1. Lender's points and loan origination fees. These points and loan origination fees usually run 0 to 3 percent of the loan, or more. A point is one percent of the loan amount. If you see a point charged to you, it should be because you're getting a lower interest rate. Lenders will typically charge more points in exchange for giving you a lower interest rate. Due to the financial crisis, some additional fees - usually in the form of points - are being charged to borrowers for purchasing condominiums and certain other properties that have had high foreclosure rates in the past. Unfortunately, these new loan origination fees won't decrease your interest rate and will just add to the fees to close on your purchase.
When shopping around with different lenders for mortgages, you need to make sure you're shopping for the same mortgage product. Lenders don't make that easy. If you are shopping for a 30 year fixed rate loan with one lender, you can shop for that same loan with another lender and then compare points and loan origination fees. But it gets more difficult when you shop for an adjustable rate loan (ARM). A 5 year ARM loan will have a fixed interest rate for the first 5 years and then in the 6th year the interest rate on the loan will generally adjust yearly. But with that adjustment comes the finer points of your loan: the loan interest rate may be tied to the US Treasury Rate or LIBOR (the London Interbank Offer Rate); the adjustment may be limited to 2 percentage points at the end of the 5th year or can increase up to 6 percentage points; and, the loan interest rate can increase when it does increase at different levels depending on whether the lender ties the adjustment to either of the US Treasury Rate or LIBOR but different lenders will add anywhere between 1.75 percent to 3.25 percent to that rate.
2. Loan Processing Fees. Many lenders charge a loan processing fee. This fee can range from $200 to $800 and is in place to compensate the lender for processing of your loan. You may not like the fee, but more and more lenders are adding it as part of their loan charges.
3. Loan application fee. The loan application fee is the fee to get the lender started on your loan application. Frequently the fee is applied towards other charges the lender will incur in processing your loan. At times it covers the appraisal and the credit report with any excess payments applied to other lender fees. Typically the loan application fee runs between $0 to $500.
4. Lender's credit report. Expect to pay $10 to $100 or more for each credit report pulled. While the pricing for credit reports has come way down, some lenders still charge a rather high amount for pulling your credit reports. Some credit reports cost lenders less than $10 to pull, while others might be compiled credit reports that cost for $50 or more. If there are two of you on the loan borrowing money, you can expect the fee to be higher. In some cases, lenders will pull an updated credit report on you right before the closing to make sure your credit history has not deteriorated. If you and your spouse or partner are both named on the loan, and the lender pulls two sets of credit reports on each of you, your credit report cost could total as much as $350 to $400.
5. Lender's underwriting fee. This lender underwriting fee can run between $75 to $600, and it is the fee the lender charges to finalize the loan by giving it the final review in its underwriting department. Not all lenders charge an underwriting fee but many do. Many lenders may be unable to explain the different between this fee and a loan processing fee to you, but what happens in the real world is that many of the fees charged by lenders are billed simply to compensate the lender and add to their bottom line.
6. Lender's document preparation fee. A fee for preparing the documentation needed in the closing, it can cost $50 to $250, or more. In unbundling their fees, lenders will try to collect on the cost to prepare the loan documents for your loan. In some cases, these fees are paid to third party loan document preparation companies.
7. Lender's appraisal fee. The lender will hire an appraiser to determine whether your property is worth what you're paying for it. This will cost $225 to $750, or more, depending on the value of the property. For some high-priced properties, lenders will always require two appraisals. When that happens, the fee usually doubles, because the lender typically hires two different appraisers.
8. Prepaid interest on the loan. The interest due on your loan is paid per day until the end of the month in which the closing occurs, so the cost is depends on how much money you're borrowing and on what day of the month you choose to close the transaction. If you choose to close on the first couple of days of a calendar month, you may to come up with a higher amount of prepaid interest because you're covering all of the days in the month starting on your closing date through the last day of the month. If you close on the last day of the month, you'll only need one day's worth of prepaid interest in cash at closing.
