FIRST TIME HOMEBUYER TAX CREDIT

Frequently Asked Questions

In 2008, Congress enacted a $7500 tax credit designed to be an incentive for first‐time homebuyers to purchase a home. The credit was designed as a mechanism to decrease the over‐supply of homes for sale.

For 2009, Congress has increased the credit to $8000 and made several additional improvements. This revised $8000 tax credit applies to purchases on or after January 1, 2009 and before
December 1, 2009.

Tax Credits

The Basics

1. What's this new homebuyer tax incentive for 2009?

The 2008 $7500, repayable credit is increased to $8000 and the repayment feature is eliminated for 2009 purchasers. Any home that is purchased for $80,000 or more qualifies for the full $8000 amount.

If the house costs less than $80,000, the credit will be 10% of the cost. Thus, if an individual purchased a home for $75,000, the credit would be $7500. It is available for the purchase of a principal residence on or after January 1, 2009 and before December 1, 2009.

2. Who is eligible?

Only first‐time homebuyers are eligible. A person is considered a first‐time buyer if he/she has not had any ownership interest in a home in the three years previous to the day of the 2009 purchase.

3. How does a tax credit work?

Every dollar of a tax credit reduces income taxes by a dollar. Credits are claimed on an individual's income tax return. Thus, a qualified purchaser would figure out all the income items and exemptions and make all the calculations required to figure out his/her total tax due. Then, once the total tax owed has been computed, tax credits are applied to reduce the total tax bill. So, if before taking any credits on a tax return a person has total tax liability of $9500, an $8000 credit would wipe out all but $1500 of the tax due. ($9,500 ‐ $8000 = $1500)

 

4. So what happens if the purchaser is eligible for an $8000 credit but their entire income tax liability for the year is only $6000?

This tax credit is what's called "refundable" credit. Thus, if the eligible purchaser's total tax liability was $6000, the IRS would send the purchaser a check for $2000. The refundable amount is the difference between $8000 credit amount and the amount of tax liability. ($8000 ‐ $6000 = $2000) Most taxpayers determine their tax liability by referring to tables that the IRS prepares each year.

 

5. How does withholding affect my tax credit and my refund?

A few examples are provided at the end of this document. There are several steps in this calculation,

but most income tax software programs are equipped to make that determination.

FIRST TIME HOMEBUYER TAX CREDIT

6. Is there an income restriction?

Yes. The income restriction is based on the tax filing status the purchaser claims when filing his/her income tax return. Individuals filing Form 1040 as Single (or Head of Household) are eligible for the credit if their income is no more than $75,000. Married couples who file a Joint return may have income of no more than $150,000.

7. How is my "income" determined?

For most individuals, income is defined and calculated in the same manner as their Adjusted Gross Income (AGI) on their 1040 income tax return. AGI includes items like wages, salaries, interest and dividends, pension and retirement earnings, rental income and a host of other elements. AGI is the final number that appears on the bottom line of the front page of an IRS Form 1040.

8. What if I worked abroad for part of the year?

Some individuals have earned income and/or receive housing allowances while working outside the US. Their income will be adjusted to reflect those items to measure Modified Adjusted Gross Income (MAGI). Their eligibility for the credit will be based on their MAGI.

9. Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the benefit of the credit?

Not always. The credit phases‐out between $75,000 ‐ $95,000 for singles and $150,000 ‐ $170,000 for married filing joint. The closer a buyer comes to the maximum phase‐out amount, the smaller the credit will be. The law provides a formula to gradually withdraw the credit. Thus, the credit will disappear after an individual's income reaches $95,000 (single return) or $170,000 (joint return).For example, if a married couple had income of $165,000, their credit would be reduced by 75% as shown:

Couple's income $165,000

Income limit 150,000 

Excess income $15,000

 

The excess income amount ($15,000 in this example) is used to form a fraction. The numerator of the fraction is the excess income amount ($15,000). The denominator is $20,000 (specified by the statute).

 

In this example, the disallowed portion of the credit is 75% of $8000, or $6000

($15,000/$20,000 = 75% x $8000 = $6000)

Stated another way, only 25% of the credit amount would be allowed.

In this example, the allowable credit would be $2000 (25% x $8000 = $2000)

 

10. What's the definition of "principal residence?"

Generally, a principal residence is the home where an individual spends most of his/her time (generally defined as more than 50%). It is also defined as "owner‐occupied" housing. The term includes single family detached housing, condos or co‐ops, townhouses or any similar type of new or existing dwelling. Even some houseboats or manufactured homes count as principal residences.

