The new Obama homebuyer tax credit has launched out of the starting gate and rather than get left behind, I thought I might find out more about it. Like a lot of real estate people, I don't quite understand it. So I asked my friend and mortgage broker professional, Eric Larsen to help clear up some of the mystery. And maybe my stupidity and his answers will make things clearer for you!
Bob Boog: From my understanding, homes purchased in 2008 are eligible for a $7,500 tax credit, right?
Eric Larsen: Yes, but unfortunately, this 2008 credit has to be paid back over 15 years.
Homes purchased in 2009 are eligible for the new $8,000 tax credit and the 2009 credit does not have to be paid back as long as the buyer lives in the home for at least 3 years.
Bob Boog: So, are we gonna go back and forth between 2008 and 2009, or just talk about 2009 here?
Eric Larsen: Sorry, all of the rest of this information pertains to the 2009 credit:
Bob Boog: Let's think backwards for a second, cuz that's me. I always do things that I'm not supposed to do first and then people will say, um, you don't qualify for this. You didn't read the fine print. So what is the fine print? What CAN'T a buyer do?
Eric Larsen: A buyer may NOT file a tax return BEFORE they close escrow, hoping to get the credit to use for the purchase they are about to make. This would be filing a false tax return! A buyer CAN file an amended tax return AFTER closing to get a quick refund from their 2008 tax return.
Bob Boog: So I guess it pays NOT to do your taxes and file for an extension?
Eric Larsen: Not really. I'm just referring to an amended return.
Bob Boog: Okay, so here's the million dollar question, the one that people keep asking me. Can I use the $8,000 credit for my down payment?
Eric Larsen: Yes and no. By this I mean that No, at this time, you cannot hope to use it directly for a down payment, however, FHA is allowing buyers to get a loan for the $8,000 credit from FHA approved lenders and non-profit organizations (think Nehemiah type agencies) which then can be used for down payment and closing costs (so yes, it CAN be used for down payment). However, while FHA has said it is OK, implementation at the lender and non-profit level is lagging. I am sure plenty of agencies and
lenders will be jumping into this "short term financing" option of the tax credit soon!
Bob Boog: So this is a good thing, right?
Eric Larsen: Yes definitely. This is the final piece we need in our industry to really make
this tax credit "pop"!
Bob Boog: So how exactly will it work?
Eric Larsen: The loan can either be paid back when the borrower
gets their refund or the small loan can have monthly payments (if the loan
does have monthly payments it has to be included in the qualifying debt
ratios!).
Bob Boog: Are there any other stipulations?
Eric Larsen: Yes, the home purchase MUST CLOSE prior to December 1st, 2009!
Bob Boog: Why do they call this credit "refundable?" This confused the heck out of me. Doesn't it mean the buyer has to pay it back some day?
Eric Larsen: No, but that's a good question. Refundable does NOT mean a buyer has to
pay it back, it means a buyer gets the full tax credit even if they have no tax liability (WHY they use the word "refundable" for this is beyond me. Must be government speak).
Bob Boog: What if I make $300,000 a year? Can I still get the tax refund?
Eric Larsen. Sorry, but NO. The tax credit phases out if a buyer makes more than $75,000 per year and disappears entirely if they make more than $95,000 per year ($150,000 to $170,000 is the phase out range for married couples).
Bob Boog: How about if I buy the house from my Uncle Harry?
Eric Larsen: That's another thing. A buyer CANNOT use the credit if they are buying a house from a close relative.
Bob Boog: Okay, what else haven't you told me?
Eric Larsen: That's it. Oh, if you are doing business in some lower-priced areas ($40,000 - 80,000 homes) keep in mind that the tax credit is $8,000 or 10% of the sales price, whichever is LESS!
Bob Boog: See? I knew there was a catch. Holding out on me again. You bastard.
Bob Boog: Let's get back to having somebody do your taxes...
Eric Larsen: You mean filing an amended return?
Bob Boog: Right. My question is, how long does this take?
Eric Larsen: How long does it take for the accountant to file the return, or how long before your buyer gets the money back from the Treasury Dept.
Bob Boog: Um, you know what I mean.
Eric Larsen: Knowing you, Bob, you want to know how quickly a buyer can expect to get their money from the Treasury Dept. So to directly answer your question, this takes about three to four weeks.
Bob Boog: Wow. That's pretty fast!
Eric Larsen: I even made a copy of one buyer's Treasury check, so I'm pretty confident that it can be done in that time frame.
Bob Boog: So here's another question for you, and it's not really a question, more of a proposed scenario. You know, one of those "what if" scenarios?
Eric Larsen: Oh not, not one of those.
Bob Boog: Well, I'm just thinking aloud here, ok so what if I'm a buyer and I borrow $8,000 from one of my solvent friends or family members, then I might be able to pay them back pretty quickly, couldn't I? I mean provided that I can get my accountant to file the amended return right away?
Eric Larsen: Sure, I don't see why not.
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