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The First Time Homebuyer Tax Credit

May 11th, 2009 1:14 PM

The First Time Homebuyer Tax Credit...

In 2008, Congress enacted a $7500 tax credit designed to be an incentive for first-time homebuyers to purchase a home. For 2009, Congress has increased the credit to $8000 and made several additional improvements. This revised $8000 tax credit applies to purchases on or after January 1, 2009 and before December 1, 2009.

Tax Credits -- The Basics

1. What’s this new homebuyer tax incentive for 2009?

The 2008 $7500 repayable credit is increased to $8000 and the repayment feature is eliminated for 2009 purchasers. Any home that is purchased for $80,000 or more qualifies for the full $8000 amount. If the house costs less than $80,000, the credit will be 10% of the cost.

2. Who is eligible?

Only first-time homebuyers are eligible. A person is considered a first-time buyer if he/she has not had any ownership interest in a home in the three years previous to the day of the 2009 purchase.

3. How does a tax credit work?

Every dollar of a tax credit reduces income taxes by a dollar. Credits are claimed on an individual’s income tax return. Thus, a qualified purchaser would figure out all the income items and exemptions and make all the calculations required to figure out his/her total tax due. Then, once the total tax owed has been computed, tax credits are applied to reduce the total tax bill. So, if before taking any credits on a tax return, a person has a total tax liability of $9500, an $8000 credit would wipe out all but $1500 of the tax due.

4. So what happens if the purchaser is eligible for an $8000 credit but his/her income tax liability is only $6000?

This tax credit is what is called a “refundable” credit. Thus, if the eligible purchaser’s total tax liability was $6000, the IRS would send the purchaser a check for $2000. The refundable amount is the difference between the $8000 credit amount and the amount of tax liability.

5. Is there an income restriction?

Yes. Individuals filing Form 1040 as Single (or Head of Household) are eligible for the credit if their income is no more than $75,000. Married couples who file a Joint return may have income of no more than $150,000.

6. Do individuals with incomes higher than these limits lose all the benefit?

The credit phases-out between $75,000 - $95,000 for singles and $150,000 - $170,000 for married filing joint. The closer a buyer comes to the maximum phase-out amount, the smaller the credit will be. The law provides a formula to gradually withdraw the credit.

7. What’s the definition of “principal residence?”

Generally, a principal residence is the home where an individual spends most of his/her time (generally defined as more than 50%). It is also defined as “owner-occupied” housing. The term includes single-family detached housing, condos or co-ops, townhouses or any similar type of new or existing dwelling.

8. Are there restrictions related to the financing on the property?

Congress eliminated the financing restriction that

applied in 2008 that disallowed the credit if the financing was obtained by means of tax exempt mortgage revenue bonds.

9. Do I have to repay the tax credit?

There is no repayment for 2009 tax credits. However, if the home is sold within three years, the credit must be recaptured upon sale.

10. Do 2008 purchasers still have to repay their tax credit?

The $7500 credit in 2008 was more like an interest-free loan. All eligible purchasers who claimed the 2008 credit will still be required to repay it over 15 years, starting with their 2010 tax return.

11. Can I use the credit amount as part of my downpayment?

Congress tried hard to devise a mechanism that would make the funds available for closing costs but found that pre-funding would require cumbersome processes that would, in effect, bring the IRS into the purchase and settlement phase of the transaction.

12. Is there a way to get any cash flow benefits before I file my tax return?

Any first-time homebuyers who believe they are eligible for all or part of the credit can modify their income tax withholding or adjust their quarterly estimated tax payments. Individuals subject to withholding would get an IRS Form W-4 from their employer...q

Source: National Association of Realtors^®^. To obtain the entire document, please contact us (info below)

Christopher

Britton

(513) 703-7500

cbritton@unmco.com

Posted by Christopher Britton on May 11th, 2009 1:14 PMPost a Comment (0)

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FHA Advantages

May 22nd, 2009 9:27 AM

Fannie Mae has conducted national surveys regarding the obstacles potential home owners have to overcome when trying to purchase their first home. The findings showed that there are many obstacles to home ownership ranging from credit to income, yet, there is no obstacle more important than finding the cash necessary to close.

The cash necessary to close is comprised of these components—

Downpayment

Closing costs

Reserves required after closing

The current fiscal crisis has made it much tougher from a cash perspective. A few years ago, just about anyone could find a loan program that would enable one to purchase with no money down. Programs were available for those with poor credit and whose incomes could not be verified. Now, there are very few no downpayment programs available and most of the programs remaining service very specific segments of the population such as veterans and rural housing.

Most programs require at least a five percent downpayment and together with closing costs and required reserves, might result in the need for $15,000 or more on a $200,000 home purchase. Coming up with that much cash is a hardship for many Americans, especially with the economy contracting.

We are here to tell you that a long-standing governmental program is proving to be the answer for many Americans in 2009. The Department of Housing and Urban Development (HUD) houses an agency called the Federal Housing Administration which insures mortgages made by lenders. Why is FHA so important? Let’s just look at the cash requirements…

Lower downpayment. The required downpayment on an FHA loan is 3.5%, instead of 5.0%. That is a savings of $1,500 on a $200,000 purchase price.

Alternatives to coming up with the downpayment. FHA not only requires a smaller downpayment than most, they also are more liberal as to “where” the potential purchaser can come up with the cash—

Gifts. One hundred percent of the required cash can come from a gift from a relative or someone with a “family-type” relationship. Most other programs allow gifts, but may require that the purchaser have a certain percentage of his/her own money in the deal. FHA allows 100% of the money required to come from a gift.

Grants from Governmental Agencies. FHA did tighten its requirements which had previously allowed the downpayment to come from non-profits that collected the money from the seller. However, grants and loans for the down payment (and closing costs) are still allowed from government agencies. States and some localities have agencies that are authorized to raise money by selling non-taxable bonds under the Federal Bond Subsidy Act. This money can be used to provide below interest loans to finance real estate outright or grants for cash to close.

Closing costs. The most popular alternatives for funding closing costs include—

Seller Contributions. Especially in a buyers market such as we are experiencing presently, many sellers are willing to pay closing costs to entice a purchaser to buy their home. FHA again is more liberal than most programs in this regard. FHA allows the seller to pay up to 6.0% of the sales price towards closing costs. Many other programs cap this contribution at 3.0%. This means that the seller can typically cover all closing costs and might even provide a subsidy for a lower interest rate.

Lender rebates. Using a slightly higher interest rate, the lender can also sometimes use a “rebate” or “yield spread” to pay closing costs. This rebate is made possible because the higher rate brings a better price when the loan is sold on the secondary markets. FHA allows the lender to pay all closing costs in this way.

Reserves. Many loan programs require that the purchaser have up to two months payments in reserve after closing. FHA does not have such a requirement. However, that does not mean that having money left is not a good idea. It is always a good idea to have cash available as a “cushion” after closing.

How much cash can you save purchasing using the FHA program? On a $200,000 sales price, the requirement of $15,000 or more could be reduced to $7,000 or even less. That is a significant savings and coupled with available tax incentives could reduce your net cost to zero!...

Posted by Christopher Britton on May 22nd, 2009 9:27 AMPost a Comment (0)

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