Senate and House Pass Home Buyer Tax Credit Extension

The White House says President Barack Obama on Friday morning will sign a bill that expands a popular homebuyers tax credit and extends unemployment benefits.

Congress on Thursday completed work on the $24 billion economic package that seeks to help out the millions who have lost jobs and have been unable to rejoin the workforce. The White House announced Obama's intention to sign the bill shortly after Congress finished the legislation.

Under the measure, an $8,000 tax credit for first-time homebuyers would be extended for seven months and expanded with a $6,500 credit for some prospective homebuyers who already own homes.  

The House passed the bill on a 403-12 vote Thursday, a day after the Senate ended a monthlong stalemate with a 98-0 vote. With some 7,000 people exhausting unemployment benefits every day and the $8,000 tax credit for first-time homebuyers set to expire at the end of November, President Barack Obama is expected to quickly sign it into law.

The $24 billion package also contains tax credits aimed at struggling businesses.

The IRS says some 1.4 million people applied for the homebuyers credit through August, helping enliven the moribund housing market. The legislation would extend the program through June of next year, as long as the buyer signs a contract by the end of April. It also offers a $6,500 tax credit to those who have lived in their current residence at least five years.

The measure doubles the income ceiling for eligible individuals to $125,000. Homes must cost less than $800,000 to qualify.

The nearly 2 million who have exhausted their unemployment benefits or face termination of benefits, usually about $300 a week, before the end of the year would receive 14 weeks of additional benefits under the bill. The unemployed in those states where the jobless rate tops 8.5 percent would get six weeks on top of that.

House Majority Leader Steny Hoyer said the bill would also help the economy because the unemployed quickly spend their checks on living necessities. "We help people in very bad straits and we help our economy and help us all."

All but 12 Republicans voted for the bill, although several took the opportunity to swipe at the Obama administration's efforts to produce new jobs. "Make no mistake, the unemployment benefits are no substitute for a good job,"said Rep. Kevin Brady, R-Texas.

The extension would be the fourth since June of last year and the first since the $787 billion stimulus package was enacted last February. The unemployed in the hardest-hit states could, once the bill becomes law, receive a maximum of 99 weeks of benefits, well above the previous record of 65 weeks in the 1970s.

Lawmakers said aggressive measures are needed because the unemployment rate, now at 9.8 percent, is expected to hover around 10 percent into next year and more than one-third of the 15 million unemployed have been looking for work for at least six months, a record.

The nation has lost 8 million jobs since the "great recession" began at the end of 2007, said Rep. Jim McDermott, D-Wash., a chief sponsor of the legislation. Even with the recession winding down, "we know it will take considerable time to restore those lost jobs."

"A stunning 600,000 workers ran out of jobless benefits in the past two months alone, and thousands more are projected to by the end of the year," said Christine Owens, executive director of the National Employment Law Project. "Workers need this extension, the economy needs this extension."

The bill only applies to those running out of benefits before the end of the year, and McDermott reminded his colleagues that Congress may have to revisit the issue before it adjourns for the year.

The bill would also allow businesses that have incurred losses in 2008 and 2009 to seek refunds for taxes paid on profits over the past five years.

The two tax credits, each costing more than $10 billion over 10 years, are paid for by delaying enactment of a law giving international companies more leeway in how they allocate interest expenses between U.S. and foreign sources in determining tax liabilities.

The $2.4 billion cost of extending unemployment benefits is offset by extending through June 2011 the federal unemployment tax that employers pay for each employee.

The three measures would add $43 billion to the 2010 deficit and then be repaid over time.

By Andrea Coombes, MarketWatch

SAN FRANCISCO (MarketWatch) -- Even as Congress mulls whether to extend the popular first-time home-buyer tax credit aimed at shoring up the decimated U.S. housing market, government auditors said Thursday that thousands of ineligible taxpayers have received millions of dollars under the program.