11. Are there restrictions on the location of the property?

Yes. The home must be located in the United States. Property located outside the US is not eligible for the credit.

12. Are there restrictions related to the financing for the mortgage on the property?

In 2009, most financing arrangements are acceptable and will not affect eligibility for the credit.

Congress eliminated the financing restriction that applied in 2008. (In 2008, purchasers were ineligible for the $7500 credit if the financing was obtained by means of mortgage revenue bonds.) Now, mortgage‐revenue bond financing will not disqualify an otherwise‐eligible purchaser. (Mortgagerevenue bonds are tax‐exempt bonds issued by a state housing agency. Proceeds from the bonds must be used for below market loans to qualified buyers.)

13. Do I have to repay the 2009 tax credit?

NO. There is no repayment for 2009 tax credits.

14. Do 2008 purchasers still have to repay their tax credit?

YES. The $7500 credit in 2008 was more like an interest‐free loan. All eligible purchasers who claimed the 2008 credit will still be required to repay it over 15 years, starting with their 2010 tax return.

Some Practical Questions

15. How do I apply for the credit?

There is no pre‐purchase authorization, application or similar approval process. All eligible purchasers simply claim the credit on their IRS Form 1040 tax return. The credit will be reflected on a new Form5405 that will be attached to the 1040. Form 5405 can be found at www.irs.gov.

16. So I can't use the credit amount as part of my downpayment?

No. Congress tried hard to devise a mechanism that would make the funds available for closing costs,but found that pre‐funding would require cumbersome processes that would, in effect, bring the IRS into the purchase and settlement phase of the transaction.

17. So there's no way to get any cash flow benefits before I file my tax return?

Yes, there is. Any first‐time homebuyers who believe they are eligible for all or part of the credit can modify their income tax withholding (through their employers) or adjust their quarterly estimated taxpayments. Individuals subject to income tax withholding would get an IRS Form W‐4 from theiremployer, follow the instructions on the schedules provided and give the completed Form W‐4 back to the employer. In many cases their withholding would decrease and their take‐home pay would increase. Those who make estimated tax payments would make similar adjustments.

Some "Real World" Examples

18. What if I purchase later this year but can't get to settlement before December 1?

The credit is available for purchases before December 1, 2009. A home is considered as "purchased" when all events have occurred that transfer the title from the seller to the new purchaser. Thus, closings must occur before December 1, 2009 for purchases to be eligible for the credit.

19. I haven't even filed my 2008 tax return yet. If I buy in 2009, do I have to wait until next year to get the benefit of the credit?

You'll have a helpful choice that might speed up the process. Eligible homebuyers who make their purchase between January 1, 2009 and December 1, 2009 can treat the purchase as if it had occurred on December 31, 2008. Thus, they can claim the credit on their 2008 tax return that is due on April 15,2009. They actually have three filing options.

      • If they purchase between January 1, 2009 and April 15, 2009, they can claim the $8000 credit on

the 2008 return due on April 15.

•  They can extend their 2008 income‐tax filing until as late as October 15, 2009. (The IRS grants

automatic extensions, but the taxpayer must file for the extension. See www.irs.gov for

instructions on how to obtain an extension.)

 • If they have filed their 2008 return before they purchase the home, they may file an amended

2008 tax return on Form 1040X. (Form 1040X is available at www.irs.gov)

Of course, 2009 purchasers will always have the option of claiming the credit for the 2009 purchase on their 2009 return. Their 2009 tax return is due on April 15, 2010.

 

20. I purchased my home in early 2009 before the stimulus bill was enacted. I claimed a $7500 tax credit on my 2008 return as prior law had permitted. Am I restricted to just a $7500 credit? 

No, you would qualify for the $8000 credit. Eligible purchasers who have already claimed the $7500 credit on a 2008 return for a 2009 purchase may file an amended return (IRS Form 1040X) for the 2008 tax year. This amended return will enable them to obtain the additional $500 credit amount.

21. If I claim my 2009 $8000 credit on my 2008 tax return, will I have to repay the credit just as the 2008 credits are repaid?

No. Congress anticipated this confusion and has made specific provision so that there would be no repayment of 2009 credits that are claimed on 2008 returns. 

22. I made an eligible purchase of a principal residence in May 2008 and claimed the $7500 credit on my 2008 tax return. My brother, who has never owned a home, wishes to purchase a partial interest in the home this spring and move in. Will he qualify for the $8000 credit, as well?

