Sunday, October 11, 2009

Bailout can help you buy a home

President Barack Obama's economic stimulus plan includes strategies to help homebuyers and stimulate the U.S. housing market.

The primary feature of the housing portion of the 2009 Obama economic stimulus package features an $8,000 first-time homebuyer refundable tax credit for qualifying buyers who purchase a home between Jan. 1, 2009 and Dec. 1, 2009. The total tax credit a homebuyer can get in this initiative is equal to 10 percent of the purchase price, or a maximum of $8,000 -- to get the full $8,000 credit, the property must cost at least $80,000.

This is a refundable tax credit, which is far better than a tax deduction. If the total taxes you owe the IRS for the year -- whether withheld from your pay or not -- are less than $8,000, you will get a refund for the balance.

As an example, if you buy a house as a first-time buyer for say $85,000, you are entitled to an $8,000 tax credit. If your total tax owed for the year is $10,000 and you've already paid in $6,000 (still owe $4,000) you will not have to pay the $4,000 and you will get another $4,000 refunded to you.

"If you have been thinking about buying your first home, I can't think of a better time to do so," says mortgage expert Rodney Anderson, managing partner of Plano, Texas-based Rodney Anderson Lending Services.

Anderson says the program differs greatly from last year's $7,500 housing tax-credit program for first-time buyers, which was essentially an interest-free loan that required repayment over 15 years. That was not widely utilized, in part because it was voluntary for banks. Because the new Stability Initiative rewards banks for participating, the new credit is becoming widely available, Anderson says.

Basics of the tax-credit plan

  • Married couples making less than $150,000 in modified adjusted gross income -- with some sliding reductions beyond that income total -- are eligible. Both spouses must be first-time homeowners, however. For unmarried people making a joint purchase, only one party (the claimant) must be a first-time homeowner
  • Individuals making less than $75,000 in taxable income are eligible, with sliding reductions above that.
  • Participants can't have owned a principal residence in the last three years. Individuals who have owned a rental or vacation home in that period may still qualify.
  • Condos, townhomes, new-construction homes and mobile homes qualify.
  • Participants can get the tax credit for the purchase on either their 2009 or 2008 taxes. Owners can move this savings into the 2008 tax year even if they've already filed for the year, by amending their returns (IRS Form 5405). "That way, homeowners can use this early credit to help fund their home purchases," Anderson says.
  • Participants must live in the house for three years.

While the tax-credit program is enticing, Anderson warns that mortgage qualifications based on income, assets and credit are stricter than the pre-bust years. In early April 2009, most banks needed to see a credit score of at least 620 to lend, he says.

Also, the market remains "flooded with homes right now and the (tax incentive) may not be as big of incentive as hoped for, but it does give an extra push," says mortgage expert Joe Gross, president of Teaneck, N.J.-based Qualified Mortgage Inc., and author of "How The Greed Of Wall Street And Your Mortgage Lender Are Destroying America's Credit." But the program is already generating deals, he adds. "Realtors say there is more traffic and as the year rolls on and more people learn about the program, there will be even more," Anderson concurred. "It is encouraging."

The new credit aims to boost sales in the nation's sagging housing market.

Lawrence Yun, chief economist for the National Association of Realtors, predicts homebuyers will purchase an additional 300,000 homes in 2009 as a result of the tax credit.

"We think this year's tax credit will certainly have a much bigger impact because it is a true tax credit which is also refundable," Yun says. "For instance, if you owe $1,000 in taxes and qualify for the first-time homebuyers tax credit, you will receive a tax refund of $7,000."

Although Yun and others are hopeful about the new credit's impact on the housing market, not everyone shares the optimism.

Greg Smith, a Certified Financial Planner with The Wise Investor Group in Reston, Va., says it's important to be realistic about the credit's potential in light of the increasingly shaky economy and souring job market.

"This incentive only works for people who have complete job security, who know they won't be transferred within three years, who qualify as first-time homebuyers and have the ability to obtain financing," he says. "In addition, they need to live in an area with reasonable home prices."

Michael Dooley, a financial planner with The Patriot Financial Group in Beverly, Mass., is also a skeptic.

"While the theory behind the tax credit is great, I just don't think $8,000 is enough," Dooley says. "The people who would benefit from this the most are looking to survive financially or are even leaving their homes because they can't afford them."

While the tax credit is meant to cover 10 percent of the purchase price (up to $8,000), an $8,000 credit covers only about 4 percent of the purchase price of a home with the 2008 national median single-family price of $197,000, Smith says.

Meanwhile, homeowners that are more affluent will not be able to take advantage of the new credit, which phases out for individuals with an adjusted gross income of $75,000 or above and for married couples with a combined adjusted gross income of $150,000 or above.


By Steve McLinden • Bankrate.com

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