About 19,350 taxpayers claimed $139 million worth of tax credits for homes they had not yet purchased, and about 70,000 taxpayers claimed more than $479 million in credits despite evidence they were not first-time home buyers, according to a report by the Treasury Inspector General for Tax Administration, the agency that monitors the Internal Revenue Service.

Almost 600 people who claimed about $4 million worth of the credit were not yet 18 years old -- and the youngest taxpayer was 4 years old, the report said.

The tax credit, worth up to $8,000, expires on Nov. 30, though some lawmakers have proposed extending it, and some have said it should be extended and expanded to people beyond just first-time buyers.

Meanwhile, another 48,450 taxpayers who claimed the credit didn't get their full due, likely because they weren't aware they were eligible for up to $8,000 under the revised credit in the American Recovery and Reinvestment Act, versus the $7,500 maximum credit available originally, TIGTA said.

"Based on the administration of the credit to date, I am concerned about the IRS's ability to effectively administer the credits claimed within the original deadline, let alone within an extended deadline for certain taxpayers," said J. Russell George, Treasury Inspector General for Tax Administration, in testimony Thursday to a House Ways and Means subcommittee hearing looking at administration of the tax credit. Read his testimony (PDF).

The TIGTA report pointed to about 90,000 erroneous claims totaling about $622 million. Through Oct. 9, the IRS has processed more than 1.2 million tax returns claiming almost $8.5 billion worth of the credit, according to the report. Read the full TIGTA report (PDF).

Still, some of the erroneous taxpayers' claims may turn out to be correct, George said. For instance, the credit rules prohibit owning a home in the previous three years -- but that means a principal residence. The TIGTA report did not assess whether the evidence of taxpayers' previous homeownership on earlier tax returns was related to a principal residence or not.

And, the TIGTA report said, the IRS recently put in place strategies to prevent such problems happening in the future. Still, the past problems have yet to be resolved in some cases. For instance, while the law prohibits taxpayers from receiving the credit before they've bought a house, thousands of taxpayers did so before the IRS put controls in place, according to TIGTA.

"Many taxpayers will be identified by recently implemented IRS filters and subject to pre-refund audits; however, TIGTA identified 70,005 taxpayers whose tax returns were processed prior to the implementation of these filters," the report said.

For its part, the IRS said it's going after erroneous claims. "We will vigorously pursue those who filed fraudulent claims for the credit, and have already opened up scores of criminal investigations," said Linda E. Stiff, the IRS's deputy commissioner for services and enforcement, in a prepared statement for the hearing. Read Stiff's statement (PDF).

"We have selected thousands of returns for those claiming the credit for civil examination," she said.

Andrea Coombes is an assistant personal finance editor for MarketWatch, based in San Francisco.

Taylor, Bean & Whitaker Mortgage Corporation

An Explanation of FHA Mortgagee Letter on Tax Credit Monetization (Quoted from NAHB with my edits)

On Friday, May 29, HUD issued Mortgagee Letter 2009-15, which outlines the requirements that must be met in order to monetize the first-time homebuyer tax credit. The tax credit can be monetized in two ways:

• Government agencies and instrumentalities of government are allowed to make tax credit advances secured by second liens.

• FHA-approved mortgagees (lenders) and FHA-approved nonprofit organizations, as well as government agencies may purchase the anticipated tax credit from a homebuyer.

Following is an excellent FAQ from the NAHB (National Association of Home Builders) site regarding the tax credit monetization. #7 of the FAQ pertains to the most talked about topic of using the tax credit for down payment.

FAQ on Monetization

1. What exactly does “monetizing” the tax credit mean?
The term “monetization” is defined as the act of converting something into money. In the context of the first time home buyer tax credit, monetization means to treat the payment of the credit as if it was cash and allow its use as a payment for certain closing and downpayment expenses.

2. What is a “bridge” loan?
A bridge loan is a type of loan that is intended to be outstanding for a very short time period, often only a few days or weeks. Bridge loans are use to provide funds in situations where the borrower is expected to receive funds, such as the payment of this tax credit, within a very short time.

