As its June 30, 2010 closing deadline approaches, the federal home buyer tax credit is back in the news.
Unfortunately, the headlines are misleading.
Contrary to what you may have read (or heard), the federal home buyer tax credit has not been extended past June 30, 2010. At least not yet. And here's why there's confusion.
Look at these headlines from earlier this week:
- Senate Extends Date On Home-Buying Tax Credit (Philadelphia Inquirer)
- U.S. Senate Approves Extension Of Home Buyer Tax Credit (NASDAQ)
- Senate Approves Home Tax Credit Extension (Reuters)
Now, nothing above is factually incorrect, but each neglects a key piece of the country's law-making process -- it takes more than the Senate to pass a law. For a bill to become a law, it must pass the Senate and the House of Representatives and then it must be ratified by the President.
To date, we've only cleared just one of those 3 steps.
This means that the federal home buyer tax credit has not been formally extended. As of now, it's still in discussion. Ultimately, though, if the extension does pass, it's expected to extend the closing date deadline for home buyers beyond the original June 30, 2010 date into September 2010.
Homeowners must still have been in contract as of April 30, 2010 to claim up to $8,000 in federal tax credits.
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Single-family housing starts plummeted to a one-year low in May, just 30 days after soaring to a 20-month high. It's no wonder home builders are confused.
Against a revised April figure, Housing Starts fell 97,000 units in May, a figure representing almost one-fifth of the total market size.
It's the worst showing for Housing Starts since May 2009, a surprise to builders and economists alike.
Furthermore, single-family Building Permits plunged in May, too -- down 10 percent from April. A permit is a certification from local government that authorizes home construction.
Housing permits are a precursor to Housing Starts with 82% of homes starting construction within 60 days of permit-issuance. Fewer permits, therefore, directly reduces the number of new homes coming to market in the coming months.
For home buyers , this should create a sense of urgency.
Home prices are based on supply and demand and supply appears to be falling about the same time that economists predict a surge in home demand. It could spell rising home prices and a complete loss of negotiation power with home sellers.
For now, though, home affordability remains high with properties cheap and mortgage rates near all-time lows. If you plan to buy a home later this year, the May 2010 Housing Starts data may be a reason to move up your timeframe a bit.
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If you plan to finance your home with a conforming interest only mortgage, get your loan application submitted no later than this Friday, June 18.
Starting next week, Fannie Mae is clamping down on the popular loan product.
An "interest only" mortgage is exactly what its name implies -- a mortgage for which the monthly payments consist entirely of interest with no principal reduction. Because there's no amortization, payments are less costly on a month-to-month basis.
For example, assuming principal + interest payments at 5 percent, a $250,000 mortgage carries a monthly payment of $1,342. The payment on a comparable interest only mortgage, however, drops to $1,042.
That's a payment difference of $300 and the size of the cost savings, not surprisingly, is the biggest reason why Fannie Mae is making its changes.
In its official announcement, Fannie Mae says it wants the give the interest only option to "borrowers who are in a position to choose it as a financial management tool" rather than allowing homeowners use it as an affordability tool for their budgets.
Going forward, there are new minimum standards for interest only home loans.
- Applicants must have a 720 credit score or better
- Applicants must have at least 24 months of reserves
- The property type may not be a 2-unit, 3-unit or 4-unit
- The property must be a primary residence, or vacation home
Furthermore, only purchase and rate-and-term refinances are eligible. Cash out refinances are prohibited.
Interest only home loans aren't for everyone, but if you plan to finance with a Fannie Mae mortgage and interest only is your preference, get your loan application submitted as soon as possible. Starting Monday, approvals will be tougher to come by.
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