Ed's Blog

Last week mortgage applications surged up 11%, a good indication that the spring real estate season may have begun a bit early. According to reports from the Mortgage Bankers Association, applications for home purchase loans and refinance loans increased 11.3%.

Even better for homeowners and buyers is that interest rates on 30 year fixed loans are on average just below 5%, which is the second lowest level since 1990. These low interest rates combined with low home prices, appear to be driving buyers back into the market, as homeownership becomes bit by bit, more affordable.

Moreover, this good news comes on the heels of the passage of the Homeowner Affordability and Stability Plan which aims to help troubled homeowners to modify their existing mortgages.

I don’t want to jump the gun, but it’s beginning to look like things might be moderately improving for our troubled housing market. More buyers equates to less inventory, meaning that home values should stabilize. Moreover, with more lenders willing and eager to modify existing mortgages, as a result of Obama’s new plan; foreclosure rates should begin to decline.

Let’s all keep our fingers crossed that more good news like this is on the horizon!

As you may know, the Housing Affordability and Stabilization Plan (aka “Making Home Affordable”) goes into effect on April 4, 2009. This program is designed to help homeowners who need to refinance their mortgage, but don’t have 20% equity. It is also designed to help those that (due to financial hardship) are finding that keeping up with their mortgage is nearly impossible. Although the program is complex, I’ve broken it down into the basics.

If you’re struggling to refinance due to a lack of equity:

· In order to refinance your current mortgage under this program, the loan must be for your primary residence (no second, vacation or investment properties apply).

· Your current loan must be through Fannie Mae or Freddie Mac. Loans owned by any other servicers are not eligible!

· You will need to qualify in the same way you would qualify for any refinance (proof of assets, income, and other debts).

· You will be required to purchase PMI (Private Mortgage Insurance) if you do not already have it.

· Limits are available up to $729,750 in high cost areas like California.

· You may be eligible for help in refinancing up to 105% of your mortgage

If you’re struggling to make your payments and you need a loan modification:

· This too must be your primary residence.

· You must be in danger of defaulting, or already in default (meaning you’ve missed payments).

· Your mortgage payment may be reduced to no more than 31% of your gross income.

What Remains To Be Seen:

· We don’t have a final list of which banks will be participating in these programs. By law, if a bank receives government bailout money, they are required to participate. However, even if they don’t receive money, they may still opt to participate.

· Second mortgages will need to take a backseat, and the servicer of that loan will need to agree to remain in the “secondary position,” to your new loan. We’re hopeful that most will agree to do this.

· Fees have yet to be determined. Again, we’re hoping that fees accompanying these modifications and refinances will remain low, but we don’t have definitive answers just yet.

With such a broad reaching plan, there will undoubtedly be changes to these programs as we move forward with “Making Home Affordable.” Rest assured though, that the team at Smith Craine Finance is keeping abreast of all changes, and is here to offer you advice and assistance with refinancing, or loan modifications.

Please don’t hesitate to contact us today to learn more, and to start working towards lowering your monthly mortgage payments. Interest rates remain at all time lows, and credit is once again beginning to flow. We can always be reached at 415-406-2330.

Thought I'd post this as aa shorter version of the long tax credit explanation that I previously posted. This is one of my newspaper columns:

Where’s The Catch With The Home Buying Tax Credit?

Q: I’ve heard about the $8,000 tax credit for first time home buyers, and it’s definitely got me interested, but there’s got to be a catch. What is it?

A: There is no catch per se, but there is naturally, some fine print. To begin, the $8,000 tax credit is the maximum amount you can receive. The way this incentive is written is that you’ll receive a tax credit of 10% of the purchase price, up to a maximum of $8K. (Of course, here in the Bay Area, the $8K is pretty much guaranteed).

However, the tax credit isn’t available to everyone. As a single person, you are only eligible for the full credit if you make less than $75,000 per year or less than $150,000 per year for couples. Please note; you may be able to get a partial credit if you make more than that, but there is no guarantee. You also need to know that “new home buyer” in this case means that you can’t have owned a home (even as an investment) during the last three years.

You should also be aware that once you purchase the home, you need to live in it for at least three years, or you may be forced to return the credit. That means that this credit won’t apply if you plan to rent out your home, or use it as your secondary residence or vacation home. Finally, the home must be purchased before November 30, 2009 in order for you to be eligible.

