HOMEOWNERS’
$8000 TAX CREDIT EXTENDED
The Worker, Homeownership, and
Business Assistance Act of 2009 has extended the $8000 first time
homebuyer tax credit. Here are the details:
-
First time homebuyers are eligible. A first time
homebuyer is described as one
who has not owned a home in the past three years.
-
The amount of the credit is calculated at 10% of the
purchase price, not to exceed $8000 total.
-
The credit is available for principal residences only
not exceeding a purchase price of $800,000.
-
New income rules apply for contracts signed after
11/6/09. The new income limits include individuals with an annual income above
$125,000 and joint filers with incomes above $225,000. (The old income limits
were $75,000 and $150,000 respectively).
-
The credit is “phased out” for individuals
who exceed the initial income limits up to an additional $20,000 a year income
($145,000 and $245,000 respectively).
-
A Purchase Agreement must be signed no later than April
30, 2010 and the Close of Escrow must occur by June 30, 2010.
NEW $6500 “MOVE-UP” TAX CREDIT AVAILABLE
Under the same Worker,
Homeownership, and Business Assistance Act of 2009 qualified move-up/repeat
buyers (existing home owners) may acquire a $6500 tax credit. Here are the
basic details:
-
A qualified borrower
is defined
as a home owner who has owned and resided in
a home for at least five consecutive years of the eight years prior to the
purchase date.
-
Repeat home buyers
do not have to purchase a home that is more expensive than their previous home
to qualify for the tax credit.
-
The amount of the credit is calculated at 10% of the
purchase price, not to exceed $6500 total.
-
The credit is available for principal residences only
not exceeding a purchase price of $650,000.
-
A Purchase Agreement must be signed after November 6,
2009 and no later than April 30, 2010. The Close of Escrow must occur by June
30, 2010.
-
The income limits include individuals with an
annual income above $125,000 and joint filers with incomes above $225,000.
-
The credit is “phased out” for individuals
who exceed the initial income limits up to an additional $20,000 a year income
($145,000 and $245,000 respectively).
HUD ALLOWS MONETIZATION OF THE CREDIT
Don’t get excited: HUD again allows the “monetization” of both tax credit options for use in
an FHA loan. This means that the funds may be acquired immediately and used for
assistance in paying closing costs. Under
HUD’s guidelines, non-profits and FHA-approved lenders are allowed to
give home buyers short-term loans of up to $8,000 or $6500. The guidelines also
allow government agencies, such as state housing finance agencies, to
facilitate home sales by providing longer term loans secured by second
mortgages.
Problem 1: As of this writing, no agency in California is prepared
to make such loans. The only FHA approved lenders that would have the capacity
to make such loans would be the large bank entities. Whether they
will do so is as yet undetermined.
Problem 2: The loaned funds can be used only for
closing costs (an FHA buyer must demonstrate the 3.5% down payment as his/her
own funds). What is the likelihood of all closing costs suddenly being inflated
to the $8000 level? Who will that benefit? The big bank
lenders.
This explanation of HUD’s monetization
option was duplicated from HUD’s Website
Government
agencies and instrumentalities of government can advance the anticipated tax
credit and secure the repayment by a second lien on the home that is being
purchased as long as the advance and the FHA-insured first mortgage do not
result in cash back to the borrower. The second lien may not exceed the sum of
the down payment, closing costs, and prepaid expenses such as escrows for
taxes, insurance, and community association assessments.
Payments to
repay the advance do not have to be counted in the homebuyer’s qualifying
ratios as long as the payment is deferred at least 36 months from
closing. Otherwise, these payments would be included in the ratios.
Tax Credit
Purchases
As an
alternative, FHA will allow FHA-approved mortgagees,
FHA-approved nonprofits, government agencies and instrumentalities of
government to buy the anticipated tax credit as long as the fees for doing so
are limited to no more than 2.5 percent of the anticipated credit, which would
cap these fees to no more than $200.00 for an $8,000.00 tax credit.
The FHA’s
required 3.5 percent minimum down payment must come from the homebuyer’s
own funds and cannot include the proceeds of the sale of the anticipated tax
credit or any other funds provided by the mortgagee,
seller or any other party of interest to the transaction.