No. Any purchase of a principal residence (or interest in a principal residence) from a related party such as a sibling, parent, grandparent, aunt or uncle is ineligible for the tax credit. Since you and your brother are related in this way, he cannot qualify for the credit on any portion of the home that he purchases from you, even if he is a first‐time homebuyer.

23. I live in the District of Columbia. If I qualify as a first‐time homebuyer, can I use both the $5000 DC credit and the $8000 credit?

No; double dipping is not allowed. You would be eligible for only the $8000 credit. This will be an

advantage because of the higher credit amount, plus the eligibility requirements for the $8000 credit are somewhat more easily satisfied than the DC credit.

24. I know there is no repayment requirement for the $8000 credit. Will I ever have to repay any of the credit back to the government?

One situation does require a recapture payment back to the government. If you claim the credit but

then sell the property within 3 years of the date of purchase, you are required to pay back the full

amount of any credit, including any refund you received from it. A few exceptions apply. (See below,

#24). Note that this same 3‐year recapture rule applies, as well, to the $7500 credit available for 2008. This provision is designed as an anti‐flipping rule.

25. What if I die or get divorced or my property is ruined in a natural disaster within the 3 years?

The repayment rules are eased for many circumstances. If the homeowner who used the credit dies

within the first three years of ownership, there is no recapture. Special rules make adjustments for

people who sell homes as part of a divorce settlement, as well. Similarly, adjustments are made in the

case of a home that is part of an involuntary conversion (property is destroyed in a natural disaster or

subject to condemnation by eminent domain by an authorized agency) within the first three years.

26. I have a home under construction. Am I eligible for the credit?

Yes, so long as you actually occupy the home before December 1, 2009.

WITHHOLDING EXAMPLES:

Note: The impact of estimated tax payments would be the same.

Situation 1: Sally plans her withholding so that her withholding is as close as possible to what she

anticipates as her income tax liability for the year. When she fills out her 1040, her liability is $6000.

She has had $6000 withheld from her paycheck. She also qualifies for the $8000 homebuyer credit.

Result: Sally's withholding satisfies her tax liability and reduces it to zero. She will receive a refund of

the full $8000.

Situation 2: Nick and Nora file a joint return. Nick is self‐employed and makes estimated payments;

Nora has taxes withheld from her salary. When they compute their taxes, their combined withholding and estimated tax payments are $11,000. Their income tax liability is $9800. They also qualified as first time homebuyers and are eligible for the $8000 refundable tax credit.

Result: Ordinarily, their combined estimated tax payments and withholding would make them eligible for a refund of $1200 ($11,000 ‐ $9800 = $1200). Because they are eligible for the refundable tax credit as well, they will receive a refund of $9200 ($1200 income tax refund + $8000 refundable tax credit =$9200)

Situation 3: Cesar and Luz Maria both have income taxes withheld from their salaries and file a joint

return. When they file their income tax return, their combined withholding is $5000. However, their total tax liability is $7200, generating an additional income tax liability of $2200 ($7200 ‐ $5000). They also qualify for the $8000 first‐time homebuyer tax credit.

Result: Cesar and Luz Maria have been under‐withheld by $2200. Ordinarily, they would be required to pay the additional $2200 they owe (plus any applicable interest and penalties). Because they are eligible for the refundable homebuyer tax credit, the credit will cover the $2200 additional liability. In addition, they will receive an income tax refund of $5800 ($8000 ‐ $2200 = $5800). If they owed penalties and/or interest, that amount would reduce the refund.

 

Source: Prepared by the National Association of REALTORS® Government Affairs Staff - February 2009

Resolve to Get Your Home Documents Organized!

As a person who is good at "saving" stuff...but not necessarily good at "organizing" all of it...I thought I would share this helpful article from Prudential's Site, PREA Center. Like comedian George Carlin described his home as a "place for my STUFF" I thought you would appreciate these tips:

As a homeowner, you begin to accumulate all sorts of records and papers the moment you made the offer on your home. Loan documents, inspection reports, title insurance policy, home improvement receipts, appliance warranties are just a few of documents that you may at one time or another need. Would you be readily able to locate these items? Are they filed away or in different junk drawers around the house? Knowing where these items are can save you a lot of time and even money in the long run.

Consider investing in a record-keeping system. It doesn't have to be expensive. You can purchase an accordion file and label each flap with a different category. Then use the following tips as a guide to get started.

