Mortgage Updates

Questions, questions, questions... These are questions often asked of me and the answers I found on the IRS web site...

Q. Does previously inheriting a home and living in it automatically disqualify me as a first-time homebuyer if I buy a different home on or before Nov. 6, 2009?

A. Yes, an ownership interest in a prior principal residence would bar you from being considered a first-time homebuyer. As long as you owned and used the prior home as your principal residence, you are not a first-time homebuyer. There is no exception for taxpayers who did not buy their prior residences. (11/19/09) 

Q. If I claim the first-time homebuyer credit in 2009 and stop using the property as my main home before the 36 month period expires after I purchase, how is the credit repaid and how long would I have to repay it?

A. If, within 36 months of the date of purchase, the property is no longer used as your principal residence, you are required to repay the credit. Repayment of the full amount of the credit is due at the time the income tax return for the year the home ceased to be your principal residence is due. The full amount of the credit is reflected as additional tax on that year's tax return. Form 5405 and its instructions will be revised for tax year 2009 to include information about repayment of the credit. (05/06/09)

Q. If a person does not actually make the payments on a home that’s their principal residence, but the deed and mortgage documents are in their name, can they be considered a first-time homebuyer?  

A. Yes. If a taxpayer purchases a home to be used as a principal residence from an unrelated person and has not owned a home within the previous 36 months, the taxpayer is eligible for the first-time homebuyer credit regardless of who makes the mortgage payment. (05/06/09

Without the proper documentation your IRS 1st Time Buyer tax credit will be delayed.  Below are tips on what you need to gather before you make your claim.   It is important that you provide the appropriate for your transaction:

Settlement Statement: Your closing agent will send you a certified copy of your final settlement statement a from called HUD-1.

1. Properly Executed Settle Statement: Generally, a properly executed settlement statement shows all parties' names and signatures, property address, sales price and date of purchase. However, settlement documents, including the Form HUD-1, can vary from one location to another and may not include the signatures of both the buyer and seller. In areas where signatures are not required on the settlement document, the IRS encourages buyers to sign the settlement statement when they file their tax return -- even in cases where the settlement form does not include a signature line.
2. Mobile Homes: Purchasers of mobile homes who are unable to get a settlement statement must attach a copy of the executed retail sales contract showing all parties' names and signatures, property address, purchase price and date of purchase.
3. New Construction: For a newly constructed home, where a settlement statement is not available, attach a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.
4. Long-Time Residents: If you are a longtime resident claiming the credit, the IRS recommends that you also attach documentation covering the five-consecutive-year period such as Form 1098, Mortgage Interest Statement or substitute mortgage interest statements, property tax records or homeowner’s insurance records.

For more information about the First-Time Homebuyer Tax Credit and the documentation requirements, visit IRS.gov/recovery.

Links:

• Special Information Regarding Signature Requirements
• Information About the First-Time Homebuyer Credit

As a lender I am continually asked so many questions about the 1st Time Home buyer tax credit and the Home buyer tax credit.  Since I am not a tax advisor it is just best to go directly to the source....

Q. I am a long-time resident (have owned and used my current home as a principal residence for five consecutive years out of the eight-year period ending on the date of purchase of the new residence) but my spouse has lived there for only three years. Can we qualify for the long-time resident homebuyer credit if we purchase a new principal residence?

A. No. Both spouses must have owned and used the same previous principal residence for five consecutive years out of the 8-year period ending on the date of purchase of the new principal residence to qualify for the credit. (12/14/09)

Q.  I am a long-time resident and current homeowner and my spouse is a first-time homebuyer (has had no ownership interest in a principal residence during the three-year period ending on the date of purchase of a new principal residence) and we purchased a new principal residence. Can we qualify for either the first-time homebuyer credit or the long-time resident homebuyer credit if we purchase a new principal residence?

A. No. Both you and your spouse must be first-time homebuyers in order to qualify for the first-time homebuyer tax credit. Since you had an ownership interest in a principal residence during the three-year period ending on the date of purchase, neither you nor your spouse qualifies for the credit. Similarly, both you and your spouse must be long-time homeowners of the same previous principal residence in order to qualify for the long-time resident homebuyer credit. Since your spouse is not a long-time homeowner of your current principal residence, neither of you qualify for the credit. (12/14/09)

Q. I am a long-time homeowner of a principal residence and my spouse is a long-time homeowner of a different principal residence. Can we qualify for the long-time resident homebuyer credit if we purchase a new principal residence?

A. No. Both spouses must have owned and used the same previous principal residence for five consecutive years out of the eight-year period ending on the date of purchase of the new principal residence to be eligible for the credit. Since you and your spouse owned and used different principal residences, neither of you qualify. (12/14/09)

Q. How does the allocation provision work when unmarried taxpayers purchase a home together and both qualify for the first-time homebuyer credit under different tests? 