9. Lender's insurance escrow. The lender expects that your home will be insured at all times. If there is a total loss to the home, the lender wants to make sure that there is a homeowners insurance policy in place to pay off the loan or - in some cases, with the lender's permission - there is enough money on hand to rebuild the home. The lender always wants to make sure that the home -- their collateral for the loan -- isn't going to go up in smoke. At closing the lender will require the homeowners insurance policy to be paid in full for at least one year and they will want to have two months' cost of the annual premium on hand up front to make sure that they have enough money collected on a monthly basis during the term of the loan to pay the insurance premium on a yearly basis. If the policy costs $1,200 per year, you'll need to come up with the $1,200 for the cost of the insurance premium at closing, unless you paid for the insurance policy before the closing and gave proof of that payment to the lender. You will also need to give the lender an additional $200 to put into the escrow for future homeowners insurance policy premiums that will come due.
10. Lender's insurance escrow for condominium owners. In a new change since the housing crisis, lenders are also requiring that condominium buyers own a homeowners insurance policy that includes contents coverage. Just like the homeowners insurance policy for a single-family house, your lender will require you to buy your condominium insurance policy prior to the closing or pay for the policy at the closing. You'll also have to escrow funds for the ongoing insurance premiums with the lender. Here's something to think about: Ask if the lender will limit its requirement to be added as an additional insured to the policy only for the condominium building items. That is to say, if your condo kitchen is damaged by fire, the insurance company would make out a check to both you and your lender. But if you lose a piece of jewelry, the lender should not be part of that coverage. Your insurance agent should be able to work out the details with your lender.
11. Lender's tax escrow. If you have a tax escrow, you'll need to come up with enough cash at closing to make sure that your lender has sufficient funds on hand when the next tax bill comes out. For example, if your annual real estate taxes are about $1,200, and the next tax bill for the first half of your tax bill is due one month after the closing, the lender will want to have the amount that will be due ($600) plus two months' reserve on hand, or $800. The amount the lender will require in escrow will also depend on the location of the home. In some parts of the country, winter taxes are higher than summer taxes. In other parts, real estate taxes are paid at irregular intervals and each of these differences will impact the amount the lender will require for a real estate tax escrow.
12. Lender's tax escrow service fee. This $40 to $125 fee is paid to the lender as a one-time fee to have a company set up the annual monitoring and payment of your real estate taxes.
13. Title insurance cost for the lender's policy. Expect to pay $150 to $1,000 or more, based on the dollar amount of the house you purchase. In some parts of the country, the seller picks up most or all of the cost of title insurance for the owner's title insurance policy and the lender's title insurance policy can be piggy backed onto that policy. But if you are buying in a state in which the buyer pays for both the owner's title insurance policy and the lender's title insurance policy, the amount you pay can be substantial. Some states have title insurance rates set by the state and those fees are non-negotiable. In other states, the fees are negotiable. You would be wise to determine whether you can negotiate the rates with the title insurance company. For comparison purposes and to educate yourself further on title insurance costs, check out Closing.com.
14. Title insurance cost for the buyer's policy. If you choose to buy a buyer's policy, and I absolutely think you should, the cost will run $150 to $1,000 or more, depending on the price of the home. If you only buy a lender's title policy, and someone makes a title claim to the property and you lose the house, only the lender will get a check. You need to buy a separate owner's policy so that you will be fully compensated for the loss of the property in the event someone else has a successful title claim. (ThinkGlink.com has dozens of stories and videos about title insurance. Learn more about title insurance at our Title Insurance Topic Page.)
15. Special endorsements to the lender's or owner's title insurance policy. These can cost $150 each, or more, depending on the type of endorsement and the fee schedule for these endorsements in your state. Depending on the type of property you are purchasing, the lender can require that you add special endorsements to the title, such as an environmental lien endorsement, adjustable rate mortgage endorsement, or even a condominium endorsement. In states where these title insurance endorsements are required and available, three endorsements could add $450 to the cost of your loan closing.