Contracts and Legal Papers
Keep all the papers signed and/or given to you at the closing together in one place, preferably in a safe deposit box. These documents include the deed, settlement statement, appraisal, disclosures, mortgage note, inspections and any other reports, and title insurance policy.  You will need these records again if you decide to refinance or sell your home.

Insurance Policies
Keep a copy of all insurance policies relating to your property together. This may include homeowners, flood and earthquake policies. With these documents, keep a list of insurance agents or companies and copies of correspondence related to claims.

Purchase and House Data
It's also a good idea to keep a copy of the original listing of your house, comparable market analysis, floor plans, blueprints, and historical information. If you own a newly built home, keep a list of contractors and material suppliers as well.

Property Taxes
Keep your tax bills and record of payment for as long as you own the home and possibly even longer. You may need these items if your tax returns are ever audited.

Home Maintenance and Improvements
Records in this category include receipts for repairs or replacement expenses, names of contractors, contracts, and a log of maintenance tasks.

Warranties, Manuals and Receipts
These documents provide you with a proof of purchase date and determine service and parts guaranteed. In addition, the manuals usually provide care information so you can help ensure your household appliances are being properly maintained. You should keep your warranties, manuals and receipts for these items for as long as you own the appliances.

Home Inventory
If you were ever to lose any of your possessions due to fire, burglary, or vandalism, having a home inventory can help you avoid a lot of heartache and make it easier when filing an insurance claim.

Start with a sheet a paper for each room in the house. Go around the room and list every item. Don't forget the attic, basement or other storage places. For each item, write the original cost, purchase date, replacement cost, model number, brand name, where purchased, and a general description. You can also use a computer software system so that you have an electronic copy.

Besides a written inventory, take photos or video of each room for visual documentation. It is also a good idea to arrange valuable collections, silver, jewelry, etc. and take close up photos. 

Keep a copy in your home files and the originals in a fireproof safe or safe deposit box. Make sure you update your home inventory photos and list at least once a year.

Organizing your home files may take a considerable amount of time initially, but it will definitely be time well spent in the event you need the documents later on.

You want to get the best price for your home, plus sell it in the least amount of time. In a buyers' market such as the one emerging now, homes will take longer to sell. Therefore, it's important that you make the right moves at the very beginning of your homeselling process to remain competitive. Here are some common traps that many homeowners fall into and how to avoid them.

 

1. Over-pricing - It's easy to think your home is worth more than the current market may support, particularly after the long run-up in home prices. Since home prices have cooled in markets around the country, home sellers must be prepared to negotiate on price and terms, and stay flexible to other stipulations benefiting the buyer. Sellers must also keep their emotions in check during the process. After all, your home is special to you and your family, and you're proud of the improvements you've made over the years. But, how does your home really stand up to the others? And are those improvements important to a potential buyer?

To determine a reasonable listing price, get sales statistics on homes in the neighborhood including listing prices and actual sales prices, how long it took for the homes to sell, and government valuation comparisons. You'll also want a market appraisal on your property. Visit homes for sale in your area and compare what you see in terms of sales appeal.

 

2. Negligent Housekeeping - Buyers need to be able to envision themselves living in the home. Take a good, objective look at the condition of your home. Clean, well-kept homes with an updated appearance always stand out, and a little decorating appeal can go a long way. You don't have to buy new furniture to create charm, but you can put toys and clutter away, freshen up paint and carpet, make the most of window coverings, and add a few key accessories in order to send out welcoming signals.

 

3. Failing to Fix-It - Buyers, unless they are looking for a fixer-upper, would prefer to move into a home that is in perfect or near-perfect condition. If they have to fix the roof, a broken tile floor, the garage door, worn carpet or just about anything, this may give them pause about buying. At the very least, it may lower the value of the home in the prospective buyer's mind.

 

4. Not Identifying Exclusions - This can be a cause of contention just at a critical point in the sale. Be sure to specify any special sales considerations or exclusions from the fixtures and furnishings list. Generally, anything permanently fixed to the house is an asset that stays with the home after the sale. So if you intend to take your grandmother's antique chandelier that's hanging in the dining room, clearly specify that the chandelier is not included in the sale price.

 

5. Not Understanding the Agent Agreement - Your sales endeavor will go smoothest when all parties have a clear understanding of what is expected. Understand the types of agency agreements when you sign with a real estate professional or company.

Be sure to check on fees, commission percentages, marketing plans and timeframes. Most importantly, get everything in writing. 