An advance against the tax credit could be used to pay closing
costs and other expenses as long as the funds aren’t used to meet the 3.5
percent down payment. Closing costs and payments for prepaid expenses, such
escrows, can be significant, which means that monetization
will be a valuable tool for first-time homebuyers.
“MAKING HOME AFFORDABLE” GUIDELINES
The Making Home Affordable portion of the stimulus bill has
been defined and the following is a summary of the guidelines. There are
several aspects to the program including a refinance
option and a modification option.
(the comments in
parenthesis and italicized are the author’s) .
Home Affordable Refinance
Purpose &
Expectation: This
program is available to homeowners who have a solid payment history on an
existing Fannie Mae or Freddie Mac loan. (A borrower is allowed only one 30 day
late within the last 12 months) The anticipation is that borrowers who have
been prohibited from refinancing because their current loan-to-value ratio
exceeds 80% will now be eligible to refinance at today’s lower rates.
(There are conditions, especially regarding PMI. See below for details.)
The expectation is that because the lenders and servicer already have the borrower’s information on
file, less documentation will be required in the new refinance transaction.
This reduction in documentation is expected to make a
refinance quicker and less costly for lenders and borrowers. There is confusion
around whether an appraisal will be required or whether, under some
circumstances, it could be waived.
The only mention is “the current value of your property will be
determined after you apply to refinance”. (the act calls for approved local lenders
being able to process eligible refinances after April 4th. There are
no guidelines regarding how to proceed locally)
The plan relies upon the voluntary cooperation of the
lenders and remains vague regarding the latitude granted to individual lenders
in determining the credit worthiness of the borrower and other aspects of each
refinance request.
General Guidelines for eligibility: The act reads “you may be eligible if (the operable word being “may”):
·
You are the owner occupant of a one to four unit
home (one unit of a multiple unit building must be owner occupied)
·
Your loan is owned or securitized
by Fannie Mae or Freddie Mac (see contact list)
·
You are current on your mortgage payments (no
more than one 30 day late in the past 12 months or if the loan is less than 12
months old, you have never missed a payment.
·
You believe
that the amount owed on the first
mortgage is about the same or slightly less than the current value of
your home. (the
process of valuation and/or appraisal is postponed until the other eligibility
standards are met. One can go through the process only to find the home value
is insufficient?)
·
You have sufficient income to qualify
·
The refinance improves the long term
affordability and stability of your loan. (The
borrower will determine if the new loan terms as provided by the lender
represents an improvement over their present loan situation)
Program Limitations
and other information:
·
The current first
mortgage can not exceed 105% of the current market value of the home. (What is the mechanism for determining
current value?)
·
If there is secondary financing, the secondary
lender must agree to remain in second position. Qualification, however, is
determined only by the borrower’s ability to meet the new first loan
payment terms. (What is the likelihood of
secondary lenders doing this? What is in it for them?)
·
The mortgage insurance requirement varies
depending upon the current PMI status. If there is no current mortgage
insurance requirement there will be no PMI required for the new loan even up to
the 105 maximum LTV. If mortgage insurance currently exists with the loan, the
mortgage insurer will have to agree to insure the new loan with the same
coverage. (Are the PMI companies prepared
to take on this added risk, perhaps up to the 105% LTV level?)
·
A borrower is ineligible for refinancing if they
are currently delinquent or has been more than 30 days overdue in the past 12
months. (The borrower might be eligible
for the loan modification aspect of the act?)
·
The new loan rate will be based on market rtes
at the time of the refinance. While rates, points and fees may vary with the market,
prepayment penalties and balloon payments are prohibited.
·
New loans are “no cash out”
transactions although Fannie Mae refinance costs can be included in the new
loan amount and, if there is sufficient equity, a borrower might obtain a
limited amount of cash up to 2% of the loan amount but not to exceed $2000.
Freddie Mac securitized loans may only include the
refinance costs, not to exceed $2,500. (If
transactions costs, especially with the Freddie Mac loans, is limited to
$2,500, it is unlikely any local lenders are going to be doing these refinance
transactions)
·
There is no principal reduction aspect to this
refinance portion of the bill
Required
Documentation:
·
Documentation of monthly gross income via pay
stubs, award letters, income tax returns, etc.