16. House inspection fees. Each house inspection fees can run $250 to $1,000 or more. If you are buying a home, you should have the home professionally inspected for problems. An inspection can cost as little as $250 for a basic inspection but you can can quickly multiply those fees if you add a radon test, water quality inspection, pest inspection, septic system inspection and lead inspection.
17. Title company or closing agent fee. The title company or closing agent needs to make money, too. This closing fee, which is separate from the cost of a title insurance policy, can run from $200 to $1,500 or more depending on the value of the home and the value of the mortgage you are obtaining. This fee is paid to the title company or closing agent to work through the paperwork for the closing. The title company and closing agent will not represent you or the seller in the transaction. They will act as an intermediary to facilitate the transaction or work on behalf of the lender.
18. Recording fees, of deed or mortgage. Expect to pay $25 to $150 each. When you purchase a home, you will receive title to the home in the form of a legal document. That document will need to get recorded with the local recorder of deeds office in the county in which the home is located or other office responsible for such documents. In addition, if you borrow money, the lender will have a mortgage or trust deed to record as well. The mortgage or trust deed is the document that gives the lender the right to foreclose and sell the home to satisfy the debt you took out. The recording fee will vary from state to state but you should expect to pay at least about $100. In some states, there is a mortgage tax. That tax is based on the amount of the mortgage. If the mortgage tax is 1 percent and your mortgage loan is for $250,000, the tax will be $250 to record the document.
19. Local city, town, or village property transfer tax; county transfer tax; state transfer tax. These charges vary from municipality to municipality, and are usually either a flat fee or are based on the sales price of the house. For example, in Chicago, the buyer picks up the city transfer tax, a hefty $3.75 per $500 of sales. The range is generally nothing to $10 per $1,000 of sales price.
20. Flood certification fee. A fee you'll pay for the lender to determine whether the home you're buying is located in a flood zone, $10 to $50. If your home is in a flood zone (and these zones are being redrawn by FEMA all over the country), your lender may require you to buy flood insurance. Read more about flood insurance or go to FloodSmart.gov, the government website headquarters for flood insurance information.
21. Attorney fee. If you need an attorney to help you close your deal, the flat fee rate generally starts around $500.
22. Condo move-in fee. A building charge that can run from nothing to more than $500. (Whether your building charges a move-in fee or not, you may have to book your move-in date ahead of time, particularly if you're in a condo building and will require the use of the elevator.)
23. Association transfer fee. Often required for condominiums and town house buyers, this fee can range from nothing to more than $500. In some cases this fee is billed to the buyer.
24. Co-op apartment fees. Often charged for the transfer of the shares of stock in a co-op transaction, the fees can range from $50 to $200 or might be based on the purchase price. In some cases this fee is billed to the buyer.
25. Credit checks for condo and co-op buildings by the board. These can run anywhere from $25 to $150 per credit check.
26. Move in deposit fees. Some condominium associations will charge you a deposit for the right to move into the building. In some cases the deposit is refundable and in others, it is an outright fee paid to the association. These fees can run from $50 to $2,000.
27. Assignment fees. Some lenders immediately sell the loan they just gave you to an investor or another institution. In that case, the lender may charge you an additional fee to assign that loan. The fee can be as little as $25 but can be quite a bit more if the fees in your state are high to record or file the documentation to reflect the assignment of the mortgage.
28. Delivery and email fees. You might think that in this electronic age, there might be some economic savings by using email. But many title companies and closing agents may charge to receive documents by email from lenders. That fee can be as little as $10 and as high as $100. Closing agents and title companies defend this charge as a fee to cover their expenses in maintaining the email server for this purpose and for the cost of printing documents along with the oversight of the package preparation. Even if you pay this fee, most title companies and closing agents may also charge a fee to send documents back to your lender. When you sign your loan documents for the purchase of your home, the lender will want those documents back and for that the closing agent or title company will charge an additional fee.