Shopping for a home is an exciting adventure and it's easy to get lost in a sea of dazzling for-sale homes and all of their fabulous amenities - which can cause you to temporarily forget that a large backyard is your top priority. To keep yourself focused, take time to identify and organize exactly what you're looking for in a home by creating thorough "must-have" and "wish" lists before you begin home shopping. You may also want to make a third list that details your dislikes.

To get started ask yourself these questions: Which items and features must your home have? Which items and features would you like to have, but could live without? What would your dream house include? And, what features or issue must you avoid?

For the must-have list, try to focus on essentials and hard-to-change details, like a home's layout. If you must have a three-bedroom, two-bath house, put it on the list. Ranking your must-haves in order of importance is also a good idea.

Hard-to-change, must-have features can include the type of house, for example a two-story colonial or sprawling rancher; the number of rooms and square footage; the home's proximity to shopping; or its overall condition. Your must-have list can't be too detailed because it aims to itemize the features that are most important to you and your family.

Your wish list is the flexible and fun list. Wish lists are good for cosmetic features that would be great to have, but that can be changed. Hardwood floors can replace old wall-to-wall carpeting. If the yard is large enough and has adequate open space, a pool can be installed later. And landscaping can be a work in progress. Since the wish list is secondary, there are no limits so be sure to also include your dream amenities.

While compiling your lists, don't hesitate to confer with your real estate professional, who is a great source for information about neighborhoods, homes and other pertinent "must-have" information.

Once you've determined your must-haves and optional features, create a checklist to take with you during your home tours. Besides helping you stay focused, it will provide an organized review of each house.

Your lists will most likely change as you tour homes and see what the market really has to offer. It's also unlikely that one house will include all of your must-have features. But, your efforts will be well worth it once you find the perfect house that includes just enough must-haves and even a few wishes. Your perfect home might not include that must-have basement, but its view may be a dream come true.

Buyers are drawn to homes that appeal to their senses. This is important to remember when preparing your home for an Open House. Through sight, sound and smell, buyers should leave your home with a lasting impression. Here are some tips to showcase your home in the best-possible light.

Exterior

Start outside by inspecting the front of your home from across the street. Does it have curb appeal? It should look inviting, with a trimmed lawn and flowerbed and a freshly painted front door. Polish door handles and knockers and replace worn items such as a rusty doorbell. Consider adding a new doormat and flowering plants at the entrance.  Do the windows need cleaning? Be sure to remove oil stains from the driveway.

Next check the side and back yards. Add some flowering plants to the back as well. Rearrange the outdoor furniture to look inviting. Put away gardening tools. Tidy around the grill area.

Interior

Now focus on the inside of the home where cleanliness, space, smell and lighting are key. First, get your house in tip-top condition by cleaning and clearing away clutter. Steam clean and vacuum the carpet. Make sure your floors are waxed and shiny. Touch up nicks on walls and make sure the porcelain sinks and tubs and metallic fixtures shine. Your kitchen and bathrooms should pass the white glove test. Be conscious of any lingering odors such as smoke, pets or strong-smelling foods. You may need to air out your home prior to the Open House. Consider grinding fresh lemons in the garbage disposal or even baking chocolate chip cookies. And don't forget to empty all trashcans.

Next, set the mood. You want buyers to be able to picture your home as their own. Consider rearranging the furniture so that rooms look more spacious. Add accessories from rooms with too many furnishings to those that appear bare. Look at your countertops in the kitchen and bathrooms and the tops of your bureaus. Do they seem cluttered? Clear away and store as much as possible. The idea is to make your home appear spacious.

Lighting is also an important factor in creating an inviting atmosphere. Bright lights provide a cheerful environment and make a small space appear larger. Pull back all the drapes and open the blinds. Turn on all the lights. Make sure all the light sockets have working bulbs and install the maximum-wattage bulb that is safe for that fixture. For rooms that you want to have a warm, cozy feeling, use softer lights.

Don't forget little touches such as fresh flowers, lighted candles in the bathrooms, new logs in the fireplace, or a bowl of fresh fruit on the kitchen counter. You may even want to set your dining room table with color-coordinated table settings.

An Open House is a terrific way to show your property to many people in a short amount of time. However, keep in mind that buyers may see seven or eight homes in a single day. The most memorable home will be the one that seemed the brightest, the most spacious and the most cheerful. So, don't rely on buyers to use their imagination. Help them capture it. Work with your real estate professional to get more tips on creating an unforgettable home.