A. Co-purchasers who are not married may allocate the credit using a reasonable method. A reasonable method is any method that does not allocate any portion of the credit to a taxpayer who is not eligible for that portion of the credit. The maximum credit for a taxpayer who qualifies under the long-time resident test is $6,500, and the maximum credit for a taxpayer who qualifies under the first-time homebuyer test is $8,000. One example of a reasonable method is to allocate $6,500 to the long-time resident homebuyer and $1,500 to the first-time homebuyer. (12/14/09)

Hopefully this will help you to better understand this Federal Tax credit.

To access the IRS website for other detailed answers click here

This month's bizarre holiday; National Puzzle Day!

Puzzles are a favorite pastime for millions of people, young and old; National Puzzle Day honors puzzles of all size, shape and form. Whether you're into crosswords, jigsaws, or even a simple word search — doing puzzles is fun! For some, they enjoy the challenge, for others it's a way to kill time — either way, puzzles keep your mind sharp.

What do puzzles have in common with Real Estate Lending? - Everything! 

When a lender receives a loan application - it is like putting together a puzzle.  The final loan package submitted to underwriting is comprised of lots of picture pieces... income, credit, liabilities, assets, property. 

1.  Let's look at income:  Income comes in many shapes and sizes.  Salary, salary with overtime; hourly, hourly with time and a half, hourly with shift differential.  Income with bonus pay; salary base with commissions; all commission.  Self employed, sole proprietors, self employed - by their S-corp, partnership or corporation. - Sometimes income is a combination of several of the aforementioned!  Each income type will have variances on the type of supporting documentation required for the final underwriting phase.
2. Credit:  The credit profile begins with the credit scores for each borrower.  If the customers are married, then the type of loan will dictate how scores are handled (as well as liabilities).  Is there a BK, if so how long has it been? Foreclosure or short sale?  Late payments, judgements, collections (out dated but on the record).
3. Liabilities;  Are there co-signed loans? Who pays, is there tracking documentation for the last 12 months to document? How many mortgages, rental income to offset payments, student loans (deferred) imputed payments due.. - Ah, to ratio's.
4. Assets;  Where are the funds for down payment and closing costs coming from?  All monies to be invested need to be documented (tracked).  Were there any large deposits in the bank?  If so, where did they come from? Repayment of a personal loan? - Is there documentation of the loan having been made...?  Will the funds be coming from a gift? - There is specific criteria on how to handle gift funds.  Is there down payment assistance from a non profit or public source?
5. The property;  Does the appraisal support the sales price?  Is the property sound? - Are there any health or safety hazards involved, is the house standing only due to the termites holding hands?  Are there permits for the room addition or remodel?

So you see, when a loan application is made... there are many things that go into putting the picture together for final loan approval.  That is also why it is helpful to work with a knowledgable loan consultant... and it is no less important is that the customer is open and forthcoming when reviewing the written application with the lender.  Withholding information from your lender to keep from complicating your transaction will only insure complication... typically at the last minute resulting in a stressful closing or an escrow "fall out". 

Happy puzzle day -January 29th!

The days of adding unlimited "upgrades" to your new home purchase seem to have run amuck with real estate appraisers using the deflated values of the foreclosure market when measuring the value of your dream home.  Never mind that the foreclosure was a "beater" and needed to be rebuilt... painted, new appliances and flooring.  The minimal difference ascribed for condition by some appraisers can really hurt your lender's ability to provide maximum financing.

Even in a good market not all possible upgrade options will reflect in a higher appraised value for your home.  If most homes sell with tile counters, you won't get a higher value by matching the "upgrade"  Do you realize that opening a wall to create a nice master-suite can actually lower your value, because your bedroom count is now reduced. So how will a lower appraisal affect your purchase? 

Lenders base loan- to -value  (LTV) on the lower of the two numbers.  If the sales price is lower than the appraisal then "no problem" all things stay the same.  However, if your value comes in lower then your new LTV is based off the appraisal and NOT the sales price.  If you are planning on a 3.5% minimum down payment - your down payment will now increase by the amount of the short fall, if you continue with the purchase transaction.

Over the last year I have seen this happen several times.  When it did occur, the buyers had already been prepared that this was a possibility and when making their selections were prepared to come in with the additional funds -if that possibility played out.  They really wanted what they wanted and were prepared to pay the additional "cash" for the items.

It pays to work with a lender that does new home lending on a regular basis and works with appraisers that are knowledgeable in the new home market as well as the resale market.  Admittedly, it is difficult when all "outside" comparables are distress or foreclosure sales but knowledgeable professionals can minimize the damage.

"The National Association of Realtors says nearly one in four of its members has reported clients losing a sale due to botched appraisals. The National Association of Home Builders, meanwhile, said low appraisals were sinking a quarter of all new home sales and argues it's not fair to compare distressed properties to brand-new homes." Excerpt from http://abcnews.go.com/Business/wireStory?id=9468512  

On November 6th Congress passed legislation renewing the government's $8,000 tax credit for first-time home buyers!  The bill states that the first-time home buyer must sign their contract by April 30,2010 and close on by June 30, 2010.

