Last week, HUD announced that the new $8,000 first-time home buyer tax credit could be used towards the down payment of the purchase of a primary residence. The way that it would have worked is that a third party would front the tax credit money to the buyer. The buyer would sign some sort of promissory note with the third party promising to pay back the fronted credit amount when they file their taxes next year (or this year if they have not filed 2008 yet). The seller would pay a fee on the buyer’s behalf, as a seller concession, to the third party.
I had heard about this potential arrangement months ago, but did not want to advertise the idea until all of the details were known. Unfortunately, the cat was let of the bag so I began to discuss this idea with my business referral partners. And then…
HUD has rescinded this decision and has in fact pulled the Mortgagee Letter (how they announce things) from the HUD website. The following is an excerpt from a blog post on ActiveRain by Jeff Belonger explaining “why” in more detail:
“In regards to FHA loans, a borrower can only obtain monies for their down payment of 3.5% by the following :
- Their own funds
- up to 100% of a gift from a relative/family member
- From the Federal, state, and local governmental agencies and nonprofit instrumentalities of government
- FHA approved non-profits
- monies from their employer in a form of employee contribution
- monies from secured borrowed funds… IE. borrowing equity from your home to buy another home or borrowing against your car that is free and clear or borrowing from your 401-k, etc, etc
Here is the major confusion that was put out yesterday, in the body of the mortgagee letter, ML 09-15, at the bottom, it stated :
The Tax Credit: Short-Term Loan:
Entities that can offer the tax credit advance with short-term loans:
- Federal, state, and local governmental agencies and nonprofit instrumentalities of government, FHA-approved nonprofits, and FHA-approved mortgagees may provide short-term or “bridge loans” secured only by the anticipated tax credit due the homebuyer as collateral.
The confusion: It states “as collateral” and not as a secured lien against the home, but as a secured loan against the collateral. Which in this case would be the $8,000 tax credit.
Because of this, HUD does not allow for monies to be borrowed or given to in any form that I did not mention above, to be used for the down payment. The reality of it all, basically everything that was stated in the mortgagee letter, that has been revoked for now, is old school FHA. When it comes to FHA loans/FHA mortgages, you could get monies for your down payment from the items that mentioned above, which is mentioned in the mortgagee letter. Well, was mentioned… One caveat to all of this is that HUD was going to allow for lenders to secure a short term loan or bridge loan against the $8,000 to be used to purchase a home. But again, that can’t be used for the actual down payment, because it goes against the basic FHA guidelines of down payment monies of 3.5%. Now, unless HUD changed this, it does not clearly state this in the mortgagee letter, even though that letter is no longer valid.”
So for now, buyers must find their down payment the same way they have always had to. Regardless of whether the tax credit can be used as the down payment, it is still a fantastic benefit for first time home buyers especially when combined with the added tax deductions of mortgage interest and property taxes (thereby lowering taxable income).
Rates are low. Prices are reasonable. $8,000 tax credit. Now is a great time to buy real estate.
Questions? Please feel free to email me: [email protected]
A rumor can be defined as “an unverified account or explanation of events circulating from person to person and pertaining to an object, event, or issue in public concern” (Warren Peterson).
I made a phone call to the City of Encinitas and spoke with a person in the San Dieguito Water District. The district services the residents of Cardiff, Leucadia, and Encinitas west of El Camino Real.
She informed me that the rumor was not true.
The city council will address the water drought issue at a future meeting. She advised me to go to their website to learn more about the drought and the stages of water conservation. At this time, we are in Stage One – Drought Watch; but could more to Stage Two after the city council meeting.
By the way, east of El Camino Real in Encinitas is serviced by Olivenhain Water District. I learned from a person there that the rates went up March 1, 2009, but they are not charging any fine or extra allocation fee at this time. Their website gives further information on the water drought stages… let’s hope we do not need to go to Stage 2 or higher!
Related Posts: San Diego
How do I apply for the credit?
There is no pre-purchase authorization, application or similar approval process. All eligible purchasers simply claim the credit on their IRS Form 1040 tax return. The credit will be reflected on a new Form 5405 that will be attached to the 1040. Form 5405 can be found at www.irs.gov
Can I use the credit amount as part of my down payment?
No. 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.
Is there a way to get any cash flow benefits before I file my tax return?
Yes, there is. Any first-time home buyers who believe they are eligible for all or part of the credit can modify their income tax withholding (through their employers) or adjust their quarterly estimated tax payments. Individuals subject to income tax withholding would get an IRS Form W-4 from their employer, follow the instructions on the schedules provided and give the completed form W-4 back to the employer. In many cases their withholding would decrease and their take-home pay would increase. Those who make estimated tax payments would make similar adjustments.
Some “Real World” Examples
What if I purchase later this year but can’t get to the settlement before December 1?
The credit is available for purchases before December 1, 2009, A home is considered as “purchased” when all events have occurred that transfer the title from the seller to the new purchaser. Thus closings must occur before December 1, 2009 for purchased to be eligible for the credit.
I purchased my home in early 2009 before the stimulus bill was enacted. I claimed a $7500 tax credit on my 2008 return as prior law had permitted. Am I restricted to just $7500 credit?
