Christina Dunham's Random Real Estate Musings

New $10,000 Tax Credit for New Home Buyers in California

California lawmakers approved a new budget that included a $10,000 tax credit for home buyers, the largest home-buyer incentive ever offered in US history to date.

The tax credit is available for qualified buyers who purchase a newly constructed home on or after March 1, 2009, and before March 1, 2010, purchase a qualified principal residence that has never been occupied. The buyer must reside in the new home for a minimum of two years immediately following the purchase date.

Qualified Buyer Definition:
The California Franchise Tax Board defines a qualified buyer as “A taxpayer who purchases a single-family residence, whether detached or attached, that has never been occupied, that is purchased to be the principal residence of the taxpayer for a minimum of two years, and that is eligible for the homeowner’s exemption under California Revenue and Taxation Code Section 218.”

Qualified Principal Residence Definition:
A qualified principal residence refers to “ single-family residence, whether detached or attached, that has never been occupied and is purchased to be the principal residence of the taxpayer for a minimum of two years and is eligible for the property tax homeowner’s exemption.” This can be a single family home, condominium, a unit in a cooperative project, a houseboat, a manufactured home, or a mobile home. According to the rules, owner-built properties do not qualify because the home has not been “purchased.”

In addition, here’s what you need to know about the tax credit:

• This is NOT limited to first-time buyers;
• There is NO income limitation; and most importantly
• You do NOT have to pay it back, as long as you remain in the home for 2 years.

The bill, however, only set aside $100 million for this tax credit, so after 10,000 new homes are purchased, the credit is gone – so don't wait.

The credit CAN be utilized along with the new $8,000 first-time home buyer's credit made available by the new Stimulus Plan.

This means that if you're a first-time home buyer, and you purchase a qualified new home in California that costs more than $200,000, you'll get $18,000 in tax credits that you do not have to pay back, if you're a first-time home buyer and you purchase a new home that remains your primary residence for three years.

It's important to note that qualified home buyers will receive the tax credit, in equal amounts, over 3-years. If your tax credit is $7,500, you will receive a tax credit of $2,500 each year for three years. If your tax credit is $10,000, you will receive a tax credit of $3,333.33 each year for three years.

Finally, there is no down payment requirement to receive the $10,000 tax credit, although you will likely have a down payment requirement to secure a mortgage in today's market, at least 3.5% if you use FHA financing. The good news is the Stimulus Plan also restored the higher maximum loan limits of $729,750 for FHA and conventional loans for 2009.

This is largest home buyer tax credit ever offered in US history, let alone California. If you have even been thinking about buying a new home in California, give your mortgage advisor a call to get pre-qualified before it's too late. Don't miss out on this great opportunity to buy the new home of your dreams.

For more information, visit the California Franchise Tax Board’s website at http://www.ftb.ca.gov/individuals/New_Home_Credit.shtml

Christina Dunham is a Mortgage Advisor with Bay Equity, LLC, a direct lender specializing in residential, commercial and FHA loans. She may be reached at contact@christinadunham.com.

Government Bail-out for First-Time Homebuyers

Before you file your taxes this year, don't forget about the $8000 tax credit (or 10% of the home’s value, whichever is less) for first-time home buyers, which was enacted by the 2008 American Housing Rescue and Foreclosure Act. Designed to help stimulate interest in the housing market, this temporary provision provides a first-time home buyer (someone who hasn't owned a home in the last three years) a tax credit of up to $8000 for homes purchased between January 1, 2009 and December 1, 2009.

Qualifying taxpayers who buy a home this year before Dec. 1 can get up to $8,000, or $4,000 for married filing separately.

“For first-time homebuyers this year, this special feature can put money in their pockets right now rather than waiting another year to claim the tax credit, “ said IRS Commissioner Doug Shulman. “This important change gives qualifying homebuyers cash they do not have to pay back.”

It's not the $15,000 credit that Lawrence Yun, chief economist for the National Association Realtors (NAR) wanted to see. But Yun said, "The $8,000 credit will bring an additional 300,000 new homebuyers into the market. The credit could also create a domino effect," he said, "because each first-time homebuyer sale will lead to two more trade-up transactions down the line."

Basically the tax credit is an interest-free loan from the government to help you offset the costs of home ownership. But here's the best part. The law allows qualified taxpayers to take the credit against either their 2008 or 2009 taxes. Unlike the $7,500 credit from the previous stimulus bill, this is a true tax credit, in that it doesn't have to be repaid, as long as the buyers remain in the home for at least 3 years.

