$8,000 Tax Credit

$8,000 TAX CREDIT – Soon To Be Available As A Down Payment – 5 – no, make that 6 – Things You Need To Know
Written by Carl Medford, Agent in Fremont
May 14, 2009 9:25 AM Home Buying in Fremont
28 comments1,901 viewsWhile I normally refrain from cutting and pasting news into this post, the following news update from the National Association of Realtors “Realtor Magazine”, May 12, 2009, deserves to be posted in its entirety:



“Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, on Tuesday said that the Federal Housing Administration is going to permit its lenders to allow home buyers to use the $8,000 tax credit as a down payment.



Previously, most buyers wouldn't receive the funds until after they filed their tax return, and that deterred some people from using the credit. The NATIONAL ASSOCIATION OF REALTORS® has been calling for the change.



“We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a down payment,” Donovan says. His remarks came in an address to several thousand REALTORS® gathered Tuesday morning at "The Real Estate Summit: Advancing the U.S. Economy," at the 2009 REALTORS® Midyear Legislative Meetings&Trade Expo in Washington, D.C..



He says FHA’s approved lenders will be permitted to “monetize” the tax credit through short-term bridge loans. This will allow eligible home buyers to access the funds immediately at the closing table.”



Here are my thoughts:



1. On the surface, COOL. REALLY GOOD NEWS.



This is great news for first-time buyers who have been looking at the market, wanting to get in but have not had any capital to do so. This will open the doors for yet another level of prospective buyers to get into the market. For responsible individuals who just haven’t been able to get together a down payment, this is the great news they’ve been waiting for.



2. On second look, NOT SO MUCH.



While this may be good news for first-time buyers who have no cash, it is a return to the scenario that got us into this mess to begin with. This will be, in reality, a return to 100% financing. FHA programs require 3.5% of the purchase price as a down payment. 3.5% on a $230,000 home is $8,050.00. I’ve sold a number of homes in the past 12 months that easily fit into this price category. In addition, FHA guidelines allow the seller to credit up to 6% of the purchase price for closing costs.



I like Warren Buffet’s concept of “skin in the game.” Although I’m just like the next guy and love a free ride, having watched the recent meltdown, I know there is no such thing as a free lunch. Those who participated in the previous 100% financing schemes that had nothing personal invested in their homes were the very ones who walked away the moment they got upside down.



In addition, the question needs to be asked, “Why don’t they have a down payment?” We’re not really talking a lot of money here. I understand that life gets in the way and expenses happen, but I also have watched a generation grow up that believe that excessive consumer debt is their god-given right of passage.



My opinion is this:



“If you don’t have the discipline, dedication and skills to build up a small down payment, then I believe the odds that you will get into serious financial difficulty in the near future are significantly increased.”



If that’s true, maybe you should wait to buy a house until you learn how to control your debts. Just a thought.



3. Funds not going where they were intended.



One of the realities of the tax credit that made sense for many first-time buyers was the fact that it provided much needed cash to improve their homes once they moved in. Most of the homes being snapped up by those eligible for the tax credits have been foreclosed properties. Many of these need carpet, paint and so on to make them nice places to live. If the tax credit is used up front, then instead of having the rebate to help fix up their homes, many will most likely rely on plastic to “get-er done.” This takes us back to point number 2 above.



Secondly, the tax credit was intended to help fuel local economies. If used up front as a down payment, the money will not make it to the local businesses that truly need a financial shot in the arm; businesses like home improvement stores, furniture companies, contractors, etc.



4. An additional layer of complexity.



For those who’ve never had the joy of working with FHA loans, I’d suggest you sign up to work on an Alaskan crab boat for the Discovery Channel’s Deadliest Catch series. That way, you could experience thrills, excitement, pain and even death WITHOUT having to deal with the FHA. For those of us not so lucky, we know what’s coming.



This suggestion actually means adding another moving part to an FHA loan.



A bridge loan of some kind. Another layer of complexity in a process that is already WAY too complicated. Even more governmental involvement in a process that’s already extremely arduous. I feel like I just clicked my heels and ended up back in Kansas (I was born there and don’t plan on returning any time soon …). Someone PLEASE tell me it’s not just me …



5. An Extension?



Lastly, if this is the direction we are going, can an extension to deadline for the tax credit be very far behind? We’re talking about the government here, and this proposal will take time to implement. It really makes no sense to go to all the trouble of making this accessible to thousands more without adding more time for it to actually happen.




6. NEWS FLASH … It’s Been Retracted!!!




Since this post was originally launched, the possibility of using the credit for a down payment seems to have been rescinded! At least for now. My guess is that someone at HUD read my blog, saw the wisdom and changed their minds! I know, I’m being silly … quit dreaming. Here’s the scoop:



Those receiving FHA loans to purchase a home have very strict guidelines attached to where they can and cannot get their minimum 3.5% down payment monies from. These include:



Funds they’ve saved themselves
A gift from a relative
Employer contributions
Secured borrowed funds (example your 401K)
From governmental agencies
FHA approved non-profit organizations
The bridge loan as proposed for the $8,000 tax credit does not qualify. Therefore, until they can work out some bugs, this is off the shelf for now.



