On March 25, 2010 Governor Schwarzenegger signed Assembly Bill 183 which provides $200 million for home buyer tax credits. The $200 million will be divided between first-time homebuyers and “move up” homebuyers. The following a summary of the legislation:
As with any tax-related issue, always consult a tax professional if you, or your clients, have specific questions about this new tax credit.
What Every Homebuyer/Homeowner Must Know
Four Key Elements Every Homebuyer/Homeowner Must Know
The Housing and Economic Recovery Act (HERA) passed by Congress in 2008 goes into effect today, July 30, 2009. The act which has many provisions primarily impacts the Truth in Lending Act requirements regarding early and final disclosures to homebuyers and addresses the timing of when fees can be charged.
There are four key items that homebuyers or people looking to refinance must now:
1. If the borrower is financing the property, these new regulatory and investor guidelines will impact, and could even dictate, the closing date of the transaction.
Historically, borrowers and sellers would agree on a closing date, and then service providers - including lenders - would work as best they could toward meeting that date. Going forward, contracts can still be written with a specific closing date in mind, but all parties need to take into account that the earliest any home financing transaction can close is 7 business days after the borrower is issued his or her initial mortgage disclosures from the lender.
2. Upfront fees cannot be collected by the mortgage originator (except for a credit report fee) until the initial disclosures are received by the borrower. Disclosures are considered received 3 full business days after mailing, allowing the fees to be collected on the fourth business day.
Historically, upfront fees could be collected immediately. Starting, July 30, 2009, upfront fees cannot be collected, including the appraisal fee, until 4 business days after the lender issues the initial disclosures (you receive a packet in the mail from the lender after you start the loan process). The only exception is the credit report fee which can be collected at application. This also means that the appraisal cannot be requested until the fourth business day.
3. The borrower must be provided with a copy of his or her appraisal a minimum of 3 business days prior to closing. The appraisal is considered “received” 3 business days after mailing.
To help expedite the process, the lenders have elected to have a copy of the appraisal issued directly to the borrower – and the borrower must receive the appraisal at least 3 business days prior to the mortgage closing. This means the borrower may receive his or her appraisal before or simultaneous to the mortgage originator receiving their copy. If the borrower believes that the 3-business-day required review period is not necessary for whatever reason, he or she has the right to waive the requirement.
4. An increase of more than 0.125% in the Annual Percentage Rate (APR) from the initial Truth in Lending Disclosure (TIL) requires the TIL disclosure to be revised and reissued to the borrower. The borrower must receive a revised TIL disclosure at least 3 business days before closing, providing the borrower with the time required to determine if the borrower is comfortable with his or her loan choice. Again, the TIL disclosure is considered “received” 3 business days after mailing.
A more typical contract date may be 30-45 days – or possibly longer. Considering that many things occur and may be changed or finalized through the course of the transaction, there are a number of things that can impact the borrower’s APR. Therefore it is critical on the front tend to ensure that estimated fees are as accurate as possible.
In our February 17th blog post, we highlighted the four primary sections of the American Recovery and Reinvestment Act of 2009. The following are important updates to two of those sections.
$729,750 FHA and Higher Conforming Loan Limits Restored in High Cost Areas
Several lenders have started lending on the increased loan limits in the month of May while others are looking to do so in the near term. These limits are up from the previous higher conforming loan limits of $625,500 in areas designated as high cost by the Department of Housing and Urban Development (HUD).
Federal First-time Home Buyer Tax Credit of $8,000
The bill provides for a $8,000 tax credit that would be available to first-time home buyers for the purchase of a principal residence on or after January 1, 2009 and before December 1, 2009. The credit does not require repayment.
On May 12, 2009, HUD announced that the Federal Housing Administration (FHA) has given the green light to lenders for a change in the real estate down payment rules. The $8,000 tax credit may now actually be applied toward the down payment of the home purchase.
Please refer to our February 17th blog post for further details on this credit.
In addition to the above Federal assitance, the State of California has also sanctioned a tax credit.
State Income Tax Credit of $10,000
The state tax credit is for new homes purchased between March 1, 2009, and Feb. 28, 2010, or as long as program funding is available. Passage of the California state budget in February first established the credit and the cap current stands at $100 million, which is enough to provide 10,000 new home buyers with a $10,000 credit.
State legislation (Assembly Bill 765) was introduced May 13th, 2009 that would make it possible for an additional 20,000 taxpayers to take advantage of a popular program by increasing the existing $100 million cap for the California new home tax credit program to $300 million.
As of May 14, 2009, 5,668 applications have been submitted for the program, resulting in $54.9 million in credits being claimed.
Effective immediately, Lenders have started accepting loan applications for qualified borrowers who were above the 80% loan-to-value threshold normally used for refinancing home loans. This is part of the Home Affordable Refinance program announced by the goverment on March 4, 2009 (see our March 19th blog post).