29. Notary and other fees. As laws have changes, some states have enacted some laws that require additional paperwork to transfer title of a home. That additional paperwork might have to be reviewed and signed by a notary public and for that the notary public might be able to charge a fee. In some cases the notary public fees are nominal and in other states they can be $25 to witness your signature on a document.
All of the fees that you are charged should show up on your HUD-1 form. They should also be detailed in the good faith estimate (GFE) that your lender is required to provide you by law within three business days of putting in your loan application. But savvy home buyers will ask the lender to give them a good faith estimate before they complete the loan application process.
Wednesday, August 12, 2009
Wednesday, July 15, 2009
First Time Buyer Tax Credit FAQ's for July 15th 2009
# 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?
Yes. The income limit for single taxpayers is $75,000; the limit is $150,000 for married taxpayers filing a joint return. 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 phaseout range for the tax credit program is equal to $20,000. That is, 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 of foreign-earned income. See IRS Form 5405 for more details.
# 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 the phaseout range of $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 the phaseout range of $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 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns). 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. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase.
# 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.
It is important to note that you cannot purchase a home from your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse. Please consult with your tax advisor for more information. Also see IRS Form 5405.
# 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 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. Please consult with your tax advisor for more information.
# 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.
In addition, 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. As a result, some state housing finance agencies have introduced programs that provide short-term second mortgage loans that may be used to fund a downpayment. Prospective home buyers should check with their state housing finance agency to see if such a program is available in their community. To date, 14 state agencies have announced tax credit assistance programs, and more are expected to follow suit. The National Council of State Housing Agencies (NCSHA) has compiled a list of such programs, which can be found here.
# The Secretary of Housing and Urban Development has announced that HUD will allow "monetization" of the tax credit. What does that mean?
It means that HUD will allow buyers using FHA-insured mortgages to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 income taxes to receive a refund. These funds may be used for certain downpayment and closing cost expenses.
Under the guidelines announced by HUD, non-profits and FHA-approved lenders will be allowed to give home buyers short-term loans of up to $8,000.
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.
Housing finance agencies and other government entities may also issue tax credit loans, which home buyers may use to satisfy the FHA 3.5 percent downpayment requirement.
In addition, approved FHA lenders will also be able to purchase a home buyer’s anticipated tax credit to pay closing costs and downpayment costs above the 3.5 percent downpayment that is required for FHA-insured homes.
More information about the guidelines is available on the NAHB web site. Read the HUD mortgagee letter (pdf) and an explanation of the FHA Mortgagee Letter on Tax Credit Monetization (pdf). An FAQ about monetization (pdf) is available at the NAHB web site.
# 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.
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?
Yes. The income limit for single taxpayers is $75,000; the limit is $150,000 for married taxpayers filing a joint return. 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 phaseout range for the tax credit program is equal to $20,000. That is, 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 of foreign-earned income. See IRS Form 5405 for more details.
# 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 the phaseout range of $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 the phaseout range of $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 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns). 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. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase.
# 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.
It is important to note that you cannot purchase a home from your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse. Please consult with your tax advisor for more information. Also see IRS Form 5405.
# 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 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. Please consult with your tax advisor for more information.
# 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.
In addition, 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. As a result, some state housing finance agencies have introduced programs that provide short-term second mortgage loans that may be used to fund a downpayment. Prospective home buyers should check with their state housing finance agency to see if such a program is available in their community. To date, 14 state agencies have announced tax credit assistance programs, and more are expected to follow suit. The National Council of State Housing Agencies (NCSHA) has compiled a list of such programs, which can be found here.
# The Secretary of Housing and Urban Development has announced that HUD will allow "monetization" of the tax credit. What does that mean?
It means that HUD will allow buyers using FHA-insured mortgages to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 income taxes to receive a refund. These funds may be used for certain downpayment and closing cost expenses.
Under the guidelines announced by HUD, non-profits and FHA-approved lenders will be allowed to give home buyers short-term loans of up to $8,000.
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.
Housing finance agencies and other government entities may also issue tax credit loans, which home buyers may use to satisfy the FHA 3.5 percent downpayment requirement.
