Real Estate Information

The stimulus package and current state of the housing market has made it more attractive than ever to buy a home as a first time homebuyer.  Consider the following: 

A couple on the fence over renting versus buying comes into my office to discuss options.  They “hear it might be a good time to buy a home” but have also heard that banks won’t lend unless your credit score is above 720.  Their’s isn’t – in fact, it’s more like 620.  Not great but not bad.  They also know of two collection accounts outstanding from a visit to the hospital last year.  These collections are each about $300.   

The wife has been employed as a teacher for two years.  The husband finished his college education in May 2008 and has been employed since June 2008 full time at his current employer.  Their bank account has just under $1,000 in it. 

Based on all the rumors and misinformation they were under the impression they would not be able to qualify for a home loan because of their credit score, lack of down payment, lack of work history, and existing collection accounts.  As a result they were considering renewing the lease on their current rental which was about $1,000/month. 

We just closed on their loan last week.  I put them into a VHDA First Time Homebuyer Program called FHA PLUS – www.vhda.com for program info.  This allows the borrower to finance 100% of the loan plus an additional 1.5% closing costs for a total of 101.5% financing. 

This program is based on an FHA loan so the buyer is not required to pay off any outstanding collections so long as they total less than $1,000.  These buyers, however, decided to pay them off as a part of their closing costs.  It was their only expense with the loan, as the seller agreed to pay all their closing costs and there was no required down payment. 

They purchased a $150,000 home in Virginia Beach in a nice neighborhood (it was originally listed for $178,000) Total mortgage payment - $1,098 per month.  And the icing on the cake – even though they have already filed their 2008 taxes, they are doing an addendum in order to immediately receive the $8,000 tax credit.  Half will be for new furniture.  The other half for savings, and even though they won’t admit it, I believe a vacation. 

So, yes…it’s a great time to be a first time homebuyer.  And don’t forget that a first time homebuyer is defined as someone who hasn’t owned a home for the past three years. 

Rates remain extremely low – I am available all weekend should you require my services. 

By:Sam Meekins, III

http://www.monarchmtg.com/sammeekins/

Senior Loan Officer

FIRST-TIME HOMEBUYER TAX CREDIT

As Modified in the American Recovery and Reinvestment Act

Major Modifications Italicized

 As you know, President Obama signed the stimulus package into law Tuesday.  One of the most important components of that bill is the First Time Homebuyer Tax Credit.  Below are FAQ about the changes in the bill from the previous version passed in the fall.  Most importantly, please note this credit is not required to be paid back so long as the buyer lives in the home for 3 years as a primary residence.  Furthermore, a buyer can use the tax credit in conjunction with other First Time Homebuyer Programs through VHDA – this was forbidden in the previous bill.

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 phase-out 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 phase-out 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 / really…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 / VHDA 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 live in the District of Columbia. Can I claim both the Washington, D.C. first-time home buyer credit and this new credit?
  No. You can claim only one.
• 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 phase-out 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.

http://www.monarchmtg.com/sammeekins/

Great news for home buyers, the Senate voted Wednesday night to give a tax break of up to $15,000 to homebuyers in hopes of revitalizing the housing industry. It would allow a tax credit of 10 percent of the value of new or existing residences, up to a $15,000 limit. Current law provides for a $7,500 tax break for the purchase of new homes only. You can read more about it on yahoo or cnn.

Highlights

• Amid the national financial uncertainties and news about the economy and stock markets, the Virginia economy and housing market are out-performing the country and it is expected that the state’s economy will continue to have moderate growth in spite of the national economic turbulence.

• After nearly a year of market slowdowns and home price depreciation, the housing market in the Commonwealth of Virginia exhibited signs of strength in the 3rd quarter of 2008. Sales activity was down only slightly in the 3rd quarter of 2008 compared with the 3rd quarter of 2007. Statewide, prices were up 1.4 percent over the year.

• Much of the increased sales activity in 3rd quarter 2008 occurred in Northern Virginia

markets where a strong economy and drastic price drops continue to attract buyers.

• Prices in many markets outside of Northern Virginia have risen slightly in the 3rd quarter of 2008 compared with the 3rd quarter of 2007. A notable slowdown in new construction

across the state in the first eight months of 2008 will put additional upward pressure on

prices.

Virginia Economic Trends

Virginia’s economy continues to perform generally well despite the national situation, although the state’s economy is moderating. A major factor in moderating job growth is the effects of the slowdown in the housing market. Following robust job growth years of 2004-2006, job growth moderated to +34,200 in 2007 and in 2008 is growing at an annualized rate of 17,000 through August. The rate of job creation appeared to moderate further in May and June, but in July and August jobs were added at an annualized rate of 19,000 per year Job growth continues to be very healthy in the services sectors and in state and local government. Sectors affected by the housing market slow down are construction, finance and real estate, and retail trade. All three sectors are contracting significantly. The Construction and Finance/Real Estate sectors are directly related to the housing downturn, while part of the retail trade decline is related to the national consumer confidence situation as well as lower sales due to fewer house refinancing.

Foreclosures in Virginia

The foreclosure issue is a major one at the national level, and Virginia has not avoided the issue. However, the foreclosure problem is concentrated in the three largest metro areas of Northern Virginia, Tidewater and Richmond, and Northern Virginia is clearly experiencing the worst of this problem. As of October, 81 percent of foreclosure activity in the state was concentrated in Northern Virginia. Other metropolitan areas of the state have experienced very little of the foreclosure problem. From the chart below it is easily seen that the majority of foreclosures in the state are concentrated in Northern Virginia, and that in Northern Virginia and Tidewater foreclosures edged higher in October as compared to July. The Richmond metropolitan area has seen a decline in foreclosure activity since July. It is expected that the foreclosure problem will abate somewhat near the end of 2008 as the sub-prime mortgage resets begin to decline.