The media has been full of stories about the slowing housing market - and although this kind of market normalization is commonplace in the real estate industry, there is no question that in many parts of the country, houses are currently on the market a little longer and there is more competition for buyers.

Hire a Professional

If you want to sell your home fairly quickly, now is not the time to go at it alone. You want to make sure that your home gets the maximum exposure and the best marketing strategy. When you work with a qualified real estate professional, your home will be listed on a MLS database that other real estate professionals can access. In addition, you get the benefit of an experienced marketer and negotiator who is familiar with real estate issues in your community.

When selecting someone to represent you, interview at least three real estate professionals who are familiar with your area.  Ask questions such as: How will your home be marketed to reach the greatest number of buyers? What price can they get for your home? What's the average time their listings have been on the market? They should be able to back up their answer with a Comparative Marketing Analysis and provide the names of two or three of their most recent sellers who you may contact for a reference.

Price It Right

A house priced at just below market value piques the interest of real estate professionals and buyers, while overpricing chases them away. If your home is priced too high, interested buyers may never even tour your listing. It is true that you can always drop the price, but the first 30 days are the most critical. That is when interest is the highest, and it can be difficult to recapture people's interest later on. The longer the property is on the market, the fewer the prospects.

Get Your Home In Show-Condition

Get your home in tip-top shape before any potential buyer views it.  Remember, you only get one chance to make a first impression. Get rid of the clutter. Touch up the paint where needed. Clean the carpet. Consider having your home inspected, and make any recommended repairs. (If there are any repairs you decide not to fix, inform the buyers about the condition of your home and discount the repair cost from the selling price).

Curb Appeal

Don't overlook the outside of your property. You don't want a buyer to rule out your home based on the outside appearance. The lawn should be trimmed, bushes and shrubs pruned, and leaves raked. The front of the house needs a clean, fresh appearance. Even the mailbox needs to be attractive and functional. (Believe it or not, a rusty, unhinged mailbox can turn potential buyers off.) And don't forget to put away bicycles; toys and other items that may make your property seem cluttered.

Offer Incentives

Offering incentives can be just the impetus a potential buyer needs to select your property over others. You may want to consider offering a carpet or paint allowance. If the buyer knows up front that there is an allowance for the worn carpet or paint, they may overlook those cosmetic flaws in order to choose their own color. You could pay for a professional home inspection or a home warranty - and, depending on your market and budget, offer to pay some of the closing costs.

Don't be discouraged if there are competing homes for sale in your neighborhood. Making the right moves at the beginning of your home selling process can give you the upper-hand you'll need in today's competitive market.

Should a buyer get a home inspection for a home they are buying? Should a seller order a home inspection prior to putting the property on the market? There are advantages for both.

Simply put, a home inspection is a visual examination of both the physical structure and major systems of the entire home including: walls, ceilings, floors, decks, exterior covering, the roof, foundation, insulation and ventilation, plumbing, electrical, heating and air conditioning. It is not an appraisal to validate the value of a home, nor a pass/fail exam. A third-party inspector will give a report on the physical condition and suggest repairs.

Buyers

For buyers, a home inspection clause in the written offer that makes the purchase contingent upon the findings can provide peace of mind. If a serious problem is found, it allows room to renegotiate the purchase price or "opt-out" of buying the home altogether. However, this is usually uncommon. Typically, the seller will already have told the buyer about any major problems.

More often, inspections reveal less serious defects that aren't enough to warrant backing out of the transition. However, knowing about these minor problems can prevent major disasters down the road. In addition, if specified in the inspection clause, the cost of the repairs can be at the seller's expense.

Another advantage to having a home inspection is it offers buyers an opportunity to become familiar with their new home and learn about maintenance to help in its upkeep. Although not required, it's recommended that buyers be present during the inspection. This allows them to observe the inspection; ask questions about the condition of the home; and receive an objective opinion.

Sellers

For sellers, conducting a home inspection (or pre-inspection) before listing their homes puts the control back into their hands.

When the buyer inspection finds problems, it can impede negotiations and cost the seller more in repairs. By having a pre-inspection, the seller can help eliminate any surprise findings after an offer has been made. The seller can make repairs before placing the home on the market and possibly even increase the value of the home.

A pre-inspection can also serve as a great marketing tool. Sellers are required by law to disclose any known defects in the home. Having a pre-inspection report available for buyers tells them that the seller has nothing to hide. It also gives them a clearer picture of the condition of the home.

If there are major problems found during the pre-inspection, it gives the seller an opportunity to disclose the condition up-front, making it less likely for the buyer to pull out of the deal or try to renegotiate the price.