We outline the key highlights of this great refinance opportunity:
Action Steps for Homeowners Looking to Refinance But Unable to do so Due to Previous Loan-to-Value Restrictions:
Details of the $75 billion Homeowner Stability Initiative announced in February were unveiled on March 4, 2009.
The program falls into two main categories: Home Affordable Refinance and Home Affordable Modification.
The Refinance program aims to help those who are not able to refinance through traditional means due to a decrease in the value of their home above the 80% loan-to-value mark.
The Modification program aims to help those whose do not qualify for any type of refinancing and struggling to make their mortgage payments.
Participating lenders have yet to roll out the details, but there are some initial steps to take to get prepared. First answer four basic questions:
If you answered “Yes” to all of the above questions, you may qualify for a Home Affordable Refinance.
The benefit of the Refinance program is to get borrowers into today’s market rates even when the loan-to-value in the home is higher than 80%.
The next step will be to gather the following basic information to start:
Once you have this information, call your mortgage lender and ask about the application process.
If you answered “No” to any of the questions, then you may not qualify for a refinance but a Home Affordable Modification by answering “Yes” to the following four questions:
If you answered “Yes” to all of the Modification program questions, then the next step will be to gather all the information required for a Home Affordable Refinance (noted above) plus a letter describing the circumstances that caused your income to be reduced or expenses to be increased (job loss, divorce, etc).
The benefit of the Modification program is to get your monthly payment down to 31% of your gross income with a rate as low as 2% for 5 years and increases 1% thereafter.
Details of the guidelines can be found at the following link: http://www.treas.gov/press/releases/reports/modification_program_guidelines.pdf
President Obama signed into law the $787 billion American Recovery and Reinvestment Act 2009, today in Denver, Colorado.
There are four primary sections of the economic stimulus pan that could be very beneficial if you own or are buying a home.
Benefit 1: Expansion of Home Improvement Tax Credit
The tax credit for making energy efficient home improvements is now 30% of the cost of the improvements up to a maximum of $1,500. This means that if the improvements cost you $4,500 you would receive a tax refund of $1,500 when you file your tax returns. Eligible improvements include energy efficient exterior door and windows, insulation, heat pumps, furnaces, central air conditioners and water heaters. Generally, your home improvement contractor and/or the manufacturer selling the improvements issues a certification that clarifies whether the improvements meet the necessary standards for energy efficiency. Most modern windows, furnaces, and air conditioners meet these requirements.
If you have been holding off on making some of these improvements, now is a great time to move forward, especially with some great deals that are being currently offered.
Benefit 2: $729,750 FHA and Higher Conforming Loan Limits Restored in High Cost Areas
As we reported in our blog yesterday, the $729,750 maximum loan limit has been restored as part of the economic stimulus plan. This limit was in force for the majority of 2008, but was reduced to $625,500 starting January 1, 2009. This makes higher cost homes more affordable, especially in the Bay Area and other coastal housing markets that tend to have higher than average home values.
Benefit 3: Expansion of First-time Home Buyer Tax Credit
The tax credit available to first time home buyers was increased from $7,500 to $8,000 for homes purchased between January, 1, 2009 and December 1, 2009. Also, the credit no longer needs to be paid back as long as you live in the home without selling it for at least 3 years. The previous version of the credit expired on July 1, 2008, and required home buyers to pay the funds back over a 15 year timeframe.
The income limitation remains the same - $75,000 for single tax payers claiming the full credit and $150,000 for married tax payers – as do most other qualification requirements. Also, the credit remains refundable. This means that first-time home buyers who owe less than $8,000 in taxes for the year are still eligible for the full $8,000 credit when they file their tax returns. In that case, the IRS will write you a check for the difference between $8,000 and your actual tax bill. In fact, the credit can be claimed on your 2008 tax returns that you file by April 15, 2009, even if you buy the home in 2009.
There is one catch, however: If you bought the home in 2008, the credit remains $7,500, and it still needs to be paid back over a 15 year timeframe beginning in 2011 when your file your 2010 tax returns.
Benefit 4: Higher Reverse Mortgage Loan Limits
The loan limits for FHA-insured reverse mortgages have been increased to $625,500 across the entire country – not just the higher cost areas. The previous limit was $417,000 across the country. This is especially important because the FHA program is virtually the only mortgage loan option available as private and jumbo reverse mortgage programs have nearly all evaporated.
This coincides with another little know change in the reverse mortgage arena: the availability of reverse mortgages on home purchase transactions. This is a fantastic opportunity for senior citizens to buy a new home and live mortgage payment-free without having to wait for their old home to sell. Seniors could also use this strategy to buy a new home and turn the old home into a rental or otherwise wait for market conditions to improve before trying to sell the old home.