Source: VAR

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Short Sale - What Buyers Should Know

In my last post, I gave homeowners a quick explanation of short sales.  This time, my post is for potential short sale buyers.

What’s a short sale?

A lender agrees to accept a sale of a property for less than the mortgage owed plus the expenses for having a short sale (realtor, appraisal & attorney fees, e.g.).   The homeowner owns the property and is selling it, but before the sale can occur, the bank needs to approve.

How do I know it’s a short sale?

If you’re looking at properties that have descriptions such as “subject to bank approval,” “subject to lien-holder approval,” or “as is,” these may be short sales.  Some listings will say, “short sale,” but not all.

How is a short sale different?

In a traditional real estate transaction, there are two parties - the buyer and seller.  With a short sale, add one more -the bank. Like any other real estate purchase, a buyer sees a property they like and submits an offer to the seller.  If the seller likes the offer, they accept it, contingent upon the approval by the bank.

The buyer can still perform an inspection, but since the sale is “as is,” neither the seller nor the bank are likely to make any repairs.  In addition, most lenders will not permit closing cost credits for repairs.

The buyer still pays for their own appraisal via their bank but the seller’s lender also has an appraisal done and it is this appraisal that matters.  The bank will base its decision to accept or reject the short sale based on their appraisal - and they have been known to reject offers that are lower than the appraisal.  They may even come back to the buyer and ask for the buyer to increase their offer before approving the short sale.

The time to close in a short sale is also different.  A bank can take anywhere from 4-6 weeks (possibly longer) to approve the sale and once they approve, they generally want to close ASAP.  So, before the sale is even approved, the buyer will have already had an inspection and had their appraisal done.

What are the risks for buyers?

As with any property owned by someone who is having trouble making payments, there is the issue of deferred maintenance.  If homeowners are letting their mortgage payments slide, what about their leaky roof, old furnace or overgrown landscaping.  Since short sales are sold as-is, a buyer can pay for an inspection but it’s really for information only - not to get repairs made or repair credits at closing. 

Another risk is that the buyer pays for the inspection and the bank does not approve the sale, or asks the buyer to come up in their offer.  If the bank says no, the buyer is then out the inspection costs and any other fees their bank is charging them.

There is also an issue with some companies that do foreclosure rescue.  These companies approach homeowners in distress and contracts to take title in a trust in exchange for negotiating a discounted payoff with the lender.  Meanwhile, the company lists the home for sale to secure a third buyer. The issue with this scenario is that the lender only approved the sale to the rescue company, not the third buyer.  And since the lender has not yet issued a release of mortgage and is still the lien-holder, they must approve the sale to the third buyer.  Short Sale are not always a better deal for the buyer.

Short Sale

A Short Sale is typically requested and initiated by a homeowner who is unable to make their mortgage payments for 2 or more periods, and where a loan restructuring is not possible. A short sale is an "arrangement" between the current owner of a home and the bank that lent them the money to buy their home to accept an offer for less than the total amount owed to pay off the home. In many cases, the lender forgives the remaining debt and accepts a mortgage payoff that doesn't cover the outstanding loan. This option is in place to help homeowners and banks, when foreclosure or bankruptcy is the other alternative.

For a lender, a short sale can be appealing because the process can be shorter and less costly than foreclosing, especially in a declining market. Lenders can avoid the costs of property maintenance, utilities and homeowners' association fees. Properties that go into foreclosure can take longer to sell, particularly in a declining market. There's also the chance that the property could be vandalized.

For borrowers, a short sale is the next worst thing on someone’s credit next to foreclosure or bankruptcy. It can be less of a black mark than a foreclosure on a borrower's credit record because it indicates that the borrower was working with the lender and once settled it’s listed on your credit record as SETTLED DEBT.

So if you are behind on your payments and only as a last resort a short sale is better than a deed in lieu, and certainly better than a bankruptcy or foreclosure.

Why should a seller consider a short sale?

A short sale is an option when foreclosure or bankruptcies are the other alternatives.  A short sale is still a negative mark on a sellers’ credit but not as bad as either foreclosure or bankruptcy. 

What are the downsides of a short sale?

If the lender absorbs the loss and allows the homeowner to walk away, the IRS looks at the value of that as taxable income.  And as mentioned above, a short sale will affect the sellers’ credit.  There is also the fact that the seller will not be able to stay in the home - it is a sale.  And, a seller may still owe the lender money after the short sale.

How does a short sale occur?

A homeowner would contact their lender and if no other options are available (negotiating a different payment plan, e.g.), the lender may agree to a short sale instead of foreclosing.  A lender may still choose to foreclose if foreclosure would result in a better outcome for the bank.  However if they agree, the lender would then require the homeowner to sell the house.  The homeowner hires an agent, who agrees to sell the house for a lower commission generally. 

If a buyer can be found for the property, the buyer submits an offer to the seller who, if accepts the offer, then forwards the offer to the bank.  The bank then either accepts the offer or does not depending on what the offer amount is and what the appraised value is determined to be, taking 4-6 weeks.   If the lender accepts the offer, a closing usually takes place very quickly.