Knowing the true condition of a home can bring peace of mind to buyers and sellers; and be one less hurdle in the home buying and selling process. Ask your real estate sales professional for a list of certified independent home inspectors in your area.

FRONT LINES: Unraveling the Subprime Mess

Real Estate's Wild Card

Just as it was set to recover, housing is visited by a hangover from its boom days.

BY ROBERT FREEDMAN

At 85, Harry Teague had every reason to be satisfied with the way his golden years were playing out. Although he was living on a fixed income, he had a solid pension; and he had money coming in from a single-family rental he owned in Trenton, N.J., and from renters sharing an Atlanta duplex he owns and lives in.

But he made the mistake of refinancing the mortgage on his duplex in 2005. The refinancing itself wasn't a mistake - millions were doing it during the boom to take advantage of historically low rates.

The mistake was taking out a loan that's become the poster child for today's subprime mess: a "2/28," sometimes known as an "exploding ARM," in which the borrower enjoys two years of low monthly payments before the rate begins to reset at six-month intervals. There's also a 3/27 version of the loan. In many cases such loans are made using undocumented "stated income," even though those loans were never intended to be widely used.

Some credit blemishes had put Teague into this subprime world, and the loan originator - acting on common industry practices - underwrote the loan based on Teague's ability to make payments only during the introductory period.

The thinking of lenders relying on such loose standards goes like this: As long as home prices head up and interest rates stay down, borrowers can refinance the loan before the rate resets. Thus, long-term ability to pay isn't necessary. And in any case, the lender is far removed from repayment risk since the lion's share of these loans get traded on Wall Street. The ultimate risk holders are often global investors far removed from the action.

But stalled home values in many markets and short-term interest rate hikes intervened in 2006, crippling the ability of borrowers like Teague to refinance. He was stuck with mortgage financing on his duplex that shot up to 12.99 percent in October 2006 from 9.99 percent, and faced an additional increase to 15.99 percent in June. Teague would have been in line to be one of the more than 2 million subprime borrowers who the Center for Responsible Lending estimates will lose their home over the next few years in what's shaping up to be the greatest subprime loan challenge in the country's history.

For Teague, the story has a happy ending because of the intervention of Barbara Williams, a REALTOR® who used to sell real estate but today works on the loan side of the business as an originator for a company called The Mortgage Division in Atlanta.

Williams spent months negotiating on Teague's behalf, and eventually the lender took action on the case. Today Teague has a 27-year fixed-rate loan at a rate he can afford.

Millions More to Go

Not all subprime borrowers - many of whom are low-income seniors and minorities with little experience in navigating today's complicated mortgage choices - will be as lucky.

Although the universe of subprime borrowers in default remains a small segment of the overall market - about half a percent of all loans, NAR says - shaky borrowers still number in the millions. CRL estimates that $164 billion worth of equity is at stake over the next couple of years, turning the homeownership dreams of moderate-income households into a nightmare.
And the devastation doesn't just hit borrowers; entire communities are hurt. Households near foreclosed homes face declines in the value of their home; tax revenues to local government shrink; public services wane; and a cycle of disinvestment - particularly in communities with clusters of problem houses - takes hold.

To be sure, some hard-hit households will eventually get back on their feet, and for financially sound households and investors, short sales on foreclosed homes provide some buying opportunities.

But the long-term damage has been done. Even households who escaped trouble by staying away from risky subprime loans and sat out the boom are harmed, as lenders tighten their underwriting standards. NAR estimates that new rules by lenders will push home ownership out of reach for as many as 250,000 households a year over the next two years, delaying to 2008 a housing recovery that NAR last year expected by the middle of this year.

Taking Action

Some lenders with big exposure in the market, including HSBC Bank, are trying to head off mass foreclosures by initiating workouts with shaky borrowers. They're getting help from a lot of players, including the two secondary mortgage market giants. Freddie Mac has unveiled a $20 billion plan to help make sure lenders can offer fair and affordable financing to home owners seeking to refinance problematic loans. Fannie Mae is taking its own steps.

State housing finance agencies, tapping low-cost funds through taxable bond issuances, are making similar offers, as are some nonprofit groups, including NeighborWorks America.

NAR has stepped up to the plate, too, with a widely applauded proposal it sent in April to the U.S. Department of Housing and Urban Development. The proposal would modify FHA rules to allow borrowers delinquent on their mortgage to refinance into safe and affordable FHA-backed financing. At a House Financial Services Committee hearing in April, FHA Commissioner Brian Montgomery said it was well within the FHA's authority to make such a change on its own. The key, he said, is whether it can make the change in an actuarially sound way, which his department is reviewing.

