Tax Credit Confusion

The past couple of weeks, many of my buyers have been scrambling to find a house to make an offer on. This past Friday was the last day that sellers could offer down payment assistance (DPA) to FHA or other first time homebuyers. Now that that is gone, many have started asking questions about the First Time Homebuyers Tax Credit.

I think many people are confused, some do not understand that it actually isn't a credit, but more of an interest- free loan. Below are some great references about the tax credit. It does sound like a good thing to take advantage of if you are a first time homebuyer (or have recently purchased for the first time) but it is important to educate yourself on all of the facts first.

Quick Chart

FAQs

Federal Housing Tax Credit

First time homebuyers have many expenses, from inspection costs, moving expenses, etc. The DPA programs were a great help when they were available. Unfortunately, there's not really a way right now to use this tax credit as a "down payment". Unless someone perhaps borrowed some gifts funds from a relative (although that's not really a gift then) and repaid them, first time homebuyers are not still needing to come with 3% for down payment now. There is one program that some will qualify for- Indiana Housing Program, that will help with grants for the DPA. However, there are many restrictions, including income, credit score, type of housing, and the whole process can get dragged out a while. However, it is definitely worth looking into if this is your only option. There are some great programs for police & fire dept workers, teachers, sanitation workers, etc. Feel free to contact me with questions!

Indianapolis is Nation's Most Affordable Housing Market!

RISMEDIA, August 21, 2008-Indianapolis, Indiana maintained its standing as the most affordable major U.S. housing market for
the 12th consecutive time in the second quarter of 2008, according to the National Association of Home Builders/Wells Fargo
Housing Opportunity Index (HOI) released this week.
Nationwide, homes became more affordable for the third consecutive quarter, with the HOI rising to and almost matching the
highest level since the second quarter of 2004.
“Today’s HOI reading shows that 55 percent of all new and existing homes that were sold during the second quarter were
affordable to families earning the national median income of $61,500,” said NAHB President Sandy Dunn, a builder from Point
Pleasant, W.Va. “Several factors combined to increase housing affordability nationwide. There was a marginal rise in mortgage
rates, which still remain near the historically low levels of a few years ago, family income nationwide held steady and lower
house prices.”
In the nation’s most affordable major housing market of Indianapolis, 91.6% of homes sold in the second quarter were affordable
to families earning the area’s median household income of $65,100. Also near the top of the list for affordable major metros this
time around were Youngstown-Warren-Boardman, Ohio-Pa.; Detroit-Livonia-Dearborn, Mich.; Warren-Troy-Farmington Hills,
Mich.; and Grand Rapids-Wyoming, Mich., in that order.


One smaller metro market (fewer than 500,000 people) outranked all others in terms of housing affordability
during the second quarter of 2008. This was Canton-Massillon, Ohio, where 96.7% of all homes
sold in the period were affordable to families earning that area’s median household income of $54,600.
New York-White Plains-Wayne, N.Y.-N.J. was the nation’s least affordable major housing market. This
was the first time a major housing market outside of California was designated the least affordable since
the HOI’s inception in 1991. In the New York market, 11.4% of new and existing homes sold during the
second quarter were affordable to those earning the area’s median family income of $63,000.
Other major metros at the bottom of the housing affordability chart included San Francisco-San Mateo-
Redwood City, Calif.; Los Angeles-Long Beach-Glendale, Calif., Miami-Miami Beach- Kendall, Fla.;
and Nassau-Suffolk, N.Y., in that order.
Among metro areas smaller than 500,000 people, the five markets at the bottom of the affordability chart
were San Luis Obispo-Paso Robles, Calif.; Ocean City, N.J.; Napa, Calif.; Santa Cruz-Watsonville, Calif.;
and Salinas, Calif., respectively.

New Housing Bill Passed by Congress

Unwrapped, Housing Tax 'Credit' Is Really a Loan

Washington Post, By Michelle Singletary

July 31, 2008

There's been a lot of discussion about how much the new housing bill passed by Congress will help individuals facing foreclosure.
Some will be able to keep their homes, to be sure. But there's a different provision of the Housing and Economic Recovery Act that I want to focus on -- the much-trumpeted tax credit for first-time homebuyers.
A tax credit is much more valuable than a deduction. A credit reduces dollar for dollar the amount of tax you owe. A deduction merely reduces the amount of your income that is taxable.
Under the new law, certain homeowners will be eligible for a tax credit equal to 10 percent of the purchase price of a home, up to a maximum of $7,500. The credit is $3,750 for married couples filing separately. Unmarried people who jointly purchase a home will be able to divide the $7,500 credit.
When I saw the $7,500 amount, I thought, not a bad tax credit. But there are all kinds of catches. Before you rush to take advantage of this, be aware it's a loan cloaked as a credit. "Essentially this is a loan administered through the tax code," said Gerald Prante, an economist with the nonprofit Tax Foundation. "I question whether the tax code is the best way to do this."
Financially, the loan has about the best rate and term you can get. It's interest-free. Homebuyers would be required to repay the government over 15 years in equal installments for any amount received.
So let's say you qualify for the maximum credit of $7,500. Considering the price of housing, just about every first-time buyer would qualify. The terms would mean a yearly loan payment of $500 for 15 years, or about $41.67 a month.
You have to begin repaying the credit in the second tax year after you purchase the home. If you sell the house before you pay off the credit, the entire amount becomes immediately due.
However, if you sell and the gain is less than the credit, then you only have to repay up to the amount of the gain. If the homeowner dies before the credit/loan is repaid, any outstanding amount is forgiven.
The new law defines a first-time homeowner as an individual who has had no ownership interest in a principal residence for a three-year period ending on the date of the current home purchase.
Also, there's a small window to this opportunity. The credit applies only to homes purchased on or after April 9, 2008, and before July 1, 2009.
Another catch: High-income homebuyers won't qualify for the credit. You can claim less of the credit amount the more you earn. The phaseout starts for single filers with adjusted income of more than $75,000 and $150,000 for joint filers. It completely phases out at $95,000 for singles; $170,000 for married couples filing jointly.
The credit is also not available to nonresident aliens or those who qualify for a similar tax credit in the District of Columbia. And you can't take this credit if your home is financed by the proceeds of a qualified tax-exempt mortgage bond.
There is one other tax-friendly provision. The bill would provide homeowners who claim the standard deduction with an additional standard deduction for state and local real property taxes.
The maximum amount that may be claimed under this provision is $500 ($1,000 for joint filers), according to a summary provided by the Senate Finance Committee.
This particular provision will be helpful to taxpayers who don't itemize. For example, a family with taxable income of $65,100 to $131,450 could deduct $1,000 of property taxes and pay up to $250 less in federal taxes, according to Nebraska Sen. Ben Nelson (D), who issued a release praising the deduction.
Previously, only taxpayers who itemize were able to take advantage of the property tax deduction. About 35 percent of tax returns include itemized deductions, according to Prante.
Ah, but there's a catch to this deduction, too. It applies only for the 2008 tax year. Nonetheless, at least for one year, the property tax deduction will help people who are close to paying off their mortgages and thus don't have a lot of mortgage interest to deduct. It will also help low- to moderate-income homeowners and people in areas with no or low state taxes but who have high property taxes, Prante said.
Weighing these two tax provisions of the new law, I believe the state and property tax deduction will be the most helpful even though it is available just for one year.
I'm not crazy about the tax credit. This loan masked as a credit increases a homebuyer's debt. Yes, it will let some people reduce their tax burden, but the benefit is only temporary.