In addition, approved FHA lenders will also be able to purchase a home buyer’s anticipated tax credit to pay closing costs and downpayment costs above the 3.5 percent downpayment that is required for FHA-insured homes.
More information about the guidelines is available on the NAHB web site. Read the HUD mortgagee letter (pdf) and an explanation of the FHA Mortgagee Letter on Tax Credit Monetization (pdf). An FAQ about monetization (pdf) is available at the NAHB web site.
# 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.
Wednesday, June 24, 2009
Home Sales Rose for a Third Month in May
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By THE ASSOCIATED PRESS
Published: June 23, 2009
WASHINGTON (AP) — A real estate group, the National Association of Realtors, said on Tuesday that sales of previously occupied homes rose modestly from April to May, the third monthly increase this year, but that signs of any housing recovery were fragile at best.
Skip to next paragraph
The New York Times
The Realtors said that home sales rose 2.4 percent to a seasonally adjusted annual rate of 4.77 million last month, from a downwardly revised pace of 4.66 million in April. Prices, meanwhile, were 16.8 percent lower than a year ago.
About one out of every three homes sold was a foreclosure or distressed sale. That helped drag down the median price to $173,000 — 16.8 percent below a year ago. Falling prices coupled with new rules for property appraisers have caused many transactions to fall apart or be delayed.
“We have just been flooded with e-mails, telephone calls on the appraisal problems,” said Lawrence Yun, the Realtors’ chief economist.
The sales results missed economists’ expectations, and stock markets headed lower on the news. Home sales had been expected to rise to an annual pace of 4.81 million units, according to Thomson Reuters.
One bright spot, however, was that the number of unsold homes on the market at the end of May fell 3.5 percent, to nearly 3.8 million. That is a 9.6-month supply at the current sales pace.
That drop was “the best news in the report,” said Joseph LaVorgna, Deutsche Bank’s chief economist.
By THE ASSOCIATED PRESS
Published: June 23, 2009
WASHINGTON (AP) — A real estate group, the National Association of Realtors, said on Tuesday that sales of previously occupied homes rose modestly from April to May, the third monthly increase this year, but that signs of any housing recovery were fragile at best.
Skip to next paragraph
The New York Times
The Realtors said that home sales rose 2.4 percent to a seasonally adjusted annual rate of 4.77 million last month, from a downwardly revised pace of 4.66 million in April. Prices, meanwhile, were 16.8 percent lower than a year ago.
About one out of every three homes sold was a foreclosure or distressed sale. That helped drag down the median price to $173,000 — 16.8 percent below a year ago. Falling prices coupled with new rules for property appraisers have caused many transactions to fall apart or be delayed.
“We have just been flooded with e-mails, telephone calls on the appraisal problems,” said Lawrence Yun, the Realtors’ chief economist.
The sales results missed economists’ expectations, and stock markets headed lower on the news. Home sales had been expected to rise to an annual pace of 4.81 million units, according to Thomson Reuters.
One bright spot, however, was that the number of unsold homes on the market at the end of May fell 3.5 percent, to nearly 3.8 million. That is a 9.6-month supply at the current sales pace.
That drop was “the best news in the report,” said Joseph LaVorgna, Deutsche Bank’s chief economist.
Wednesday, April 15, 2009
Wednesday, March 25, 2009
Constance Ramos is on the show today, and offer these tips for FAUX Painting
Materials and Tools:
paint brush
tire brush
toilet brush
2 empty buckets
dark green paint (Benjamin Moore Brookside Moss, 2145-30)
green metallic paint (Mark's Paints Sage, ME 247)
gold paint (Mark's Paints Iridescent Gold, ME 194)
Steps:
1. Pour the green metallic paint in one bucket and the dark green in another.
2. Mix the paint around with a brush to thin it out, making it more translucent.
Figure A
3. Use the paint brush to add paint to the toilet (figure A) and tire brushes or dip the brushes directly in the paint.
Figure B
4. Paint the wall with the cleaning brushes (figure B). The rough bristles allow you to spread the paint in rough and unpredictable streaks, which gives the wall a distressed quality.
