First-Time Buyer Tax Credit Demystified

With all the information coming out about the $8,000 tax credit for first-time home buyers, it might help to recap some of it and clear up some of the more common misconceptions.

A first-timer is deemed to be someone who has had no home ownership in the last three years.

How Much You Get

The tax credit is good toward the purchase of a home that the borrower intends to live in as his or her primary residence.

This means that investment properties are excluded.

The amount of the tax credit can be up to $8,000 or 10% of the purchase price, whichever is less. The buyer of an $80,000 home will get the same benefit as someone buying a $200,000 home.

Buyers must own the property for a minimum of 36 months or will forfeit some or all of the tax credit.

Tax Credit at Closing

Buyers may be under the impression that they will get all or part of this credit at the closing table, thereby helping to pay for closing costs, or even toward a down payment.  There is a very small number of instances where this is happening, but this typically occurs when a borrower is working with a non-profit or charitable organization.

Lenders, most of which have been reluctant to adopt these credit-at-closing programs, would in effect be floating the money to buyers, and most if not all are reluctant to do this.

In the current lending environment, buyers can expect to put down at least 3.5% (with FHA) of their own money or gift funds and take the credit when they file their taxes next year.

Where to Get Help

Buyers should check with their tax professional to get specifics on the home buyer tax credit.

They can also visit the IRS website at www.irs.gov.

How Your Credit Card Debt Affects Your Mortgage

Credit is a very important part of the mortgage qualification process because borrowers with the best credit profiles will be able to borrow against their homes at the lowest rates.

With sweeping credit card reforms coming next year, credit users will enjoy many benefits and protections never before seen, but at the same time, they may find themselves paying more for that credit and find it more challenging to come by. Understanding credit, from the perspective of obtaining a mortgage or the anticipation of obtaining one in the future is important.  Here are a few of the many things that lenders look at with regard to credit, and how it may impact your ability to get a mortgage.

Balance to Limit Ratios: Lenders like to see that borrowers are able to keep balances on credit cards low, ideally under 40% of the limit. Higher balances will impact credit scores, and balances that are over the limit, versus near the limit, will have even more of an impact.

Payment History: A demonstrated ability to make payments is important, especially in the period immediately prior to applying for the mortgage.  Borrowers with recent late payments will have challenges in convincing a lender that they are worthy of a mortgage if they are unable to make smaller payments on time.

Debt Ratios: The total amount of debt you are carrying in relation to your income will give the lender a picture of how well you are living within your means. Lower ratios are better.

Inside Mortgages: How Lenders Set Rates

With so many different terms that relate to mortgage rates and how they are set, it might be helpful to compare and contrast some of them in order to get a clearer understanding of the differences.

HELOCs and Other Short-Term Lending

The prime rate is the rate that banks use to lend money to each other.

Many credit instruments, such as home equity loans and lines of credit, automobile loans, and credit card rates, are based on this.

From the perspective of the creditors, this is considered short-term lending, and the rate can change regularly.

Adjustable Rate Mortgages

Rates for adjustable rate mortgages, or ARMs, are based on indices that often reflect the prime rate but are, at the same time, different.

These economic indices include rates of shorter-term Treasury bills, such as the one-year Treasury bill, the LIBOR, which is the London InterBank Offered Rate, and COFI, which is the Cost of Funds Index.

To arrive at a rate that they will offer potential borrowers on a mortgage, lenders take these indices and add what is called a margin to them.

For example, if the rate on an index were to be 3.00% and the lender were to add a margin of 2.5%, the rate the borrower would pay, at least initially, would be 5.5%.

The rate may change over time as the index changes, and as the loan is eligible for rate adjustments, per the terms of the loan.

Fixed-Rate Mortgages

Fixed-rate mortgages, more specifically those that are for 15 or more years in length, are considered long-tem lending.

For the most part, except for very recently, long-term mortgage rates have followed the yield on the ten-year Treasury bill, which tends to change with economic conditions.

Discover How to Clean Up a Damaged Credit Report

Now more than ever, having good credit is important if you want to qualify for a mortgage. Borrowers with all types of credit profiles can and do obtain mortgages, but those with the best credit profiles get the best rates and terms.

