The Diamond Blog

Here are details on the $8,000 tax credit for first time homebuyers that can be used on all properties that are part of the The American Recovery and Reinvestment Act of 2009 ...

• Tax credit equals lessor of 10% of the property's value or $8,000
• Effective for properties bought between January 1, 2009 and December 1, 2009
• The property purchased must be single-family (condos & townhouses included) and used as a principal residence for three years.
• There is an income limit of $75,000 per individual (adjusted gross income) or $150,000 if filing a joint reurn.  Individuals above these salaries may still receive a portion of the tax credit.  IRS Form 5405 will help to determine this. 
• Only first-time homebuyers are eligible or the purchaser (and purchaser's spouse) must not have owned a principal residence in the last three years
• This tax credit does not have to be repaid if the property is purchased between 1/1/09-12/1/09
• This tax credit can be used on all properties, as long as indviduals meet the federal criteria. 

This is just a basic summary, it is recommended that you consult a tax professional for more specific information that may pertain to you, as several states also have local policies.

Will the recovery look more like a "U" or more like an "L"?

FHA Preps Tax Credit for Down Payment Use

FHA has just announced that it is going to permit its lenders to allow homebuyers to use the $8,000 tax credit as a down payment. The announcement was made today by the secretary of Housing and Urban Development, Shaun Donovan. Lenders will be able allow this through a short-term bridge loan that buyers can then use at the closing table for immediate "good" funds.

Home buyers qualifying for Federal Housing Administration-insured mortgages may soon use the new first-time home buyer $8,000 tax credit as a down payment.

The process of applying the tax credit toward down payment, called ‘monetization’ in the industry, allows for FHA-qualified borrowers to use the tax credit to obtain a government-insured mortgage.

Donovan’s announcement came at a National Association of Realtors legislative summit this morning, although HUD’s details on the initiative aren’t scheduled for official release until next week. The initiative will allow FHA-approved lenders to monetize the tax credit through short-term bridge loans, letting borrowers access the funds at the closing table.

“We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a down payment,” Donovan said, according to NAR.

The tax credit arrived as part of the American Recovery and Reinvestment Act of 2009 for qualifying taxpayers that buy homes in 2009. The law states that qualifying home buyers may claim up to $8,000 — or $4,000 for married individuals filing separately — on either their 2008 or 2009 tax returns. Unlike the previous law — which required recipients of the tax credit to repay the funds over a number of years without interest — the new home buyer credit effective with the passage of the act does not have to be repaid.

How to sell the FHA 3/1 ARM – Thanks to Paul for this suggestion.

You could present a 30 year fixed at 5.25%.

Or, a 3/1 ARM at 3.75%

The difference to the borrower is 1.50% savings for the first three years, which is a 4.50% savings over the first three years. That savings equates to a $11,250 savings on a $250,000 loan.

Then, the 3/1 rate could adjust upwards 1% for the forth year under worst case scenario, so the savings becomes .50% for the forth year which equates $1,250. Total savings at the end of the forth year is $12,500

For the fifth year under the worst case scenario the 30 year fixed gains an advantage of .50% since the 3/1 ARM can adjust upwards another 1% to 5.75%

The total savings by the end of the fifth year is reduced to $11,250

The sixth year under the worst case scenario the 3/1 ARM could become 6.75% reducing the lifetime savings to $7,500

Continuing under the worst case scenario with the 3/1 ARM potentially adjusting upwards 1% per year to a maximum of 5% lifetime Cap, the breakeven is in the 9^th year. The 3/1 ARM is much better over the first 7 or 8 years of the loan.

If the market does not move upwards to the worst case each year during the first nine years, which it probably won’t, the breakeven is pushed out even further than nine years.

The questions become:

1. How long do you plan to stay in this home?

2. How long has it been since the last time you refinanced?

Quite possibly, the answers to these questions will be less than nine years. Not to mention the benefit of the lower monthly payments.

The real financial planner may suggest to take the 3/1 ARM and continue to make the 30 year fixed payment for accelerated principal reduction.

If a borrower comes to you that already has say a 5.50% mortgage, this may be the only way you can go.

Home values are set to decrease with the implementation of the new appraisal law that took effect on May 1, 2009.