5. Cover the wall with the gold paint to make the wall shine.
Wednesday, February 18, 2009
First Time Buyer Tax Credit, do you qualify?
1. Eight grand, new buyers: The tax credit included in the economic stimulus legislation is much narrower than the $15,000 proposal. This credit is equivalent to 10 percent of the purchase price of the home--although it's capped at $8,000--and applies only to first-time home buyers and principal residences. But unlike an earlier $7,500 home buyer tax credit, this one does not have to be repaid.
2. First time buyers defined: For the purpose of this legislation, a "first-time home buyer" is someone who hasn't owned a principal residence for three years before buying a house. (The date of purchase is considered the day that the title is transferred.) That means if you've owned a vacation home--but not a principal residence--within the past three years, you would still qualify for the credit.
3. 2009 buyers only: Only those who purchase a home on or after January 1 and before December 1, 2009 are eligible for the credit. Anyone who bought a home last year won't be able to take advantage of it.
4. Income limits: The tax credit is subject to income limitations. Single buyers need a modified adjusted gross income of $75,000 or less to qualify for the full credit, that's $150,000 for married couples. Those earning more than these thresholds may be eligible for reduced credits.
5. Refundable: Because the tax credit is "refundable," qualified buyers can take advantage of it even if they don't have much tax liability.
6. Recapture: Buyers have to own the home for at least three years in order to capitalize on the credit. If they sell the home before then, they will have to return the credit to the government. (Exceptions will be made in certain cases, such as death or divorce.)
2. First time buyers defined: For the purpose of this legislation, a "first-time home buyer" is someone who hasn't owned a principal residence for three years before buying a house. (The date of purchase is considered the day that the title is transferred.) That means if you've owned a vacation home--but not a principal residence--within the past three years, you would still qualify for the credit.
3. 2009 buyers only: Only those who purchase a home on or after January 1 and before December 1, 2009 are eligible for the credit. Anyone who bought a home last year won't be able to take advantage of it.
4. Income limits: The tax credit is subject to income limitations. Single buyers need a modified adjusted gross income of $75,000 or less to qualify for the full credit, that's $150,000 for married couples. Those earning more than these thresholds may be eligible for reduced credits.
5. Refundable: Because the tax credit is "refundable," qualified buyers can take advantage of it even if they don't have much tax liability.
6. Recapture: Buyers have to own the home for at least three years in order to capitalize on the credit. If they sell the home before then, they will have to return the credit to the government. (Exceptions will be made in certain cases, such as death or divorce.)
Wednesday, February 11, 2009
The American Recovery and Reinvestment Act of 2009
The American Recovery and Reinvestment Act of 2009, the Treasury’s financial stability plan, and other stimulus efforts for families and housing.
The National Association of Realtors® hailed the Senate for passing its stimulus bill that expands the homebuyer tax credit, an important housing component that will help shrink housing inventory, bring stability to home values and move the country closer to an economic recovery.
The bill now heads to conference committee to reconcile differences between the Senate and House versions.
Congressional leaders hope to have the bill ready for President Obama’s signature by the weekend. NAR will continue to press the need for housing stabilization measures with Congress and the Obama administration to make housing a primary component of the government’s economic recovery plans.
Additionally, NAR commended the Obama Administration for the financial stability plan announced today by Treasury Secretary Timothy Geithner.
Geithner stressed the importance of improving the housing market by reducing foreclosures, making credit more available and by bringing mortgage interest rates down.
NAR believes that many of the actions called for in the Treasury plan should result in lower mortgage rates and fewer foreclosures.
About the tax credit, McMillan said, “The credit of up to $15,000 for homebuyers is a critical provision in the Senate bill that will result in approximately 1 million additional home purchases this year,” McMillan said. The provision also eliminates the repayment feature of the earlier tax credit, makes the credit available for all purchases of primary residences and extends the credit for one full year. These are all provisions NAR has continually called for in any federal stimulus plans. Review that…..