This means, if you qualify, you can buy a house this year before the end of the year and receive the credit on the 2008 tax returns you're filling out right now. Imagine having an extra $8000 in cash to pay bills or credit cards or even pay for renovations on your new home. If you choose to utilize the credit on your 2009 returns, your tax professional can help you reduce income tax withholding up to the amount of the credit. This will help you to increase your take-home pay throughout the year to save money for a down payment for a qualified purchase before December 1^st.

Qualified taxpayers who have already completed their returns and filed for the $7,500 credit can file amended returns for 2008 to claim the credit. You can download the necessary form from the IRS website at http://www.irs.gov/pub/irs-pdf/f5405.pdf. The instructions to the revised Form 5405 provide additional information on who can and cannot claim the credit, income limitations, and repayment of the credit.

There are certain income restrictions and rules for repayment. The new law does not affect people who purchased a home after April 8, 2008, and on or before December 31, 2008. For taxpayers who are claiming the credit on their 2008 tax returns, the maximum credit remains at 10 percent of the purchase price, up to $7,500, or $3,750 for married individuals filing separately. In addition, the credit for these 2008 purchases must be repaid in 15 equal installments over 15 years, beginning with the 2010 tax year.

Although the building industry was pleased with the credit, the $15,000 credit "would have done a lot more to turn around the housing market," said Bernard Markstein, an economist and director of forecasting for the National Association of Homebuilders (NAHB).

Christina Dunham is a Mortgage Advisor with Bay Equity, a commercial, residential and FHA Direct Lender. She may be reached at contact@christinadunham.com.

Home values in the San Francisco Bay Area continue to slide for the third year in a row. Values for single-family homes in the nine-county region dropped to $350,000, the lowest it has been since 2000. In San Francisco and the Northern Peninsula area, property values have dropped about 20%. In areas like Vallejo, the drop is even steeper at 32%.

Nationwide, one in every five homes sold in the last 12 months was a foreclosure, and one in six of all homeowners are upside down on their mortgage; that is, their loan balance is greater than their home’s value.

When this is the case, the best option is a short sale, which occurs when a bank or mortgage lender agrees to discount a loan balance, due to an economic hardship on the part of the home owner. The home owner sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove a proposed sale.

A short sale is typically executed to prevent a home foreclosure. Lenders often choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the home owners, the advantages include avoidance of having foreclosures on their credit histories. Additionally, a short sale is typically faster and less expensive than a foreclosure.

Junior lien holders, such as holders of second mortgages, HELOC lenders, and homeowner associations (special assessment liens), may also need to approve the short sale. Frequent objectors to short sales include those who hold tax liens (income, estate or corporate franchise tax - as opposed to real property taxes, which have priority even unrecorded) and mechanic's lien holders. It is possible for junior lien holders to prevent the short sale.

While it is frequently common for a lender to forgive the balance of the loan in question, it is unlikely that a lien holder that is not a mortgagee will forgive any of their balance. Further, it is common for a lender to omit updating the zero balance and settlement option on the mortgagor's credit report, or even flat-out refuse to do so "due to their financial loss."

The Mortgage Forgiveness Debt Relief Act Of 2007

When the lender decides to forgive all or a portion of the debt and accept less, the forgiven amount is considered as income for the borrower, like with a foreclosure, leaving it open to be taxed. However, The Mortgage Forgiveness Debt Relief Act of 2007 contains amendments to remove such tax liability, allowing the borrower and lender to work together to find a solution beneficial to both parties. For more details, download the IRS publication “Canceled Debts, Foreclosures, Repossessions and Abandonments” at http://www.irs.gov/pub/irs-pdf/p4681.pdf.

How Does a Short Sale Affect the Borrower's Credit?

To date, most short-sales are appearing as "Paid Settlements" on a mortgage account. In the wake of the current mortgage crisis, short sales are becoming extremely common, but legislation has not caught up with the tidal wave and there is no law on the books relating to them to date. As a result, there is an opportunity for the borrower to negotiate credit reporting with the lender.

A short sale proves that the borrower is exhausting every effort to pay the loan. The borrower has willingly committed to taking on months of emotional and physical stress in a good-faith effort to sell the property to maintain a good relationship with that lender. Here are the options you can request for in preferred order:

• Paid As Agreed - Won't hurt the score at all as long as the borrower has kept payments current.
• Unrated - May drop a few points.
• Paid Settlement - Credit score will drop 50-150 points.

If the short-sale is reported to the credit bureaus, the item will remain on the credit report for 7 years from the completion date or the settlement date. Since some lenders consider short sales the same as foreclosure, borrowers may need to wait up to 2 years from the date the short sale is completed to apply for another home loan. There is no exception for extenuating circumstances.

Christina Dunham is a Mortgage Advisor with Bay Equity, LLC, a direct lender specializing in residential, commercial and FHA loans. She may be reached at contact@christinadunham.com.