To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. federal tax advice contained in this communication was not intended or written to be used, and cannot be used, by any person for the purpose of (i) avoiding tax related penalties or (ii) promoting, marketing, or recommending to another person any transaction or matter addressed in this communication. Also, it is important to note that we are providing this information to you as your mortgage planners, in order to make you aware of information that may benefit you. We are not investment, tax, or legal advisors, and this information does not constitute legal, tax, or investment advice.
As first reported by us in our Janaury 2009 newsletter, The American Recovery and Reinvestment Act of 2009, to be signed into law by President Obama tomorrow in Denver, will temporarily revert the current loan amounts/levels back to $729,750 in high cost areas.
After the President signs the bill into law, three things MUST happen before lenders can accept applications with higher loan amounts (between $417,000 and $729,750):
1. Fannie Mae and Freddie Mac (the agencies) and FHA must determine whether the pricing, policy and/or delivery requirements will be changed.
2. The agencies must report their requirements to mortgage lenders.
3. Lenders must identify impacts caused by the agencies' and FHA's requirements and implement the changes.
Stay tuned for further information on dates and specific changes to the higher balance conforming loans.
Mortgage rates on conforming loans (up to $417,000) and high balance conforming loans ($between $417,000 and $625,500) started declining last week and are now in the mid 5% range. These are the lowest rates have been in the last 5 years. If you have a mortgage rate of 6% or higher, this is the time to take advantage of a refinance and save money.
The Wall Street Journal reported on December 3rd that the U.S. Treasury Department is mulling over a plan to jump start the U.S. housing market, seen as the underlying reason for the current recession, by dropping mortgage interest rates further. Under the plan, the government would purchase billions of dollars worth of mortgage backed securities issued by mortgage giants Fannie Mae and Freddie Mac who guarantee a large portion of all the new mortgages, as well as those guaranteed by the Federal Housing Administration.
If this plan were to come to fruition, it would provide tremendous help to people considering buying a home and to current home owners trying to save more money on their home payments.
As a note of caution, the plan is only being considered and nothing has been finalized as yet. Homeowners currently working on a refinance to lower their payments should continue forth on their transaction.
It is important to remember that we now live in a world of very stringent lending guidelines and not as many people will be able to refinance either due to strict income and asset requirements, higher credit scores, a substantial drop in values or a combination of other factors.
ACTION STEP FOR HOMEOWNERS: It is highly advised that you proactively in contact your trusted mortgage advisor immediately to see if and what rate you qualify for.
Our experience shows that when rates drop significantly, they do so for only a day or two. To take advantage of these lower rates, it is imperative that you provide your latest income, asset and employment information to your mortgage broker. He/she will be able to perform the proper due diligence in advance to ensure you qualify for lower rates now or in the future. Only 3 out of every 10 borrowers wanting to lower their payment is qualifying for a refinance under the newer lending guidelines. Your prompt action now will ensure you are one of few to lower your rate and save money.
The temporary higher conforming loan limits of $729,750 established for certain “high cost” areas as part of the 2008 Housing and Economic Recovery Act have been reduced. The new 2009 higher conforming loan limit is $625,500 for 1-unit properties in “high cost” areas (see Reliance Financial Newsletter: August, 2008).
Most Bay Area counties with the exception of Sonoma and Solano fall under this “high cost” area designation. You can look-up your specific area's conforming loan limit on the HUD website.
The following additional facts are important to keep in mind regarding the higher conforming limit loans:
The Federal Housing Finance Agency also recently released the standard conforming loan limits for 2009. There are no changes to these loan limits from 2008, for most areas in the US. The limits are as follows:
Mortgage rates jumped higher today by 0.25% on news of the Fed Funds rate cut. The Federal Reserve, in an emergency meeting early this morning, cut its key rate - the Fed Funds rate - by 0.5%. This brings the Fed Funds rate to 1.5%.
Fed rates cuts are seen as inflationary, as lower rates are meant to be an economic stimulant and as such lead to price increases of commodities and consumer goods. Mortgage rates on long term fixed rates jump higher on any inflationary news as investors know that a static bond they purchase today will be worth less tomorrow due to an increased risk of inflation. However, given the perilous state of the US economy, mortgage rates on government backed conforming loans are expected to stay low.
On the bright side, a lower Fed Funds rate means consumers will be able to start seeing a reduction in home equity lines of credit (HELOC), credit card, car loans and other kinds of consumer debt, directly linked to the Fed Funds rate. For example, HELOCs are tied to Prime Rate (Fed Funds Rate + 3% margin). Prime rate is down from 5.0% to 4.5% on today’s interest rate cut. Consumers will notice the lower payment on the next payment statement.
The U.S. Federal Reserve Bank led a rare coordinated rate cut along with Central Banks of 6 other nations including Europe, Canada, China, Switzerland, UK and Sweden. Given the enormity of the financial crisis, it became evident that central banks had to make an unprecedented move. The Dow has plunged nearly 2,000 points or 17.6% lower than where it was before the record one-day point drop of 777 points on Sept. 29.
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