·
Information on all current mortgages, including
secondary financing.
·
Account balances and minimum monthly payment
obligations on all other debts, including credit cards, auto payments, student
loans, etc.
·
Note: one
is not required to provide a hardship letter with the refinance portion of the
bill.
The lender volunteer
nature of this program accompanied by a lack of consistent guidelines, adopted
by all lenders, is a concern for consumers. It may be reasonable to assume that
many borrowers will be deemed ineligible and thus we can expect that short sale
transactions will likely continue.
Home Affordable Modification
This portion of the program has received the most attention and
seems to have the more developed guidelines. It is designed to reach “at
risk” borrowers and modify loans into more affordable payment schedules.
Mortgage servicers will be encouraged to modify loans via financial incentives provided by the
Treasury Department. The program is scheduled to expire on December 31, 2012
General Guidelines:
·
The loan must be currently securitized
by Fannie Mae or Freddie Mac. Other loans, including FHA or VA are not eligible
for modification consideration under this program.
·
Only first liens on owner occupied properties
are eligible for modification . . .
see below for comments regarding second loans.
·
Full documentation of income and assets required
accompanied by a affidavit of financial hardship is required
·
Borrowers who have not missed payments but who
are deemed at imminent risk of default are to be targeted. A borrower need not
be behind in payments to be eligible to seek assistance.
·
The monthly payments, including PITI and any
PMI, will be reduced to no more than 31% of the borrower’s gross monthly
income. The lender will be reimbursed by the government for the cost of the
reductions in monthly payments from 38% DTI to 31% DTI.
·
The modification sequence requires first the
reduction of interest rate with a floor of 2% and then extending the term to a
maximum of 40 years. Then, if necessary, a principal forbearance (deferring
payment of a portion of the debt until a later time) could be initiated.
·
The amount contained in any forbearance is
likely to be carried as a no interest, balloon payment to be paid only at the
time the property is sold. (This would
affect the owner’s potential equity position at time of sale)
·
While principal reduction/forgiveness could be
initiated, it is unlikely to occur.
·
Impound accounts are required with all modified
loans.
·
Loans can be modified only once (this was in response to the criticism that
previous modifications were insufficient to provide real relief and were for
only a short period of time)
Basic Eligibility
Requirements: the
act reads “you may (the
operable word being “may”)
be eligible if you answer yes to the following:
·
You are an owner-occupant of a one to four unit
property.
·
You have an unpaid principal balance that is
equal to or less than $729,750 for a one unit property. (this higher limit is available only in
designated communities. Locally, the conforming limit is $417,000. )
·
Your loan originated on or before January 1,
2009
·
Your mortgage payment (principal, interest,
taxes, insurance and home owners association dues) represents more than 31% of
your gross monthly income
·
Your mortgage payment is no longer affordable .
. . see the section referring to hardship letters being required.
Note of Warning: Even if a borrower answers yes to the
above questions, the legislation states that “only your servicer will be able to determine if you qualify for
assistance.
Three Month Trial
Modification: If a
borrower is ultimately granted a modification, it will be initially for a three
month trial period. If the modified payments are paid successfully, a permanent
modification agreement will be executed that will lower the interest rate for five years.
If the modified interest rate is below the market rate (how many loans will not be below market
rate if they are to be helpful to struggling borrowers?) it will be fixed
for five years. Beginning year six, the rate may increase a maximum of one
percent per year until it reaches the cap indicated in the modification
agreement. The cap will be the prevailing market interest rate on the date the
modification is finalized. Translated, this means that the rate can never be
higher than the market rate on the day the loan is originally modified. If the
initial modified rate is at or above the prevailing market rate, it will remain
the fixed rate for the life of the loan.
Some critics have already voiced an opinion that this
”structured relief” plan of lower monthly payments is only a temporary fix and are
concerned that borrowers will be unable to afford the interest rate bumps in
the future. (If home values have not
rebounded significantly during that same 5 year period, home owners may have
found that they only postponed a problem rather than having found a solution.)
