6.5 steps to $6500: Getting the Move-up buyer's tax credit in 2010 for Providence and beyond!

6.5 steps to $6500: Getting the Move-up buyer's tax credit in 2010 for Providence and beyond!

Throughout 2009 there was a lot of talk about further means to stimulate activity in the real estate market. Many things were happening already: the Federal Reserve preserved the mortgage market by inserting itself as the largest, and sometimes only, buyer of mortgage backed securities; and an $8000 tax credit for first time homebuyers was instituted quite successfully, among other efforts. For 2010, congress has presented additional buyer incentives to maintain activity.

If a flaw can be found in the original 2009 homebuyer tax credit, it was the law's timing. The $8000 first time homebuyer credit was originally set to expire November 30th, 2009, but has since been extended. From a timing perspective, it is clear that the politicians who chose November 30th aren't familiar with the seasonal fluctuations of the real estate market. In general, real estate sales tend to slow down in late November. Scheduling the end of a stimulus program to coincide with a point that is already weak in the seasonal cycles of real estate was a poor choice.

Now, first time homebuyers have until April 30th, 2010, to sign a contract to purchase a home, and, in addition, existing homeowners can also participate, getting a $6500 tax credit. Because the tax credit requires existing homeowners to have owned a home for 5 out of the last 8 years, many existing homeowners could be a little rusty regarding the homebuying process, especially in regards to the procedural changes for mortgage approval that have occurred in the past few years. Today, I'd like to review the steps existing homeowners should consider in preparing to pursue this opportunity.

Find out if you qualify for the credit

First and foremost, it is important to be certain that you actually qualify to receive the tax credit. There are several different qualifications that apply to the tax credit, as follows:

• Prior home ownership: You must have owned a home and resided in it as your primary residence for 5 out of the last 8 years. This means that several different scenarios will qualify, among others:
  

1. You currently own your primary residence since January 2005, and plan to sell it prior to purchasing a new home.
2. You owned a home from 2002 through 2007 which you sold. You have been renting since then.
3. You bought a home in 1999 and lived there as your primary residence until 2006. Since then you have rented it out to tenants.
4. You bought a home in 2003 and live there now as your primary residence. You plan to rent it out when you purchase your new home.
   

• Home purchase price: homes priced at up to $800,000 qualify for the credit, however, homes priced below $65,000 will receive a reduced credit equal to 10% of the purchase price
• Household income: individual buyers with "Modified Adjusted Gross Income" of $125,000 or less, and joint income tax filers with MAGI of $225,000 or less can qualify for the full credit amount. Partial credit is available up to $145,000 and $245,000 respectively.

Do you still qualify for the credit? Great! Time to move on and make sure you qualify for a new mortgage.

Find out if you qualify for a loan

Mortgage approvals are not as easy to come by in 2010 as they were in 2006 or 2007. Where a single paystub used to suffice for income documentation, most banks are requiring 2 full years tax returns. I've heard a number of bank representatives recently mention the "Rule of 2's":

• 2 years tax returns
• 2 pay stubs
• 2 months bank statements
• (2 years credit history)
  
• (2 years work history in the country)

The last two items are somewhat less commonly discussed, or not applicable to all buyers. Not only are banks collecting all this information, they are also using 3rd-party means to verify it. We found out the hard way last week that a buyer had provided us with a falsified tax return when the IRS 4506 verification showed him reporting about 1/3 the income he showed us.

The bottom line: if it needs to be on the application in order for you to qualify, it's going to be verified, so don't waste your time lying.

In considering your qualifications, you also need to decide if you will be selling your existing home, or holding it as a rental. Rules permitting use as a rental are much more challenging in 2010, and require evidence of substantial (25%) equity in the property, lease, proof of receipt of security deposit, and substantial after-closing cash reserves usually equal to 6 months of payments on all properties you own, although things are a little easier if that income can be verified through the last 2 years tax returns. Many buyers who might have considered keeping their homes will be forced to sell to take advantage of this opportunity.

Do you need to sell your house?

You'll know if you need to sell your home as soon as you've met with your mortgage advisor, although you might have decided before that you'll sell anyway. Selling isn't as easy as putting a sign up and maybe putting a listing on Craigslist. To get your home sold in time to buy, you need a plan, and you'll need a real estate professional to help you through the process. Here's what to do:

1. Choose a real estate professional: Do you have a good relationship with the Realtor who helped you purchase your home? Then use that person. If not, you can ask your mortgage advisor, or friends, for a recommendation, or you can interview several agents to make sure of a good fit for your goals.
2. Prepare your home: You may love that lived-in look your home has. I can guarantee a potential purchaser will find fault with it. Take your Realtor's advice about staging - he helps people sell houses all year long, while you might do it once a decade.
3. Price aggressively: You only have 4 months to get into a contract. If you start too high, you might miss the opportunity.
4. Be flexible: New changes in underwriting and disclosure law are complicating the mortgage process for buyers. Be prepared to help if a snag is encountered.