“This is a great effort by the Senate and a major step in the right direction, but our work is far from finished. Much more needs to be done in the coming days and weeks to bring stability to the housing market and to begin an economic recovery,” said McMillan. (courtesy of Realtor.org)
The Treasury’s plan anticipates lower interest rates through the ongoing Federal Reserve program to purchase mortgage-backed securities. The Treasury has also agreed to buy commercial MBS, a bold step in helping preserve the commercial real estate sector.
The National Association of Realtors® hailed the Senate for passing its stimulus bill that expands the homebuyer tax credit, an important housing component that will help shrink housing inventory, bring stability to home values and move the country closer to an economic recovery.
The bill now heads to conference committee to reconcile differences between the Senate and House versions.
Congressional leaders hope to have the bill ready for President Obama’s signature by the weekend. NAR will continue to press the need for housing stabilization measures with Congress and the Obama administration to make housing a primary component of the government’s economic recovery plans.
Additionally, NAR commended the Obama Administration for the financial stability plan announced today by Treasury Secretary Timothy Geithner.
Geithner stressed the importance of improving the housing market by reducing foreclosures, making credit more available and by bringing mortgage interest rates down.
NAR believes that many of the actions called for in the Treasury plan should result in lower mortgage rates and fewer foreclosures.
About the tax credit, McMillan said, “The credit of up to $15,000 for homebuyers is a critical provision in the Senate bill that will result in approximately 1 million additional home purchases this year,” McMillan said. The provision also eliminates the repayment feature of the earlier tax credit, makes the credit available for all purchases of primary residences and extends the credit for one full year. These are all provisions NAR has continually called for in any federal stimulus plans. Review that…..
“This is a great effort by the Senate and a major step in the right direction, but our work is far from finished. Much more needs to be done in the coming days and weeks to bring stability to the housing market and to begin an economic recovery,” said McMillan. (courtesy of Realtor.org)
The Treasury’s plan anticipates lower interest rates through the ongoing Federal Reserve program to purchase mortgage-backed securities. The Treasury has also agreed to buy commercial MBS, a bold step in helping preserve the commercial real estate sector.
Wednesday, January 7, 2009
What should I do to prepare to buy a home in 2009?
In 2008 mortgage crisis increased the numbers of foreclosures and short sales in the U.S. Lenders responded by tightening rules for new home loans. If you want to buy a home in 2009, what do you need to know before looking for your home and home loan? What can you do to make yourself a desirable mortgage borrower so that banks will issue you a home loan? Check out these New Year's resolutions for home buyers to improve your changes of getting a great home loan and the property you want.
As we say goodbye to 2008, it's worth looking back at the year that was for home buyers, sellers and homeowners.
Frankly, I wouldn't be surprised if 2008 goes down as one of the worst-ever for housing since the Great Depression.
Housing values fell by double-digits in many metropolitan areas. Housing starts virtually stopped. Inventories of new and existing homes grew dramatically. Mortgage interest rates remained relatively high, even as the short-term Federal Funds rate plunged to nearly zero by the end of December.
Foreclosures reached record numbers, and lenders found themselves literally buried under stacks of short sale proposals, foreclosure filings, and loan modifications. Late in the year, Fannie Mae announced it would stop tossing renters who paid on time out of houses that had been foreclosed upon.
Of those loans that had been modified more than 50 percent went delinquent, reflecting the increasing number of jobs lost and diminished paychecks.
The old lender's maxim holds true: If you don't have a job, you probably won't make your mortgage payment.
Lets talk about Income Affecting your Ability To Make Mortgage Payments
Sometime around the middle of the year, when Fannie Mae and Freddie Mac were taken over by the government, lenders realized that having a real job with a real income is central to assessing someone's ability to make monthly payments of principal, interest, taxes and insurance. Having a great credit score simply isn't a good enough predictor on its own, which is why "no-doc" loans have entirely faded away.