Net Value
Calculation: One
major concern identified with the process has to do with the requirement that servicers conduct a “net present value”
calculation. Translated, this means that the servicer
will compare the cost of a loan modification with a foreclosure and will
implement whichever option provides the lesser cost or loss to the lender. (The net present value is non-transparent,
meaning that the numbers used to make the calculations are presently available
only to the servicers.)
Secondary Financing
Not Included: While
the program does not address the issue of secondary loans directly, the program
emphasizes that it will modify only loans in first position. It seems
reasonable that secondary lenders would have to agree to subordinate to the new
modified first loan. It also remains unclear what role mortgage insurers will
play in the modification process.
Maximum 105%
Loan-to-Value Cap: The
plan retains its limitation on the amount of value loss that a borrower can
have experienced in order to be eligible for a modification. If one is more
than 5% “underwater” the property is not eligible. Many borrowers
whose loans are more than 5% more than their home’s current value will be
prohibited from participating in the modification program. (A reasonable assumption might be that short sale transactions will
continue to be a remedy for many borrowers)
Who is Considered “at Risk”? The current
interpretation of an “at risk” borrower is one who is current on
payments but can identify a sufficient hardship to warrant modification.
The borrower who is delinquent in payments seems ineligible under the
guidelines. (Unfortunately, many
borrowers were previously instructed that they were ineligible for assistance
until they were delinquent. Now, those same borrowers are told that because
they stopped making payments, in an effort to qualify for help, that they are
no longer eligible. We can only imagine the confusion and outright anger at
this turn of events.)
Financial Incentives for Borrowers: Success incentives are available for borrowers who
make timely payments on their modified loans. The incentive is a reduction of
the loan’s principal balance and will apply for every month an on-time
payment is made and will be applied directly to the loan balance annually. The
total available principal reduction over the five year period could add up to $5000.
Unemployed Borrowers
Not Included: There
appears to be no assistance available for the unemployed borrower. The
guidelines clearly require modifications for those who can
“qualify” under the 31% ratio rule and other set forth provisions noted
above. No provisions have been identified for the borrower who has done
everything right, has paid the mortgage faithfully and now is unemployed and
unable to continue payments. (Many
believe that some form of forbearance assistance should be made available.)
Information &
Documentation Required for Application: The
minimum information required includes:
·
Documentation of monthly gross income via pay
stubs, award letters, income tax returns, etc.
·
Information about assets.
·
Information on all current mortgages, including
secondary financing.
·
Account balances and minimum monthly payment
obligations on all other debts, including credit cards, auto payments, student
loans, etc.
·
A “hardship” letter identifying why
the mortgage is unaffordable. While still mostly undefined, it is generally
agreed that the most likely hardships include loss of a job, reduced income via
being reduced to part-time, medical difficulty, increasing number in the
household, etc.
Other provisions
The legislation is lengthy and has other provisions
included. There are elements to strengthen FHA, Fannie Mae and Freddie Mac in
their ability to intervene with at risk borrowers. There are outlined
provisions for borrowers with high total debt ratios who can seek HUD certified
consumer counseling and a debt reconstruction program along with their loan
modification. Incentives for
lenders and servicers are spelled out in the
legislation along with expectations regarding how PMI companies will assist in
the modification process. While a very ambitious program, we have to wait to
see how it will actually help troubled homeowners.
A good start
In spite of the limitations to the programs noted above, we
can be hopeful that the refinance and modification programs set out above will
help millions of projected borrowers. Keeping home owners in their homes is a
big step towards establishing some stability to the housing segment of the
economy.
HOMEOWNERS SEEKING HELP TO AVOID FORECLOSURE
Please see “Avoiding Foreclosure” in our Tip
Sheet Section. We have provided information regarding the FHA Secure Program,
the Hope for Homeowners Plan along with Short Sale information and Workout
Plans.
TAX
CHANGE . . . OWNING 2 OUT OF 5 YEAR RULE
The
old Rule: The rule
as we have understood it for the last several years has been that a homeowner
was able to exclude capital gain realized on a sale of a home used as a
personal residence for two out of the last five years. The use did not have to
be consecutive nor did the home owner have to be living in the home at the time
of sale. Rental properties could be converted to
primary homes and primary residences to rentals -- if the time of occupancy
requirements were met -- and you could still take a big chunk of any gains
tax-free
In other words, one could live in the home
for two years, rent it for up to three years and still
benefit from the capital gain exclusion rule. The maximum capital gain
exclusion was up to $250,000 for a single individual and $500,000 for a married
couple, filing jointly. The old rule also provided for a partial exclusion if
the full ownership use test was not met. In other words, if one lived in the
home only one year, a partial capital gain exclusion from income was available.