SO … good news, right? Maybe … maybe not … we’ll see.

Tax Credit!

Think There's Lots of Time for Tax Credit? Think Again
Chicago Tribune, By Mary Ellen Podmolik

July 10, 2009

Do you hear that clock ticking?

It's the sound of time creeping up on the expiration of the $8,000 tax credit for first-time home buyers.

Yes, it's only July and the credit doesn't expire until Dec. 1. And yes, it's definitely in the best interests of real estate agents and lenders to instill a sense of urgency in buyers right now, particularly because August is typically a ho-hum month.

But unless the federal government decides to extend or expand the credit -- as the housing industry has campaigned for -- it may be time for potential first-time buyers to reset their watches.

That's because it's not that a contract must be signed before Dec. 1 or a loan approved. It's that the sale has to close before Dec. 1.

"There's not as much sand in the hourglass as we may think," said Jim Merrion, regional director at Re/Max Northern Illinois.

Buyers, many advise, should have a purchase contract signed by early October so they've got 45 to 60 days to safely close the deal. Buyers who want to be in a new home by Thanksgiving need a contract by late September.

Buying a home is a complicated process, particularly after the fun of looking at potential homes descends into financial minutia.

"Any time you're dealing with first-time home buyers there's little issues that come up," said Peter Thompson, a senior loan officer at Wintrust Mortgage. "They've never been through it and they don't understand the process."

That process has become more laborious. New appraisal rules have kicked in and the lending environment remains challenging. Also, it can take significantly longer to get an answer back on an offer for a distressed property than a traditional one.

"These days, everything is dragging out," said Scott Gerami, broker of Real Time Realty in Naperville . "It seems like every transaction I've had in the past three to four months hasn't closed on time."

It's a different scenario for new home construction.

Cambridge Homes, for instance, started construction on some spec homes in anticipation of increased demand because of the tax credit. Buying one of those homes, and participating in some of the decision-making, requires the process to be started in short order.

"This is not going to be like Christmas shopping," said Cambridge vice president Dave Smith. "The night before is not going to work. The month before is not going to work."

Troubling Numbers

Two new reports paint a clear picture of how troubled the housing market was this spring.

The first, issued this week by First American CoreLogic, showed that the portion of Chicago-area mortgages that were 90 or more days delinquent rose to 7.4 percent in May, compared with 4.2 percent in May 2008. That's higher than the 6.5 percent delinquency rate for Illinois and for the nation. The Chicago area's foreclosure rate also was higher than that of the state and nation.

Report No. 2 comes from the Office of the Comptroller of the Currency and the Office of Thrift Supervision. It concluded that loan modifications were on the increase even before the Obama administration's Making Home Affordable program got rolling, but so were the number of foreclosures. The report also provided fresh evidence that the foreclosure crisis continues to extend into the prime borrowing market, defined in this report as those borrowers who have credit scores of 660 or above.

Almost 3 percent of prime mortgages were 60 days or more past due in the year's first quarter, double the percentage of seriously delinquent loans in 2008's first three months.

Meanwhile, the number of foreclosures in process rose 72.6 percent from the year-ago period, to 844,389 cases nationally. Not all will become bank-owned properties because of mitigation efforts.

The report's bright spot centers on efforts to help consumers keep their homes. New loan modifications surpassed 185,000 during the quarter, a 55 percent increase from 2008's fourth quarter and up more than 170 percent from a year ago.

But not all of those modifications stuck. The report also found that nine months after a modification was made, about half of Fannie Mae- and Freddie Mac-backed loans had re-defaulted and were 60 days or more past due.



Debra Noguera
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Problems with your Motgage!

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Problems With Your Mortgage?
There May be a Short Way Out

With unemployment figures reaching a 25-year high, the toll of the declining economy continues to impact hundreds of thousands of families each month, especially homeowners struggling with their mortgage. According to RealtyTrac, 303,410 foreclosure notices were served on properties in the month of December alone. This followed the 2,854,396 foreclosure filings throughout all of 2008.

For homeowners facing foreclosure, options do exist that can prevent the trauma of losing their home or facing long-term financial loss. YOU Magazine has addressed these options in previous issues. So, this month we'll focus instead on short sales, an alternative to foreclosure for struggling homeowners who do not want to stay in their homes but would also like to avoid the years of potential financial damage that a foreclosure could cause on their credit rating. If you or someone you know are looking for a "short" way out of a mortgage, keep reading and find out if a short sale is a feasible option.

Don't Be Short-Sighted
Before we dive into what a short sale is and how it can benefit some struggling homeowners, it's important to understand that you're not alone, and that just because you're struggling now doesn't mean you won't be able to recover in the near future. In today's tough economy, millions of Americans are facing challenging situations seriously affecting their finances right now that they can, and will, eventually overcome, including lay-offs, divorce, the death of a spouse, or even major losses in the stock market or their retirement investments.