3. What is a state housing finance agency?
A state housing finance agency, often referred to as an “HFA,” is an organization that provides funding for a variety of loan and grant activities related to for-sale and rental housing. HFAs are also typically responsible to distribute grant funds from federal agencies, such as the U.S. Department of Housing and Urban Development (HUD).

4. How do I find out if my state housing finance agency is providing this service?
The best way to locate information about your state’s HFA is via the Internet. The National Council of State Housing Agencies (NCSHA) maintains a directory of state HFAs at: http://www.ncsha.org/section.cfm/4/39/187

5. What kinds of lenders are doing this? How can I find a list of lenders who are providing these short-term loans?
Many state housing finance agencies are either running or sponsoring programs that will use a tax credit for a downpayment. These programs often place a second lien on the home as collateral to secure the eventual repayment of the tax credit funds. Some state HFAs lend directly to home buyers while other HFAs work through networks of state-approved lenders.
In addition to state agencies, FHA-approved lenders may be offering to purchase a first time home buyer’s tax credit in conjunction with an FHA-insured mortgage loan.
Interested buyers should check with area lenders, home builders, or real estate agents for the names of participating lenders.
The Federal Housing Administration (FHA) also has an online tool to find FHA-approved lenders: http://www.fhaoutreach.gov/FHALookup/

6. What types of loans qualify?
Any lender could offer a program that would permit a first-time home buyer to apply the tax credit to funds needed for a loan that is obtained in conjunction with a home purchase. At this time, however, only the Federal Housing Administration (FHA) has issued guidance regarding the monetization of the first-time home buyer tax credit in conjunction with FHA-insured mortgage loans.

7. Can this short-term loan be applied to the minimum 3.5% downpayment required by my FHA loan or is it only available above and beyond the initial downpayment required?
If an FHA-approved lender or state housing finance agency is purchasing a tax credit and therefore making a short-term loan that is secured only by the repayment of the first-time home buyer tax credit, these funds cannot be applied to a downpayment in lieu of the home buyer’s funds. A home buyer still has to provide the 3.5 percent downpayment from his or her own funds. The money from the short-term loan can be used to pay closing costs and prepaid expenses, such as escrows for taxes, insurance, and community association assessments. These funds could also be used to make a larger downpayment or to “buy down” the interest rate on the mortgage loan.
However, many HFAs are offering tax credit loan programs that offer home buyers a short-term loan backed by the anticipated tax credit and secured by a second lien, which in general will be paid off after the homebuyer receives their income tax credit from the IRS. The proceeds of these loans may be used to satisfy the 3.5 percent downpayment requirement for FHA-insured loans. The National Council of State Housing Agencies (NCSHA) maintains a list of such tax credit loans programs at: http://www.ncsha.org/section.cfm/3/34/2920.

8. Who should I contact at my state housing finance agency to urge them to participate in this program if they don’t already do so? What should I say?
The best way to locate information about your state’s HFA is via the Internet. The National Council of State Housing Agencies (NCSHA) maintains a directory of state HFAs at: http://www.ncsha.org/section.cfm/4/39/187
Most state HFA web sites include phone numbers and email addresses by which they can be contacted.

9. Is this an interest-free loan or are there fees associated with this type of short-term loan?
If a governmental agency, such as a state housing finance agency, or an FHA-approved lender purchase a first-time home buyer tax credit, they are allowed to charge no more than 2.5 percent of amount of the credit.

10. How can I tell if the short-term loan on the tax credit is being offered by a reputable company?
If the organization is a unit of state government, it is safe to say that it is reputable. Otherwise, a home buyer may want to check with their local Better Business Bureau or through a state or local government’s department of consumer affairs.

On May 11, 2009, Governor Sonny Perdue signed into law HB 261 which provides home buyers up to $1800 tax credit. The tax credit must be claimed in one-third increments over a three year period and is eligible to home buyers who purchase single family residences closing between June 1 and November 30 of this year. Following is a FAQ provided by the Georgia Association of Realtors (GAR):

1. Is this tax credit limited to first time homebuyers?
NO, all purchasers of an eligible single family residence in Georgia that file a Georgia income tax return can claim the credit.