So, while there is no catch, there are clearly a few stipulations that must be met. However, this new incentive is definitely a step in the right direction towards bringing more buyers into the market. Even without this incentive, it’s a magnificent time to be a buyer. There remains a great selection of homes currently for sale, not to mention interest rates continue to remain at historic lows. So this tax credit is really just an added bonus for those whose are ready to buy a home. Happy house hunting!

A business partner wrote this lengthy (sorry), but excellent piece on the tax credit that Congress has approved. If you're thinking of buying this year, or already have, check out this valuable information:

Washington has been busy lately. In one of the most rapidly approved bills in memory, the Housing and Economic Recovery Act was passed into law, and could have significant implications on the housing and mortgage industry. When Congress passed the housing rescue bill (The Housing Assistance Act of 2008) this past July, it included a new $7,500 tax credit for first time homebuyers. This has since been replaced with a NEW bill providing for an $8000 first time homebuyer tax credit!

In its efforts to stimulate the economy and revive the housing market, Congress has enacted legislation providing a tax credit of up to $8,000 for first-time home buyers.

$8,000 Home Buyer Tax Credit at a Glance:

The tax credit is for first-time home buyers only.

The tax credit does not have to be repaid.

The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.

The credit is available for homes purchased on or after January 1, 2009 and before December 1, 2009.

Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.

Frequently Asked Questions About the Home Buyer Tax Credit:

The American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.

The following questions and answers provide basic information about the tax credit. You should not rely on this as tax or legal advice. If you have more specific questions, or wish to take advantage of the credit, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.

Who is eligible to claim the tax credit?
First-time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and before December 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner.

What is the definition of a first-time home buyer?
The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse.

For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.


How is the amount of the tax credit determined?
The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.

Are there any income limits for claiming the tax credit?
The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.

What is "modified adjusted gross income"?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.

To determine modified adjusted gross income (MAGI), add to AGI certain amounts such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.

If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits.

Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000.

Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800.

Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.

How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008?
The most significant difference is that this tax credit does not have to be repaid. Because it had to be repaid, the previous "credit" was essentially an interest-free loan. This tax incentive is a true tax credit. However, home buyers must use the residence as a principal residence for at least three years or face recapture of the tax credit amount. Certain exceptions apply.

How do I claim the tax credit? Do I need to complete a form or application?
Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on Line 69 of their 1040 income tax return. No other applications or forms are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and first-time home buyer tests.

What types of homes will qualify for the tax credit?
Any home that will be used as a principal residence will qualify for the credit. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.

I read that the tax credit is "refundable." What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.

For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed).

I purchased a home in early 2009 and have already filed to receive the $7,500 tax credit on my 2008 tax returns. How can I claim the new $8,000 tax credit instead?
Home buyers in this situation may file an amended 2008 tax return with a 1040X form. You should consult with a tax advisor to ensure you file this return properly.

Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been "purchased" on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after January 1, 2009 and before December 1, 2009.

In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.

Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
Yes. The tax credit can be combined with the MRB home buyer program. Note that first-time home buyers who purchased a home in 2008 may not claim the tax credit if they are participating in an MRB program.

I am not a U.S. citizen. Can I claim the tax credit?
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of "nonresident alien" in IRS Publication 519.

Is a tax credit the same as a tax deduction?
No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS.

A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,200 (15 percent of $8,000), or lowered from $8,000 to $6,800.

I bought a home in 2008. Do I qualify for this credit?
No, but if you purchased your first home between April 9, 2008 and January 1, 2009, you may qualify for a different tax credit.

Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 tax return?

Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment.
Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.

Further, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. Some state housing finance agencies, such as the Missouri Housing Development Commission, have introduced programs that provide short-term credit acceleration loans that may be used to fund a downpayment. Prospective home buyers should inquire with their state housing finance agency to determine the availability of such a program in their community.

If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
Yes. The law allows taxpayers to choose ("elect") to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.

Taxpayers buying a home who wish to claim it on their 2008 tax return, but who have already submitted their 2008 return to the IRS, may file an amended 2008 return claiming the tax credit. You should consult with a tax professional to determine how to arrange this.

For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?
Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.

But time is of the essence for buyers who want to take advantage of this opportunity. Only homes purchased on or after January 1, 2009 and before December 1, 2009 are eligible

Information on these and other details of the program can be researched on a website maintained by the National Association of Homebuilders at www.federalhousingtaxcredit.com.