That's why, before choosing to attempt a short sale, it's important to ask yourself if staying in your home is an option you'd like to explore, because there are opportunities, including a loan modification that may be a better path for some struggling homeowners to pursue. A loan modification would allow the homeowner, in many instances, to renegotiate the terms of their existing mortgage(s) to a more affordable monthly payment(s). This can be accomplished in a number of ways that bring about both temporary and permanent solutions but ultimately allow the homeowner to keep their home.

If you think that a change in your mortgage terms, like a lower rate or lower monthly payments, might help you make it through this rough patch, it's important to communicate with your lender, even if you're several months behind in your payments. Many lenders have reported that in over 50% of the cases where a homeowner is delinquent on his or her mortgage, they have been unable to reach the owner to discuss any options. Picking up the phone and placing a call is always in your best interest. More importantly, opening lines of communication with family members, in many cases, could help lighten the emotional burden that often comes along with these challenges.

When Staying is Not a Viable Option
If, however, you think a loan modification would not be appropriate for your individual needs, one solution to avoiding foreclosure could be a short sale. A short sale is an agreement from the lender(s) to allow the homeowner to sell the property for less than what is owed on the mortgage(s). An example would be an agreement to allow a sale of the home to take place for $175,000 when $300,000 is actually owed on the property.

For a lender to consider a short sale, there are a number of factors that the lender will take into consideration before an approval can be secured, including:

Current hardship, which can include a change of income due to job loss, loss of hours or salary reduction, illness, death of a wage earner, or a change in marital status.
The property is "upside down," which means the house is worth less in today's market than what is owed.
It's important to note that, unlike a loan modification, a homeowner does not have to be delinquent to be considered for a short sale. However, a hardship should be demonstrated showing that the homeowner would not be able to remain current on the mortgage in the future due to mounting financial obligations.

Why would a lender agree to sell your home at a loss? Well, in many cases, the foreclosure process results in a loss of up to 40% or more of the original mortgage balance for the lender. When borrowers and lenders work together on a short sale or loan modification, however, these losses can be reduced by roughly half, in many cases. For example, a foreclosure on a $300,000 home could cost the lender up to $120,000 or more in losses, where they might only lose $60,000 by working with the borrower. Add to that the record losses incurred on other foreclosures, and it's clear why lenders, in many cases, prefer to negotiate a solution.

Credit Benefit
Working with a lender to negotiate a short sale instead of a foreclosure can also be more beneficial to your credit as well, especially if you want to secure another mortgage in the near future when your finances are back on track. According to Fannie Mae, one of the largest mortgage insurers in the country, a foreclosure on your credit record will likely mean it will be between 3 and 5 years before you're able to secure a new mortgage. The typical timeframe to buy a new home with a short sale on your record, however, is only two years.

A short sale also has a lesser impact to your FICO score compared to a foreclosure, which is very important for obtaining future credit from everything including automobiles and consumer credit to getting reconnected with local utilities and cell phones services. Your credit score can even affect certain employment opportunities as well.

Start the Process
The first step of a short sale is to contact your lender and seek their assistance.

The second step is to enlist the help of an experienced real estate agent. An agent who is skilled at handling the negotiation process will not only minimize negotiation time, he or she will also help in limiting the time and costs of marketing the property.

Tony Sena, a real estate agent with North American Realty in Las Vegas, Nevada agrees. Sena, who is currently closing 10-15 short sale transactions a month says, "The single greatest reason for a distressed property not selling is selecting the wrong agent."

When selecting an agent, don't be afraid to ask questions about their experience. Sena says to look at the current inventory of listings the agent represents and ask:

How many of the properties are currently short sale properties?
Does the agent have testimonial letters from short sale sellers?
If an agent says they have sold a number of short sale properties, how many of the transactions were listings sold, not just where they had the buyer.
The third step is to price the house properly, according to the market. While many buyers would love to "steal" your property for the lowest price possible, remember that the lender is already going to incur a loss and they are not interested in losing more than they have to. Sena suggests initially pricing the property at the current value and then reducing the asking price every two weeks until it attracts buyers. Then, once you have an offer, the negotiations on the final price can begin with the lender.

The last step is to be prepared for challenges in both the short sale process and in the market place. Remember, you have a lot of competition out there and getting a property sold can be tough, especially in a buyer's market. However, choosing the right agent and setting the right price can assist you in not only selling it more quickly but also in minimizing the friction of having to deal with the lender directly.

Be aware that, in some cases, not all, a lender will agree to a certain price, but only if the seller agrees to accept a promissory note for some amount of the deficiency – that means money that you will be responsible for paying back. In some cases, Sena has seen lenders ask that sellers pay up to $20,000. However, while early last year the interest rate for these notes was in the range of 4% to 8%, lately Sena has seen that lenders have also been extending offers with 0% and terms of repayment up to ten years.

Get Moving
Once you recognize that you are having problems keeping up with your mortgage payment, take action quickly. Decide whether you want to stay in the home or not. Then contact your lender to find out the best solution to your needs. If you'd like to learn more about short sales or other foreclosure alternatives, a great place to start is by contacting the professional who provided you with this copy of YOU Magazine.

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