Reduced Home Sale Exclusion: A new provision changes the general rule by excluding
all periods of “non-qualifying use” during the five-year period
before a principal residence is sold. This provision applies to residences sold
after December 31, 2008.
A common
strategy in today’s market where home values have declined and a home
owner wants to or must move, was waiting to sell until home values improved.
Holding on to the home and renting it out until the market improves now
requires careful consideration. Now, the time the property is not your
principal residence is considered 'non-qualified use.' You are only permitted
to exclude gain for qualified use -- the time the property is your principal
residence." Homeowners who rent their homes could now be looking at
receiving less (a pro-ration) of the previous exclusion -- if they are lucky
enough to make a profit when they sell.
Certain use is not treated as nonqualified
use, including leaving the home vacant and temporary absences due to a change
in employment, health or unforeseen circumstances (good luck in getting the IRS to clarify what is meant by unforeseen
circumstances).
This
will have a major impact upon home owners who cannot sell their home without a
short sale or significant loss in equity. A possible result could be more
homeowners going into foreclosure rather than chancing that the market will
improve sufficiently to allow the recapture of some equity. Lenders have
already acted to close a potential strategy for homeowners in this no-win
situation. A homeowner recognizing that their present home is “under
water” (the mortgage owed exceeds the current value of the home) could
choose to purchase another home, indicating that they intend to rent their
current home. Lenders now require that buyers in this situation qualify for the
new mortgage as well as the one retained on the old residence without an prospective rent offset of the expense. The rationale . .
. lenders know that after the completion of the new purchase, chances are high
that the borrower will simply “walk away” form the burden of the
previous home.
The following example illustrates the
Act’s new provision: Mr. and Mrs. Homeowner buy a home on January 1, 2009
and rent it for two years. On January 1, 2011, the Homeowner occupy
and use their home as a principal residence. They again move out of the house
on January 1, 2013, due to a change in the Homeowner’s employment. A sale
occurs on January 1, 2014 resulting in a $400,000 capital gain. The period from
2009 to 2010 is a non-qualifying use period. 2013 is counted as a qualifying
use period because the lack of occupancy was due to a change of employment. Of
the $400,000 gain, 40% (two years out of five), or $160,000, is not eligible
for the exclusion. The $240,000 balance of the gain ($400,000 minus $160,000) is
excluded.
With capital gain taxes at approximately 15%
federally and 9% state, the capital gain consequence of 24% of $160,000
recognized gain is $38,400. (Can we
suppose that there is no recognition at the federal level that this new rule
has onerous unintended consequences?)
RULES STILL APPLYING TO THE 2008 RECOVERY ACT MEASURE
Eligibility: First time
homebuyers purchasing a new or resale home within the dates noted above are
eligible for the tax credit. A property must close escrow by the July 1,
2009 date.
First time home buyer
definition: A buyer
(both spouses must qualify) who has not owned a principal residence during the
past three years prior to purchase.
Qualifying Homes: Single family detached home,
townhouses and condominiums are specifically named in the legislation.
Newly Constructed
Homes: Homes
specifically built for an owner are eligible and treated as having been
“purchased” on the date the owner first occupies the home. This
date of occupancy must have occurred on or after April 9, 2008. Eligibility of
newly constructed homes purchased from a home builder (e.g:
new tract home) are determined by the escrow settlement date.
Income Phase out: The credit becomes totally
unavailable for individual taxpayers with a modified adjusted gross income of
more than $75,000 and for married taxpayers filing joint returns with an AGI of
more than $150,000.
Partial Tax Credit: A taxpayer may have a partial
tax credit even though s/he exceeds the phase out limits. The formula for
calculating the partial tax credit can be confusing and buyers should consult
tax counsel for guidance.