Even better, the bill will extend tax credits up to $6,500 for qualified repeat homebuyers! This is a huge opportunity.  It allows up to a $6,500 credit/refund if they purchase a new principle residence after November 6,2009 and on or before April 30,2010 (or closed by June 30, 2010 with a binding sales contraact signed by April 30,2010.

For detailed information about the IRS requirements click here.

December is the time to start looking for ways to avoid the last-minute rush for doing your taxes. Here are some stress-relieving tips to help you.

1. Don’t Procrastinate – Resist the temptation to put off your taxes until the very last minute. Your haste to meet the filing deadline may cause you to overlook potential sources of tax savings and will likely increase your risk of making an error.  Things to consider: 

* Organize your deductions and supporting receipts now.  You still have a month to plan what expenses to take now or postpone.  * If you bought a home, check to see if you qualify for the IRS tax credit, pull your final closing statement to be sure not to overlook the tax deductable closing fees.. *  Don't forget interest AND property taxes as well as points are tax deductible. * Check with your accountant about benefits of additional deposits to your IRA or 401K. 

2. Visit the IRS Online – In 2008, there were more than 330 million visits to IRS.gov. Anyone with Internet access can find tax law information and answers to frequently asked tax questions.  click here

3. File Your Return Electronically – Nearly 90 million taxpayers filed their returns electronically in 2008. Aside from ease of filing, IRS e-file is the fastest and most accurate way to file a tax return. If you’re due a refund, the waiting time for e-filers is half that of paper filers.

4. Don’t Panic if You Can’t Pay – If you cannot pay the full amount of taxes you owe by the April deadline, you should still file your return by the deadline and pay as much as you can to avoid penalties and interest. You also should contact the IRS to discuss your payment options at 1-800-829-1040. The agency may be able to provide some relief such as a short-term extension to pay, an installment agreement or an offer in compromise. More than 75 percent of taxpayers eligible for an Installment Agreement can apply using the Web-based Online Payment Agreement application available on IRS.gov. To find out more about this simple and convenient process type “Online Payment Agreement” in the search box on the IRS.gov homepage.

5. Request an Extension of Time to File – But Pay on Time. If the clock runs out, you can get an automatic six month extension of time to file to October 15. However, this extension of time to file does not give you more time to pay any taxes due. You will owe interest on any amount not paid by the April deadline, plus a late payment penalty if you have not paid at least 90 percent of your total tax by that date.

See IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return for a variety of easy ways to apply for an extension. Form 4868 is available at IRS.gov or by calling 800-TAX-FORM (800-829-3676). Taxpayers needing Form 4868 should act early to be sure they have the item in time to meet the April deadline.

For questions be sure to contact your accountant, CPA or tax advisor who are your best source for specific tax guidance and  information.

Until Real Estate markets and the housing  industry return our economy will continue to flounder.  Housing brings construction jobs, home improvements and the eventual purchase of landscaping - gardening supplies and new or almost new furniture.  This in turn creates jobs, production and retail sales.  Perhaps this cash for appliances program, which really comes out of global warming beliefs, will further help families afford their homes. 

The coming "carbon foot prints" legislation will have a dramatic effect on the cost of utilities, heating air conditioning and general household use of electricity.  The wise person will take advantage of these credits to provide for future savings.  In California we have a State run program called CHEERS (California Home Energy Efficiency Rating Service) which oversees energy raters.  It is the responsibility of these raters to evaluate a home's energy efficiency, provide a plan to increase the that efficiency through a cost benefit  analysis.  This is something any home owner can order.  The fee for this service is similar to an appraisal fee.

For a home buyer, the energy rating can be used to increase the energy savings by adding the cost (provided by the analysis) to the loan amount.  This is only in the case of government loans.  The lender qualifies the borrower for the purchase, then ads the energy improvement costs to the loan. (No additional qualifying.)  This can make a significant difference in utility costs for buyers of older homes since the EEM (Energy Efficient Mortgage) also covers replacing single pane windows, adding insulation in addition to the afore mentioned items like updated heating and air systems.  In newer homes with raised foundations, often the "blower/pressure test" shows that the ducting has loosened and is leaking - a less costly fix but a money savor.  With the work being completed after the close of escrow there has been little resistance to the program from Realtors or sellers.

The additional "cash for appliance" program just ads another incentive to make energy efficiency part of the home buying process. With the rebates available, even existing homeowners may want to take a closer look at increasing the energy efficiency of their homes since the EEM is also available for government loan refinance transactions.

Thousands of new-home sales resulted last spring and summer due to the CA $10,000 new home tax credit originally promoted by the California building industry. 

A 35-1 vote in the Senate reauthorizes the credits, estimated at $30 million, that were not awarded in the first go round of the program.  This paves the way for approximately 4,300 home buyers to receive a $3,333 California State tax credit over the next three years.  The Senate Bill now heads to the Assembly, which has already shown that it is in favor of supporting the struggling housing industry by allocating tax credits to buyers. 

An earlier version of the bill was approved by wide margins in this Assembly.  The final step, of course, is governor Schwarzenegger's approval.  But, there seems little doubt that this won't happen.  The governor has already stated that this will stimulate the CA economy.