Tammy Ernst

According to home builders around the country, the housing market is looking good.

Each month, the National Association of Home Builders releases its Housing Market Index report, a survey meant to "take the pulse of the single-family housing market".

Respondents report on three facets of their business, each series weighted and averaged:

1. How are market conditions today?
2. How do market conditions look 6 months from now?
3. How is the traffic of prospective buyers of new homes?

For the 3rd straight month, the Housing Market Index improved. It's now at its highest level since May 2008.

The housing market has shown signs of life since March. Both Existing Home Sales and New Homes Sales have soared and home values are up in a lot of towns. Builders showing confidence is another positive signal.

Fed Chairman Ben Bernanke said that the recession is "very likely over" and strong housing data corroborates that statement.

As the economy strengthens and housing does, too, home sellers will start to regain the upper-hand in contract negotiations. If you're an active home buyer, therefore, and looking for "a deal", be aware that time is close to running out.

What is a Tax Credit?

A tax credit is a direct reduction in tax liability owed by an individual to the Internal Revenue Service (IRS). In the event no taxes are owed, the IRS will issue a check for the amount of the tax credit an individual is owed.

Unlike the tax credit that existed in 2008, this credit does not require repayment unless the home, at any time in the first 36 months of ownership, is no longer an individual's primary residence.

What is the tax credit for first-time homebuyers (FTHB's)?

An eligible home-buyer may request from the IRS a tax credit of up to $8,000 or 10% of the purchase price for a home. If the amount of the home purchased is $75,000, the maximum amount the credit can be is $7,500. If the amount of the home purchased is $100,000, the amount of the credit may not exceed $8,000.

Who is eligible for the FTHB tax credit?

Anyone who has not owned a primary residence in the previous 36 months, prior to closing and the transfer of title, is eligible. This applies both to single taxpayers and married couples.

In the case where there is a married couple, if either spouse has owned a primary residence in the last 36 months, neither would qualify. In the case where an individual has owned property that has not been a primary residence, such as a second home or investment property, that individual would be eligible.

How do I claim the credit?

You may choose to either apply for the credit with your 2009 tax return or you may apply for the credit sooner by filing an amended 2008 tax return with FORM 5405 (http://www.irs.gov/pub/irs-pdf/f5405.pdf).

Is there a deadline for purchasing the home?

Yes. You must close on or before November 30, 2009.

Are there other restrictions?

Yes. the credit is reduced or eliminated for higher income tax filers: The credit is phased out based on modified adjusted gross income. For a married couple filing a joint return, the range for a reduced credit is $150,000 to $170,000. For single taxpayers, the range is $75,000 to $95,000. So, the full credit is available for single taxpayers earning$75,000 or less and married taxpayers earning $150,000 or less.

Can you claim the tax credit in advance of purchasing a property?

No. The IRS has recently begun prosecuting people that have claimed credits where a purchase had not taken place.

Can a taxpayer claim a credit if the property is purchased from a seller with seller financing and the seller retains title to the property?

Yes. In situations where the buyer purchases the property, even though the seller retains legal title, the taxpayer may file for the credit. Examples of this would include a land contract, contract for deed, etc.

According to the IRS, factors that would demonstrate the ownership of the property would include: 1. the right of possession, 2. the right to obtain legal title upon full payment of the purchase price, 3. The right to construct improvements, 4. the obligation to pay property taxes, 5. the risk of loss, 6. the responsibility and 7. the duty to maintain the property.

Are there other restrictions to taking the credit?

Yes. According to the IRS, if any of the following describe your situation, a credit would not be due.

• You buy your home from a close relative. This includes your spouse, parent, grandparent, child or grandchild.
• You do not use the home as your principal residence.
• You sell your home before the end of the year.
• You are a nonresident alien
• You are, or were, eligible to claim the district of Columbia first-time home buyer credit for any taxable year. (This does not apply for a home purchased in 2009.)
• Your home financing comes from tax-exempt mortgage revenue bonds. (This does not apply for a home purchased in 2009.)
• You owned a principal residence at any time during the three years prior to the date of purchase of your new home. For example, if your bought a home on July 1, 2008, you cannot take the credit for that home if you owned, or had an ownership interest in, another principal residence at any time from July2, 2005, through July 1, 2008.

Can you buy a home from a step-relative and be eligible for the credit?

Yes. Provided the person you are buying a home from is not a direct blood relative, the purchase would be allowed.

Can parents(s) who will not live in the property cosign for a mortgage for their child and the child that is a new qualifying FTHB still be eligible for the credit?

Yes.

Can a separated spouse who has not owned a home for four years qualifying if the spouse has owned a property anytime in the last three years?

No.