2. Can the Georgia credit be combined with the federal $8,000 first time homebuyer tax credit?
YES, if buyers meet the qualification for each credit they may claim both. Each credit operates independently from the other. One is claimed on your federal income tax return, the other is claimed on your Georgia income tax return.

3. Is it true this credit is limited to the purchase of a single family residence?
YES, the tax credit is limited to the purchase of one single family residence.
Single-family residences (including condominiums) are eligible if they are:
 * New residences, residences occupied at the time of sale, or previously occupied residences, if such residences: 
    - Were for sale prior to the effective date (5/11/09) and were still for sale after the effective date; 
 * Owner-occupied residences with respect to which the owner’s acquisition debt is in default on or before March 1, 2009; and 
 * Residences with respect to which a foreclosure event has taken place and which are owned by the mortgagor or the mortgagor’s agent.

4. Is it true that eligible single family residences must have been listed prior to May 11, 2009 in order to qualify for the credit?
YES, the original intent of the bill was aimed at reducing the housing stock that has been on the market for an extended period of time.

5. Is it true that only eligible buyers that close between June 1, 2009 and Nov. 30, 2009 can claim the credit?
YES, the intent of credit is to stimulate the market by encouraging potential buyers to get off the fence and BUY NOW!

6. How do I determine the amount of tax credit I am eligible for?
The tax credit will be for 1.2% of the purchase price, with a maximum credit of $1,800 (whichever is less). Homes purchased for $150,000 or more will receive a maximum of $1,800.

7. Can I claim all $1,800 on my 2009 income tax returns?
NO, the total amount of your credit must be claimed in one-third increments over a three year period. The maximum credit per year is $600 if you are eligible for the maximum $1,800. Any excess or unused credit may be carried forward to apply to succeeding years’ tax liability.

8. Can I amend my 2008 Georgia income tax return to claim the credit?
NO, the tax credit cannot be applied against prior years’ tax liability.

9. I am looking for investment property or a second home, is the credit available for the purchase of owner-occupied residences only?
NO, all eligible single family residences qualify for the credit. However, each taxpayer can claim the credit one time only.

10. Is there an income limit for buyers who claim the credit?
NO, there are no income limits applicable to this credit.

11. Is there a limit to how long a buyer must own the property to claim the credit?
NO, there is not a limit to how long a buyer must own the property.

12. Does any portion of the credit require repayment for any reason?
NO, if you are awarded the credit there are no penalties that would require you repay any portion of the credit.

The Department of Revenue memo regarding the home buyer tax credit is available here: DOR Home Buyer Tax Credit Memo.

The President in conjunction with Fannie Mae and Freddie Mac announced the Making Home Affordable Program several weeks ago. Since the introduction of the program, there seems to be much confusion about what the program entails and what home owners can qualify for. In a nut shell, there are two main programs: A Refinance program and a Loan Modification program. I have posted details of the program on a separate previous posting.

To provide further clarity, a brand new website has been established to provide further information on the program. It provides a self-assessment test to help you determine exactly which program you qualify for. Website address is: http://makinghomeaffordable.gov/.

Once you complete the self-assessment and need further information, please post your questions in the comment section and I will answer as many as I can.

You can check if your loan is owned by Fannie MAe or Freddie Mac by using the following links:

Fannie Mae          Freddie Mac

Courtesy of the Clark Howard Show

clarkhoward.com

Mar 05, 2009 -- A plain English explanation of the homeowner bailout

There has been a lot of chatter about the tax credits for first time home buyers contained in the new stimulus bill. Last week both the House and the Senate passed the American Recovery and Reinvestment Act of 2009 and President Obama is expected to sign it into law this week.