Lenders also rediscovered the beauty of having some skin in the game. Except for the USDA's rural loan program and a VA loan, zero down payment mortgages have virtually dried up.
Sellers aren't happy. But there are plenty of deals to be had, as the economy is expected to get worse at the beginning of 2009. Higher rates of unemployment mean more foreclosures, driving down the price of homes.
As we ended 2007, I wrote that some were comparing the 2007 housing market to the Great Depression. Looking back on this year, most housing markets took a turn for the worst. The silver lining for home buyers: If you're looking to buy a house, 2009 could be a great year to close on a deal.
If you're planning to buy a house this coming year, here's my annual list of New Year's resolutions you should consider making:
Lets talk about your new years resolution to buy a home:
You can say (raise your right hand) As a buyer, I resolve to:
- Get my credit and finances in shape.
Put a lid on your spending, cut up the cards, and don't max out any one card (in fact, never charge more than 25 percent of your maximum credit limit) or your credit score will suffer. If you're going to cancel an account, do it in writing, but you get bonus points on your credit score the longer you maintain a credit account. So a credit card account that you opened in 1984 is worth a lot more than one you opened last month.
Don't forget that good credit also means job stability. Most lenders require that you work for the same employer for at least a year, and maybe two, before they'll approve your home loan application. If you're self-employed, they'll want to see at least two years of tax returns before you'll qualify for a conventional loan. If you're offered a better job in your field, by all means take it. But if you want to buy a home, try not to jump from job-to-job to job within a relatively short period of time, particularly if the job changes are in different industries.
If you want to buy a house next year, pull a copy of your credit history and credit score. Try to reduce the amount of personal debt you have, including credit card debt, student loans and auto loans. While having personal debt doesn't mean you can't qualify for a loan, it will lower the amount of the mortgage a lender might be willing to give you. And, given the current mortgage crisis, lenders are paying close attention to your credit history and credit score.
If you keep one resolution this year, choose to clean up your credit. One of the best things you can do to prepare for buying a home is to make your monthly debt payments on time. Even if you have a lousy credit history, lenders will be more forgiving if they see you've gotten your act together in the last 6 to 12 months.
Federal law now requires each of the three main credit reporting bureaus (Experian, Equifax and Transunion) to give you a free copy of your credit history once a year.
To get yours, go to www.annualcreditreport.com. At the time, buy a copy of your credit score from Equifax. The cost is under $10, which is still less than other sites.
- Resolution for buying in 09 is Know how much I can afford to spend before shopping for a home.
You have three options when it comes to figuring out how far your down payment and income will take you: You can guess; or you can pay a visit to your local lender, who will pre-qualify or pre-approve you for a loan, or you can go online.
Your lender will look at your income, debt, assets and liabilities and come up with the maximum amount you can spend on a home. Once you know how much you can afford to spend, you'll avoid making a common, heartbreaking, home buyer error: Looking at homes you can't afford to buy.
Too busy to visit a lender? There are several websites that offer good mortgage information. Try stonegatemtg.com for a state-by-state look at current interest rates from lenders who work in your area, including online lenders.
- Know your neighborhood, and be comfortable with it, before YOU buy a home there.
Everyone wants to live on the best block in the best neighborhood. Unfortunately, that location may not be in your budget. You might be able to afford the smallest home on the best block, but that won't do you much good if you need four bedrooms and that home only has two. Balancing affordability with location means you will have to compromise. While you may be willing to compromise on the size garden you have, you may not be willing to change your children's school districts.
Start looking at various neighborhoods and the amenities they offer. Is there a park? Shopping? Transportation? A house of worship? Do your friends and family live close by? Be careful not to limit your choice of neighborhoods too early on in the process. Explore new areas and the housing stock and amenities they offer.
Make sure you spend time during different parts of the day and night in the neighborhoods you like. Walk the streets, go into local shops. Visit the neighborhood police department and local schools. Stop by the local park district offices and see what programs and classes are available. Drive the commute from prospective neighborhoods to your job during rush hour. Get to know the neighborhood and its residents inside and out before you buy.
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