Many borrowers, especially those with dings on their credit reports -such as late payments and medical collections – might benefit from a credit restoration service.

Many credit restoration services work under the guidelines of FACTA – the Fair and Accurate Credit Transactions Act. FACTA states that creditors are obligated to follow certain procedures before reporting information, specifically derogatory information, to the credit bureaus.

Credit restoration services, in cases where proper disclosure was absent, confront the creditors, sometimes with threats of legal action on behalf of a borrower, and can often have information such as late payments, collections and judgments removed from the credit report, under FACTA laws. With most items that carry some type of balance, such as collections, borrowers are still obligated to repay them but can do so without having it appear on their credit reports. A credit restoration can take anywhere from 30 to 60 or more days.

Borrowers need to research credit restoration services. Many are legitimate, but as with many other industries that have appeared after  the housing crisis, there are some that will try to charge high fees or skimp on the service they provide.

The Basics of Investment Property Financing

Given the current real estate market, with an abundance of undervalued and distressed properties, looking into the purchase of an investment property might be a good idea.

Keeping in mind how these properties work from a finance perspective will help in the decision to purchase one.

What is The Strategy?

The three questions that a potential property investor should ask are:

  1. How much of a down payment is needed?
  2. How much of an investment will be required to get the property either rentable or resalable after purchase?
  3. What will the market bear in terms of either a rental rate or a sales price?

Getting Financed

Investors should expect to have a down payment of at least 25% when purchasing a property. Rates are from 0.5% to 1% higher than those charged to purchase a home used as a primary residence, and you should expect to have at least six months of mortgage payments in the bank as asset reserves for each investment property that you own.

However, if you purchase a two- to four-unit property and intend to live in one of the units, the property will be considered a primary residence and financed accordingly.  There are still premiums that apply for multiunit properties, but they are normally lower than those for investment properties.

On a mortgage application, rental income is typically calculated at 75% of the amount on the lease, to account for vacancies throughout the year.  This difference in income will be made up by your personal income. If you have less than two years of landlord experience, you will not be eligible to use the rental income on the mortgage application and will need to cover that amount with your personal income.

Essential Tips to Help Get the Best Mortgage

Whether purchasing or refinancing a mortgage, following a few simple steps will ensure that borrowers get the best mortgage for their situation.

The first questions that borrowers should ask themselves are how long they plan to own the property and what type of stability in payments are they looking for. If you plan on being in the property for only a few years, an adjustable-rate mortgage (ARM) or a balloon loan might be best for you, as the rates on these can be lower than that of a fixed-rate mortgage.

Finding the Best Mortgage

Getting in touch with one or more mortgage professionals is the next step in the process. You should explain your situation, then listen to what the professional has to say.  Mortgage brokers and banks are required by law to provide, in writing, to a potential borrower a good faith estimate, or GFE. The GFE will show a rate, costs and the amount of escrows that a borrower should expect to pay.

Good faith estimates can and should be compared to one another. If you want another opinion, you should speak to someone you trust and who is independent of the transaction, such as a real estate attorney.

You should also be asking how long you can expect the process to take. Longer turn times in periods of very low rates are to be expected. A good idea, especially in the case of a refinance, is to get prequalified in anticipation of low rates. The less processing that a lender needs to do with a file after the rate is locked, the lower the rate it is usually able to offer.

Why Now Is First-Timers Chance of a Lifetime

With low home prices and an abundance of foreclosed properties for sale, first-time home buyers might do well to find out what is available in their areas.

First-timers are in a unique position to purchase foreclosures, for two reasons.

The first is that few if any lenders will accept a contract on a foreclosure from a borrower who has another home to sell.

The second reason is that first-timers can most likely stay where they are while going through the drawn-out process of purchasing a foreclosed property.  Some borrowers might wait weeks to even hear if an offer they have placed on a property has been accepted.

First Steps for First-Timers

To start the process, as a borrower, you should get yourself prequalified, so you know what you can afford.  You should then find yourself a good real estate agent who knows the ins and outs of foreclosures, preferably one who does a lot of these transactions.

Having a real estate attorney review the documents is also a very good idea.

