums. In addition, manufactured or homes and houseboats used for principle residence also qualify. For new construction, the purchase date is considered the day you occupy the home; therefore you must move-in by November 30th 2009 to qualify for the tax credit.

Also, homes in the District of Columbia qualify for the tax credit. However, it cannot be used in conjunction with the existing District of Columbia tax credit.

If you purchased a home under the Mortgage Revenue Bond Program, you can utilize the $8,000 in conjunction (different than 2008 $7,500 repayable tax credit).

How About Those Who Purchased Homes in 2008?

Homes purchased in 2008 are subject to the $7,500 repayable tax credit.

Sources:

HR 1, American Recovery and Reinvestment Act

HR 3221: Housing Economic and Recovery Act of 2008

Last Thursday Austin, Texas joined 185 other cities around the world to host our very own Twestival! It was at Ace's Lounge on 6th Street and gave local Austin tweeters, tweeple (or whatever you can people who "tweet") an opportunity to bridge the gap to meet each other in person, and make new friends. My family was really glad I went to meet my "virtual friends" as they call it -- they were becoming a little concerned about my new-found addiction to Twitter (I've only been tweeting since November). However, I think Twestival may've sold my husband on Twitter, as he joined the very next day (@stephenlahti)!

Not only was Twestival a VERY fun time, it also benefited a great cause -- we raised $8,868 for charity: water. Let me put that in real terms for you...

$20 can give a person in Africa up to 20 years of safe drinking water, so that would mean Austin gave 443 people safe drinking water for 20 years! This is really great, especially considering Los Angeles and London each raised just over $10,000, and we're a much smaller city. This either means Austinites have a big hearts, a large percentage of us tweet OR we enjoy watching people go at it in the summo smackdown (I'm still looking for a picture of this, so if anyone has one, post a link in the comments) -- I'm thinking all three!

Oh, the band T-Bird & The Breaks also ROCKED! Hey, T-Bird, if you guys need another back-up singer please give me a ring. I don't sing, but can play a pretty mean tambourine or cow bell (as long as I can wear one of those pretty gold dresses).

Thanks to all the volunteers that put on such an amazing event! There were over 450 of us there, so I'm sure it was a lot of work! It was really cool meeting-up with all you fellow tweeple, and if I didn't get to meet you in person, feel free to look me up (@nicolelahti).

Thanks to Michael Cummings, Jungle McLovin, and Eugene Hsu for taking some great pictures. Here are just a couple, but check out their sites for more!

(Pictured above) @jljohansen, @pastelmagick, @joebangles, @statesman, @nicolelahti

Tweet-ya later!

@nicolelahti

Enjoying some good conversation at the Austin Texas Twestival.

The stimulus bill took over headlines last week as the Senate and Housed fleshed out their versions into one cohesive bill. Here's a wrap-up of news that affected the housing market, and what to expect this week.

Mortgage Rates

Last week was another volatile week for mortgage rates. They improved earlier in the week, but lost their ground later in the week and ended slightly worse than where they began. Last week's Bankrate.com 30 yr fixed rate average ended at 5.44% (last week's was 5.34%). Usually, bad news for stocks equals good news for mortgage bonds (i.e., interest rates) as money flows from stocks to bonds. However, investors are flooded with mortgages right now as Americans take advantage of lower interest rates, so bad Stock news hasn't completed translated to lower mortgage rates.

That being said, if you're buying a home or refinancing keep in mind it may take a little longer than normal to close.

Revised Home-buyer Tax Credit

The $15,000 tax credit is gone; it has been replaced by a $8,000 tax credit available to first-time home-buyers that does NOT need to be re-paid if you live in your home for at least 3 years. Not bad, huh? The government is essentially paying your down-payment, you just need to front the money and then get it back when you file your taxes.

To qualify for the credit, you need to purchase a home from January 1st to November 30th. The credit begins phasing out if an individual buyer makes $75,000 or more a year, and joint filers make $150,000 or more a year.

Government to Step-up Efforts to Help Those in Foreclosure

The Obama administration announced last week it would begin working on a new program to subsidize mortgages in foreclosure. This program is aimed to help homeowners BEFORE they fall behind on their mortgage, whereas current loan modification efforts have been criticized for only helping homeowners AFTER they fall behind on the mortgage.

There aren't too many details on the plan just yet, but here's a short article on what is to be expected.

http://budurl.com/djbf

What to Look Out for This Week

We may see some volatility in mortgage rates on Wednesday, Thursday and Friday. Keep this in mind when thinking about locking your interest rate. Generally speaking, bad news positively affects mortgage rates. However, other economic news associated with our crisis is playing into the equation, which sometimes distorts this previously predictable pattern.