The provisions in the bill pertaining to the tax credit for first time home buyers are as follows:

* The $8000 tax credit or 10% of the home's purchase price, whichever is less is available only for first-time home buyers (Definition of a ";first-time home buyer"; is a buyer who has not owned a principal residence during the three-year period prior to the purchase)
* There is a $75,000 adjusted gross income limit for tax filers filing as single and $150,000 limit for joint return filers.
* The $8000 tax credit is available only for primary residence purchases.
* The tax credit does not require a repayment for most cases.
* The tax credit does have a repayment provision if the homeowner does not occupy the property for a minimum of 3 years from the closing date.
* The home buyer must purchase a home between January 1, 2009 and December 1, 2009.
*The $8000 tax credit is received when you file your tax return. An example of how the credit would work (example courtesy of Intuit):

How does the credit affect the taxes I owe and the refund I get?

The credit reduces your tax liability, that is, the amount of taxes you are required to pay. Depending on your tax withholdings, you could get a bigger refund or owe less in taxes when you file.

If, for example, your taxes owed for one year are $6,000, you’ve had $4,000 withheld from your wages, and you buy a home worth $100,000, the housing credit would entitle you to a refund, as shown below:

But if, for example, your tax liability was $10,000, but you had paid no withholding, then the credit would reduce the taxes you owe, as illustrated below. 

Keep in mind that if you purchased a home between April 9, 2008 and December 31, 2008, you are still eligible for the $7500 tax credit. This tax credit does have a repayment provision to be paid back over 15 year’s interest free. You can read more about the $7500 tax credit further down on my blog.

BEFORE YOU POST A QUESTION, PLEASE READ THE MULTIPLE COMMENTS BELOW. ANSWERS TO MANY OF THE MOST COMMON QUESTIONS ARE AVAILABLE. THANK YOU.

Reference links:

IRS form 5405 (First-Time Homebuyer Tax Credit): http://www.irs.gov/pub/irs-pdf/f5405.pdf

IRS Form 1040X (Amended U.S. Individual Income Tax Return): http://www.irs.gov/pub/irs-pdf/f1040x.pdf

National Association of Home Builders has an extensive FAQ regarding the new $8000 Tax Credit.

IRS has established an excellent FAQ and scenario section on their website regarding the First Time Home buyer Tax Credit: IRS Firstime Home Buyer FAQ.

If you are located in certain states, you may be able to utilize the First-Time Homebuyer Tax Credit Loan Programs to use the tax credit for your down payment and closing cost assistance. Please visit the NCSHA (National Council of State Housing Agencies) for further information.

In response to the higher mortgage default rates being experienced by Fannie Mae and Freddie Mac (the largest buyers of 30-year fixed, conforming mortgages), the formal announcement of “Risk Based Pricing” was established during 2008.

Before this was announced, a 30-year fixed loan was basically the same price for any borrower with a credit score of 660 or higher and a loan amount up to 95% of the home value. But now, Fannie and Freddie require pricing “add–ons” using a matrix of credit score and loan-to-value percentages. This risk based pricing is MANDATED by Fannie and Freddie, and is required of ALL lenders originating conforming 30-year fixed loans.

Sometimes the interest rate can be increased to cover these add–ons without having to pay them out of pocket, but that is becoming increasingly difficult in today’s market. Investors have changed the way they create rate sheet options, and they offer very little in the way of what is called “premium pricing”, which used to allow options for closing costs or points to be covered in return for a higher interest rate. But in today’s environment, sometimes the add-ons must be paid in the form of points – to either keep the rate and corresponding payments as low as possible, or sometimes because there simply is no other way they can be covered.

The bottom line is – smart consumers can’t just call a lender and say “what’s your rate and closing costs?” There are simply so many unknowns with the combination of credit score, loan-to-value percentages, property type, etc… that any reputable lender should be upfront, and be clear that any quote given is based on an assumption of certain parameters.

We are here to provide honest, straightforward advice. If we can be of any assistance to you, your friends or your family feel free to contact us. We will take care of you and your referrals in the same upfront fashion as we always have.