10% Maximum
eligibility: The tax
credit equals 10% of the qualified home purchase price up to and exceeding a
$75,000 purchase price. Any home purchased for less than $75,000 will have a
tax credit equaling only 10% of the home’s purchase price. Conversely,
any home purchased for more than $75,000 will have only the $7,500 maximum
credit available.
“Refundable”
Tax Credit: The home buyer
tax credit can be claimed even if the taxpayer has little or no offsetting
federal income liability. In such circumstances, the tax payer can receive a
government check for a portion or even all of the refundable tax credit. The
tax credit is a dollar-for-dollar reduction against what the taxpayer owes. If
absolutely no taxes are owed, the tax payer could receive a refund for the
entire $7,500 credit.
Tax Credit must be
Repaid: Home buyers must repay the
credit to the government, without interest, over 15 years or when they sell the
home, if there is sufficient capital gain from the sale. Repayment must begin
two years after the credit is claimed, based upon the total credit amount
divided by 15 years. (e.g.: if the full credit of $7,500 is claimed, the
repayment would be $500 per year beginning two years after the tax claim). Any
remaining repayment due when the home is sold will be paid from the profit on
the home. If there is insufficient profit, the remaining credit payback will be
forgiven.
Zero Interest Rate
Loan: The
case has been made that since the tax credit must be repaid it is much like a
zero interest rate loan administered by the IRS via the tax code. For instance,
if one borrowed, as a second TD, $7,500 amortized over 15 years at 7% interest,
the interest over the full term would be over $4,600.
Comment: In some ways,
this proposal represents an attempt by legislators to say that they are finding
ways to solve the housing crises. The stated intent of the legislation is to
stimulate home sales during this housing “crises” time. As is so
often the case, it seems as if the government is “giving” with one
hand and “taking away” with the other.
Whether we believe this to be a good
“opportunity” for buyers or not, we are asked for advice. While we
can provide some information, whether a buyer should participate is a decision
to be discussed with their accountant. First time buyers may find the idea of
an interest free loan tempting, especially if the credit reduces the immediacy
of their tax obligation. While a reduction in tax payments may assist some
buyers to make a decision that they can “afford” the new house
payments, buyers may need help assessing the larger
picture of making future mortgage payments. We counsel against making any
perceived savings as a result of a tax credit the reason for being able to
afford the mortgage payments.
LOANS ARE STILL AVAILABLE TO HOMEOWNERS
While the number of borrowers who will be assisted via the
H4H loan or FHA Secure remains unknown, it is fairly clear that the more recent
$700 billion bailout/rescue bill will provide virtually no assistance to
distressed home borrowers beyond the possibility of requiring lenders to
negotiate with homeowners facing foreclosure.
The main question regarding this legislation and the highly
touted FHA options continues to be whether it will make available more loans
for prospective home buyers? The quick answer is that it has not been as
effective as anticipated. Washington
is making another effort to provide additional incentives lenders to help
struggling home owners.
Home loans are still available. Yes, borrowers do need to
fully qualify for today’s loans. The stated income or no doc type loans
are gone. But, rather than lament that fact, we recognize that borrowers
acquiring loans today actually can afford to make the payments and are unlikely
to face he prospect of foreclosure that plagues so many borrowers who acquired
those so called bad loans.
Most loans are fixed rate but hybrid adjustable rate loans
are available for some unique circumstances. Fixed rate financing is in most
instances limited to 90% Loan-to-Value (requiring a minimum 10% down payment)
but 95% loans are available under some circumstances to extremely
well-qualified buyers. FHA loans,
with only 3.5% down payment continue but the down payment may increase to 5%
sometime after the new year. Well qualified prospective
home buyers should carefully compare the FHA loan with the 95% conventional
loan. While the FHA program is excellent, it does have some government
requirements attached that can make the conventional loan a much better option.
We recommend acquiring good counseling before making a final selection of loan
option. If indeed, one is putting more than 5% down payment the conventional
product will in almost every situation be a better alternative than a
government sponsored loan option.
Finally, it is important to not be discouraged with all of
the negative news and to know that good loans are available and borrowers can
qualify to purchase homes. See the loan
counselors at Humboldt Home Loans for guidance in selecting the best loan
option for your specific need. You can talk to Jody Harper (707-269-2304) or
John Fesler (707-269-2318) to discuss your loan
options.
.