Is your home on the market? Good! Now it's time to move to the next step.

Look look look!

You're probably not alone out there looking, and, if you're looking at bank owned properties, there's probably quite a crowd at the houses you're seeing. The sooner you start looking, the better, because the 2010 spring market is likely going to be very active. Be prepared for some competition on those homes, and many others.

There's been a lot of discussion lately about multiple offer situations. You might think this is a buyer's market because prices are low, but I'll be surprised if that is the case for the next 4 months. Consequentially, you may very well get the call from your buyer's agent that there are other bidders and that the seller is looking for your "highest and best offer". That's ok!

Many buyers are seeing this challenge now, which is why it is that much more important to start looking soon. If you do lose out to other offers, you need to give yourself the opportunity of another day to make another offer.

And, by all means, listen to your agent's advice.

Bend over backwards for the banks

So you finally found your home. Congratulations! Now it's time to finalize getting the funding. Because of changes to documentation and disclosure requirements, this time is going to be a lot different than the last time you got a loan, even if you refinanced last year.

To minimize the pain associated with this part of the process, let's look at the steps your loan application will go through once you have found a home:

1. Initial Disclosures: Assuming you have completed all other initial application steps, within 3 days of providing the property's address, you will be presented with initial loan disclosure paperwork in compliance with the Mortgage Disclosure Improvement Act (MDIA). Specifically, you will receive a Truth-in-Lending disclosure. Until you have received this document, the rest of the process will stay on hold, so make sure you provide all relevant contact information, especially an email address.
   
2. Underwriting: This is the part of the process where your pre-approval letter will (hopefully) turn into a commitment, assuring you of financing for your purchase. It is common that an appraisal will be ordered at this time, which will require you to provide a credit card for payment of the appraisal fee. Don't be surprised if the underwriter requests additional documentation, though.
   
3. Conditions: Once you receive your commitment, it is likely there may be some additional conditions associated with it. Did you have an unusually large deposit made into your bank account? Is there a 2' x 2' space on the property with peeling paint? Did you miss 2 weeks of work on unpaid leave recently? Expect that you will need to document these things. Additionally, if the property you are purchasing is a condominium, expect the bank will be working on approving the condo, and may have additional questions.
   

One your conditions are cleared, your loan will be cleared to close. You're almost home!

Closing day!

Start the morning with the traditional walk-through, followed up with a 1-2 hour meeting with your attorney. If all went well, you should have been given information the day before so that you will know what to expect you will be charged at closing. Here's a few things to bring with you to closing:

• Certified funds: You'll probably owe some money at closing. Unless the amount is very small (under $1000), most attorneys will require you to get a bank certified check, as they will have to write checks on its basis the same day. Don't know who to make the check out to? Usually if you have the check made out to yourself, it gives you the most flexibility, as you can endorse it to the attorney, to the seller, to the Realtor, or you can even cash it yourself if a problem arises and the closing doesn't go through.
  
• Identification: You need to be able to prove to the settlement agent who you are, otherwise the settlement agent won't be able to swear to having seen you at closing. Make sure you bring a government issued picture ID, preferably a driver's license or passport.
• Inspection reports: In some cases, banks are requiring copies of pest inspections, septic inspections, water tests, home inspections, etc. be presented at closing. It's better to be safe than sorry, so bring it!

What if you're selling, then buying the same day? Try to use the same attorney to represent you on both transactions, as that will simplify the movement of funds: the attorney will handle all of it. Be prepared for a long day, too. As banks get busier, more and more closings will be happening in a day, making it tougher to dictate the exact time you want. You may find it easier to plan for at least the whole afternoon off to handle the details.

Congratulations! You made it! I hope you've found this guide helpful. Over the next few days, I plan to write a few more articles to help the move-up buyer, including information on preparing credit, when to file income tax returns, what to expect in interest rates in 2010, and more. Please comment below if you have any questions, and I'll do my best to get right back to you.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and has worked in the mortgage industry since February of 2000, since July 2005 with Province. In addition to his work with Province, he is the Chair of the Greater Providence Chamber of Commerce Ambassadors, and serves as an Adjunct Professor of Finance with Roger Williams University and the University of New Haven. He can be reached by commenting on this article.