The best path to take in any situation regarding income taxes is to speak with a professional tax preparer or CPA. If you have any questions that fall outside the situations here, give me a call and if you do not have an accountant to speak with, I can refer you to one.

Unless you have either been under a rock for the past 12 months or you never work with first time homebuyers you are no doubt aware the clock is ticking on the IRS tax credit for FTHBs. My purpose here is to give you some additional information on what you can do to move listings, motivate buyers, and more importantly close deals.

General Points to Consider - Buyer and Seller

The expiration date of the tax credit is November 30, 2009. Close December 1, as of now, and any qualifying buyer will not receive the tax credit. With the 30th falling on the Monday following Thanksgiving, where possible work towards a closing date of November 24th. This will provide some cushion if anything pops up in the closing process that could delay a closing.

Recent legislation mandates that if the Annual Percentage Rate or APR changes outside acceptable tolerances from the initial application, some documentation needs to be re-disclosed and time needs to pass before the closing can occur. Items that can impact APR can include a change in interest rate or fees required to close. If a buyer delays locking the application and interest rates increase during the loan process, this could delay the closing. This is just one reason to plan accordingly and schedule an earlier closing date than the last possible day.

Protect your clients on both sides with extended closing dates of 45-60 days. Expectations are high that more FTHBs will be going under contract in the next month. Interest rates have fallen to levels not seen since May. The result is that many lenders' pipelines will be swelling with people seeking to take advantage of lower rates and the tax credit. Where feasible, work to get people under contract soon and plan accordingly to allow for any processing delays that could result.

Seller Points to Consider

Many FTHB's are motivate to purchase but may lack the necessary funds to close or may fall short in qualifying income. One way to assist with either or both situations and make the property more attractive is to promote that the seller will pay to reduce the borrower's interest rate and/or closing costs. In many cases, this will not only cost the seller less than a price reduction but also bring additional prospects to consider the house.

Most FTHBs today are choosing to obtain loans that are guaranteed by the FHA, VA, or USDA. In the case of both FHA and USDA loans, the seller can pay up to 6% of the sales price or appraised value. For VA loans, the maximum seller concession is capped at 4%.

Consider approaching all sellers today with homes that would appeal to FTHBs and get them to commit to paying closing costs and/or reducing the buyer's interest rate. this has often worked for builders in generating sales and it can work for your sellers, too!

Sellers who do not move homes before the end of November may find themselves waiting until the spring buying season kicks in to find their buyer. Make sure sellers know they need to promote their property now or risk waiting months while potentially seeing their property's value decline in the process.

Buyers Points to Consider

In the same light as just mentioned, many buyers may feel they lack the funds required to close. When buyers are interested in a property, encourage them to submit an offer with the concessions needed to get the mortgage approved. They may just find that the seller is willing to negotiate.

Get all potential buyers pre-approved. As the time to close will be at a premium during the months of October and November, any work that can be done to expedite the application process will be golden. Prepare your buyers by advising them not to wait until they have a home under contract. Any documentation submitted today for pre-approval should be good through the end of November. Also, with a pre-approval in hand, both you and they will know exactly what they can qualify and shop for.

If you want to help with the application process and prevent the need to possibly re-disclose loan documents, encourage your buyers to lock their interest rate early in the loan process. This will be helpful for all parties and help the buyer focus on closing and providing any additional documentation that may be needed.

Let's Move Some Property!!!!

If you have any questions from either a seller or buyer side as to what someone can or can not offer where financing is concerned, pick up the phone and call me. I am here to help you and look forward to making this year's November holiday a very Happy Thanksgiving for everyone!

Sincerely,

Tammy S Ernst

Fannie and Freddie...

With the increasing media attention surrounding Fannie Mae and Freddie Mac, more and more people are asking my thoughts on the future of these mortgage giants. Will they stay publicly traded companies, or be privatized by the government in an effort to hide the losses many economists believe will continue over the next several years?

What's clear is the losses show no end in sight as foreclosure rates rise at a staggering pace. Many of the homes we are seeing in the foreclosure process now, began with loans closed in 2003, originally originated as five year adjustable rate mortgages, now adjusting to their new rates...most much higher than what the borrower was comfortable with. Couple this with real estate depreciation in many areas, and the lack of, or total loss of equity in these homes, many homeowners are electing to walk-away from their homes rather than reduce the principal balance of their mortgages to match the home's value.

As we watch this storyline unfold over the coming months, one thing is clear to me, and that is the government will not let these two critical agencies fail. The reason for this is that they are both critical to the real estate industry as they make billions of dollars in mortgage money available through the secondary market. I tend to believe that if the losses continue to mount and the stock prices suffer further, these agencies will be privatized no only to secure their future, but to hide the losses from the public in an effort to restore consumer confidence and stabilize the troubling real estate market from its current condition.