No, you would qualify for the $8000 credit. Eligible purchasers who have already claimed the $7500 credit on a 2008 return for a 2009 purchase may file an amended return (IRS Form 1040X) for the 2008 tax year. This amended return will enable them to obtain the additional $500 credit amount.
If I claim my 2009 $8000 credit on my 2008 tax return, will I have to repay the credit just as the 2008 credits are repaid?
No. Congress anticipated this confusion and has made specific provision so that there would be no repayment of 2009 credits that are claimed on 2008 returns.
I know there is no repayment requirement for the $8000 credit. Will I ever have to repay any of the credit back to the government?
One situation does require a recapture payment back to the government. If you claim the credit but then sell the property within 3 years of the date of purchase, you are required to pay back the full amount of any credit, including any refund you received from it. A few exceptions may apply, check with your accountant. Note that this same 3 year recapture rule applies, as well, to the $7500 credit available for 2008. This provision is designed as an anti-flipping rule.
What if I die or get divorced or my property is ruined in a natural disaster within the 3 years?
The repayment rules are eased for many circumstances. If the homeowner who used the credit dies within the first three years of ownership, there is no recapture. Special rules make adjustments for people who sell homes as part of a divorce settlement, as well. Similarly, adjustments are made in the case of a home that is part of an involuntary conversion (property is destroyed in a natural disaster ) within the first three years.
For information on using your credits this year contact Diane Teti, Realtor [email protected]
You can read more of my articles here.
The real estate market has improved for many San Diego first time home buyers, some can now afford homes but many are still finding it difficult to dream of being a homeowner in San Diego.
These hard working citizens want to purchase their dream home, but are unable to afford the home prices. The City of Carlsbad has teamed up with Habitat for Humanity to offer units to homeowners who fit a certain income bracket plus work at least 250 hours on their own project.
Additional volunteers are working with the Habitat for Humanity doing the hard work to build and complete these units right here in our own community of Carlsbad, on Roosevelt Avenue.
Recently two volunteers who are Realtors donated their time, Judy Davis and Sandra Keirns with Exclusive Properties Exclusive Properties in Carlsbad. They put on their working clothes, rolled up their sleeves and did the mudding of the walls in the units.
It was a challenge for each of them but a great feeling of giving back to the community.
This is an example of their dedication. You may reach Judy Davis at 760-473-3156 or Sandra Keirns at 760-822-8161.
Has your home foreclosed (or is about to) and left you feeling desperate and uncertain? Would you like the opportunity to get your home back, even post-foreclosure? You may be in luck.
There is a new option available which allows foreclosure victims to BUY BACK their homes from the bank. It is gaining momentum and may not be a viable option for a long time, but if you are in this situation and are employed, keep reading.
With all the options available to help struggling homeowners avoid foreclosure this is the first that deals with the problem after the fact, and believe it or not it IS working for many people. Some attorneys and non-profit groups have been very successful in submitting offers to lenders on behalf of the recently displaced homeowners.
In a sense this works like a loan modification after the fact, so the homeowner will still suffer some credit ramifications from the foreclosure, but will be able to buy their home back from the bank at a price that is comparable to recently sold homes in the area, which means monthly payments will be more affordable. Many of these homeowners were unable to work out modifications or use other options to save their homes, and many are still living there and have not been presented with a notice of eviction from the lender.
Why is this buy back option so successful?
1. It is unlikely that the lender, the new owner of the property, will find a buyer to purchase the home at a cost that would narrow the gap the lender has opened through the foreclosure process. Plus, in this market it is likely the home will sit for some time, causing further loss to the lender. Selling it back to the owner is a win-win, as there is no market time expended and no monthly payments to be doled out by the lender. A quick close can be arranged and everyone wins.
2. Abandoned homes can fall into disrepair. This can force the lender to pay lots of money for upkeep. A home that is not cared-for is unlikely to sell.
3. With credit damaged from the foreclosure it is not likely that the homeowners will be able to get a loan for a long time–this is the chance to stay in their home with an affordable payment, instead of putting them out on the street.
4. This option eases the lender’s already overflowing portfolio–it is one less home to worry about.
There is really no valid argument against buy backs. Some lawyers are already doing so and charge minimal fees to negotiate with the lender.
If you live in the San Diego area and would like a referral to an attorney who knows how to do this and has a success rate please feel free to email or call me and I will pass the information along. If you are in another area I would recommend calling real estate attorneys and asking if they do this, and if not see if they can refer you to an attorney who does.
Another option is to contact a non-profit group who can help you or point you in the right direction. If you live in Boston there is a group called Boston Community Capital, and they currently have about 30 borrowers in the process of buy back negotiations. You can call community resource organizations, the city offices, or call HopeNow and see if they can help. Their number is (888)995-HOPE.
Keep in mind that you DO have to be employed and be able to show that you can make the payments on the new loan. Also, your lender may have a clause in the paperwork that prohibits a buy back (or other language that can be interpreted to prohibit one). But don’t let this discourage you…it is still worth a try, and if you work with an attorney or organization who knows the ropes this may be sidestepped. If this is not an option for you I suggest you read up and learn all the possible options that ARE available before it is too late and your home is sold. A great resource is www.MortgageWalkawayOptions.com. Best of luck!