Wednesday: FOMC minutes. Minutes will be released from the 1/28 FOMC meeting where the near-term direction of monetary policy was determined.

Thursday: Philadelphia Fed Index (PPI). This is a regional manufacturing index that is a good indicator of the national manufacturing index. This is a good snapshot of our factory sector, and indication of contraction or expansion.

Friday: Consumer Price Index and Core Consumer Price Index (CPI). This report will give us a read on deflation/inflation. Inflation is mortgage rates arch-enemy: however, it doesn't seem to be looming its head, for now.

Fair Isaac Corporation, the maker of the popular FICO scoring system has changed-up its recipe of how it calculates consumers' credit scores with its new FICO 2008 model. This new scoring model which was originally scheduled to release in 2008 (hence the name) began implementation last week. This is the biggest change to the credit-scoring system since 1989, and is anticipated to affect 40-50% of consumers' credit scores by approximately 20 points.

During a time when lenders are re-evaluating their risk tolerance, Fair Isaac Corporation believes its introduction of FICO 2008 provides a 5-15% improvement to default predictability. The scoring model still uses its familiar 300-850 score range, but contends the new system considers the bigger picture, and better differentiates between consumers with incidental late payments, and those who habitually miss payments.

Transunion adopted FICO 2008 last week, and Equifax anticipates implementation in second quarter 2009.

Here are a few pros and cons to the new scoring system.

The Pro's

Spouses and family members can benefit from being authorized users. The benefit of "inheriting" someone's good credit history by virtue of being an authorized user was recently challenged by Fair Isaac; but after harsh consumer and regulatory backlash, Fair Isaac will allow family members to benefit from authorized user status. Although, there is no way to verify someone's familial relationship, filters have been added to FICO 2008 to better disqualify "piggy-backing" -- a method by which people allow strangers to piggy-back on their good credit by giving them authorized user status on their credit cards for a fee.

Small collections hurt less. Collections under $100 will not hurt credit scores as severely as they did in the past.

Big picture matters more. Previously, a late payment would immediately flush a score down the toilet. Under FICO 2008, an incidental late will not affect the score as much if someone has an overall good pay history (see figure 3).

The Con's

Less credit hurts score. Available credit on revolving accounts will be much heavier weighted. This may negatively affect many consumers as credit card balances rise during our recession, and credit card companies slash consumers' credit limits. Fewer open and active accounts will also negatively impact scores which affects people who don't utilize as much credit.

A healthy mix of accounts is better. Its better for consumers to have a mix of auto, revolving, mortgage, installment, etc. than to have only one type of account like student loans.

Closed or unused accounts hurt score. Paying-off your credit cards? Make sure to keep them active afterwards because closing them or allowing them to go dormant will hurt your score. A great alternative to closing your account is using it only for gas or groceries and paying-off the balance at the end of the month.

Don't let these changes overwhelm you, as tried and true methods of managing credit will always work: Keep balances low relative to your credit limits, keep a good mix of account types, and payoff balances on time and in full. You may not always have the highest FICO on the block, but practicing these easy steps will always ensure you have a healthy score.

Employment

The labor department reported 598,000 jobs were lost in January. This is worse than the expected 540,000 job loss projection and puts current unemployment at 7.6%. Overall, 3.6 million jobs have been lost since December 2007, with half of them lost in the last 3 months. Ouch.

Personal Consumption

The PCE (Personal Consumption Index) reported its smallest gain in 5 years. This puts inflationary concerns in the backseat (for now) as the concern of deflation continues to loom. Dropping prices sounds pretty great, except they exasperate our slower economy as people delay spending in hopes of buying when prices drop.

Mortgage Rates

It was a pretty volatile week in mortgage market, and rates ended only slightly worse than where they began. Bankrate.com reported last week's average 30 year fixed rate at 5.34%.

$15,000 Home-Buyer Tax Credit -- Not Yet

The Senate did pass an ammendment adding a $15,000 tax credit to the stimulus bill and is scheduled to vote on it this Tuesday (Feb 10th). The House stimulus bill (including home-buyer credit) is different than the Senate's, so passage of the Senate's stimulus bill doesn't make it law just yet. The bill will go to conference committee to iron out the details between both versions of the bill. I expect some sort of change to the current home-buyer tax credit, but we won't know the final version just yet, so mosely along with the current $7,500 tax credit in the meantime.

Here's Some Good News for You -- Americans are Savings More!

The government reported Americans' savings rate rose to 2.9% of after-tax income in the last three months of 2008. This is up from 1.2% in the 3rd quarter, and less than 1% a year ago. This is probably not what the government wants to hear because everyone saving doesn't help bring us out of our recession. I, however, don't think its our patriotic duty to spend right now, and am glad Americans are starting to realize the need for saving!