Conventional Financing

To obtain traditional financing (conventional or FHA) the property must be habitable – which means it has functioning water, electricity, heat, etc. – but may be missing things such as a stove and a dishwasher.  These items are considered separate from the property itself.

FHA 203(k) Financing

For properties that need a bit more work or are sold as-is, look into the FHA 203(k) program.

This two-in-one loan covers the cost of the property and some of the repairs that it might need.  The loan amount is based on the anticipated appraised value once the repairs are made.|

This program covers one- to four-unit buildings and is for borrowers who intend to live at the property, meaning that investors would be excluded from the program.

June 2009

What is the Difference between Foreclosures and Short Sales?

With all the talk about foreclosures these days, a basic overview of some of the terminology might be helpful.

When a property is in foreclosure, it means that the lender has started legal proceedings to take back the property from the borrower.

A borrower is considered to be in default when he or she misses even one payment, but lenders typically start proceedings after three missed payments.  Depending on the state where the property is located, the court system may be involved.

The period of time from when the borrower misses the first payment to when the lender starts the foreclosure proceedings is called the pre-foreclosure period. A number of things can happen at this point. The borrower and the lender can sit down and come up with some type of loan modification agreement, by which the terms of the loan can be altered, at least for a certain period of time, to allow the borrower to get into a better financial position.

If the borrower can find someone who wants to, and is able to, buy the property, he or she can sell.  If the amount the person wants to pay is less than the borrower owes and the lender will take that amount, it is called a short sale. Once the foreclosure proceedings have started, however, the lender will be the only one that is able to sell the property.

If the borrower and lender agree that the borrower will turn the property back over to the lender, then walk away – without going through the foreclosure process, a deed in lieu of foreclosure takes place.

June 2009

First-Timer? Why This Is a Great Time to Buy

As home prices continue to decline across the nation, unprecedented opportunities have appeared for the first-time home buyer and for those who are currently looking to buy without first having to sell another home.

Income, credit and the amount of down payment will of course determine the best program to use for an individual borrower.

For this article, let’s take a look at a first-time home buyer who has two years of stable employment and 3.5% or less to put down on a property.

Federal Housing Administration

The FHA, which has changed slightly its guidelines since last year, is looking for a down payment of at least 3.5% from the borrower’s own funds or via a gift from a close relative.

While there is an upfront mortgage insurance premium (financeable) of 1.75% of the loan amount and a monthly mortgage insurance premium, the FHA allows lower credit scores than do conventional loans.
It also discounts the issue of markets with declining property values, unlike conventional loans, which take markets with falling property values into account.

Conventional Loans

With a conventional loan, depending on where the property is located, a borrower may put down as little as 3%. Credit requirements are much tighter than with the FHA at this level of down payment, and income requirements are about the same, but borrowers will bypass the upfront premium. They must still pay a monthly premium, however.

For the buyer interested in purchasing one of the many foreclosures available these days, specifically ones that need extensive repairs, the FHA has a program called a 203(k).

This is a rehabilitation and repair program that allows the buyer to borrow, in one loan, funds to buy the home that they, themselves, intend to live in, plus enough to do at least $5,000 of rehab and repair work.

Why Rainy-Day Planning Is Essential Right Now

In the current employment market, it is no surprise that many people are wondering what they can do to prevent getting into difficulties with their mortgages if they lose their jobs.

The first thing to do is make sure you are living within your means. This sounds basic, but many homeowners – especially those with very low mortgage rates – have acquired other debt, with payments that, in some cases, are greater than those of the mortgage itself.

Making wise consumer choices will help leave extra funds each month that can be put away for a rainy day
The second action is to set up access to reserve funds, such as a home equity line of credit, to be used only in the case of an employment gap. Applying for a home equity line – let alone any type of mortgage – after employment has ended is an uphill challenge, unless there is another borrower in the household who can qualify on his or her own.

A home equity loan is ideal because the application process is normally much simpler than it is for a standard mortgage and often comes at no cost to the borrower.

With the recent tightening of lending standards, it might be a good idea to find out what your options are before you need them.

Homeowners often reap benefits renters miss out on, such as being able to write off mortgage interest and property taxes. Managing debt – to protect your home by being able to weather a financial debacle should it occur – therefore makes good sense. Check with your tax professional for more details.