To be sure, there's only so much lenders can do, given the big role Wall Street has taken in spreading the risk to global investors. There's no doubt that the dispersal of investors has curtailed lenders' ability to do workouts.

Self-Correction Sought

In taking the aggressive actions that they have, lenders are aiming to save themselves huge amounts of money by avoiding short sales on hundreds of thousands of houses.

But they're also trying to show federal financial services regulators like the Federal Reserve and members of Congress that draconian steps in the form of new laws and regulations aren't needed. Indeed, should the federal government overreach in an effort to help borrowers, housing could get hit with an even tougher problem: a credit crunch, as liquidity for mortgages dries up.

"Careful consideration of the macroeconomic impacts of new laws or regulator guidance is required so that we avoid making the current subprime issues even worse," Sandor Samuels, executive managing director of lending giant Countrywide Financial Corp., told the Senate Banking Committee in late March. Although some proposals on Capitol Hill are under discussion - Sen. Hillary Clinton (D-N.Y.) has proposed a "foreclosure time-out," and Sen. Charles Schumer (D-N.Y.) wants to make federal funds available to help nonprofit groups provide replacement financing - lawmakers largely appear content to point fingers of blame rather than step in with a legislative remedy.

At a hearing in March, Senate Banking Committee Chairman Christopher Dodd (D-Conn.) took federal banking regulators to task for proposing subprime lending guidelines only this spring, long after the first wave of troubled borrowers broke.

"Our nation's financial regulators were supposed to be cops on the beat," Dodd said. "Yet they were spectators for far too long. How many home owners were sold loans they couldn't afford in the time that the regulators delayed?"

As it is, the guidelines are voluntary, and in their prescriptions, they scarcely rise above the level of normal business prudence, critics say. In a key provision, for example, lenders are directed to take into account borrowers' ability to repay the loan beyond the introductory period - something that critics say lenders should have been doing all along. "Why would lenders ever make such loans?" says Rep. Barney Frank (D-Mass.), chair of the House Financial Services Committee.

Looking Ahead

Although no big push to provide assistance for today's troubled borrowers is in the works, Dodd and Frank, the chairs of committees with jurisdiction over the issue, are gathering ideas from regulators, lenders, industry groups, and consumer advocates for preventing a recurrence of trouble.

The principles Dodd and Frank have laid out center on enforcement against deceptive and abusive predatory lending practices while maintaining liquidity for all types of mortgages. REALTORS® are helping to shape the legislative and regulatory debate. In testimony on Capitol Hill throughout the spring, REALTORS® have made headway with their long-sought call to make the FHA more competitive against subprime lenders by increasing its loan limits, allowing risk-based pricing, and eliminating the minimum down payment requirement.

At a mid-April hearing on the issue, lawmakers on both sides of the aisle agreed on all of these basic reform measures, positioning the legislation for victory once issues not tied to reform - including the use of FHA proceeds to capitalize a housing trust fund - are resolved.

Also enjoying success is legislation backed by REALTORS® to eliminate the tax burden on hard-hit households who've had mortgage debt forgiven by lenders after foreclosure or a short sale. The IRS counts the forgiven debt as taxable income. Reps. Rob Andrews (D-N.J.) and Ron Lewis (R-Ky.) introduced the "Mortgage Cancellation Relief Act" (H.R. 1876) in April, and by the end of April two dozen lawmakers had signed on as cosponsors.

More initiatives from REALTORS® are in the works, but the focus won't just be legislative. Building on a series of popular brochures it's published over the last two years about mortgage financing, including Specialty Mortgages: What are the Risks and Advantages?, NAR is planning beefed-up educational outreach to members and consumers that will include information on working with trusted lenders to safely restructure troubled mortgage debt.

And on the regulatory side, NAR is submitting comments to the Federal Reserve and other agencies on their proposed subprime lending guidelines.

"As the nation's leading advocate for home ownership, NAR believes that all avenues to help consumers should be explored," says NAR President Pat Vredevoogd Combs. "The goal for all - government, lenders, banks, individuals, and REALTORS® - should be to help keep people in their homes."

  

Reprinted from REALTOR® Magazine Online] [June 1, 2007] with permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright 2007. All rights reserved. REALTOR® Magazine Online (http://www.realtor.org/realtormag).