- The Washington Times - Friday, March 13, 2009

First-time homebuyers are in a great position to buy a home this year since they do not have to sell one before moving. Lower home prices, plenty of homes on the market and low interest rates are other factors favorable to homebuyers - as long as they have secure jobs, decent credit and some savings for a down payment and closing costs. In addition, a first-time homebuyer tax credit is providing an extra incentive for buyers to purchase homes now.

Two first-time homebuyer tax credits are currently in place. In 2008, President Bush signed into law a first-time homebuyers tax credit of $7,500. As part of the economic stimulus package, President Obama has signed into law a first-time homebuyers tax credit of $8,000. Homebuyers need to understand that they cannot take advantage of both tax credits and that they cannot choose which one they use. These tax credits have strict rules, which are defined by the date of the home purchase.

Internal Revenue Service (IRS) rules state that first-time homebuyers (defined by the federal government as anyone who has not owned a home within the previous three tax years) who purchased their primary residence between April 8 and Dec. 31, 2008, are only eligible for the $7,500 tax credit. First-time homebuyers who purchase a home this year between Jan. 1 and Dec. 1 are only eligible for the $8,000 tax credit.

There are several differences between the two tax credits, but they both require that the buyers live in the home. In other words, the credit is not available to investors.

Here are the rules for the 2008 first-time homebuyers tax credit:

• Tax credit is $7,500 or 10 percent of the purchase price of the home (whichever is smaller).

• It applies only to first-time homebuyers, defined as those who have not owned a home within the previous three tax years.

• Must be repaid over 15 years in 15 equal installments; in other words, this functions more as an interest-free loan. Repayment begins two years after the year the credit is claimed. If the tax credit is claimed on the 2008 taxes, repayment begins with the 2010 tax return.

• The tax credit is restricted to individuals with a modified adjusted gross income of $95,000 or less or $170,000 or less for married couples filing jointly. The tax credit phases out for individuals with a modified adjusted gross income between $75,000 and $95,000; and for married couples filing jointly with a modified adjusted gross income between $150,000 and $170,000.

• Residents in the District who are (or were) eligible to claim the D.C. first-time homebuyer tax credit cannot claim the federal tax credit. (Note: This does not apply for homes purchased this year that are eligible for the 2009 tax credit.)

See IRS Form 5405 for complete instructions.

Here are the rules for the 2009 first-time homebuyers tax credit:

• Tax credit is $8,000 or 10 percent of the purchase price of the home (whichever is smaller).

• It does not have to be repaid unless the home is sold within three years. If you sell the home within 36 months of the purchase date, you have to pay back the full amount of your tax credit.

• Applies only to first-time homebuyers, which are defined as those who have not owned a home within the previous three tax years.

• Available only for homes purchased this year between Jan. 1 and Dec. 1.

• The tax credit is restricted to individuals with a modified adjusted gross income of $95,000 or less or $170,000 or less for married couples filing jointly. The tax credit phases out for individuals with a modified adjusted gross income between $75,000 and $95,000; and for married couples filing jointly with a modified adjusted gross income between $150,000 and $170,000.

• Tax credit is for up to 10 percent of the purchase price, up to a maximum of $8,000. For example, a buyer of a $150,000 home could receive a tax credit of a maximum of $8,000, while a first-time buyer of a $70,000 home would be eligible for a tax credit of $7,000.

• The credit can be taken on 2008 taxes even if the purchase is made in 2009. Homebuyers can take advantage of this filing exception by closing on the home prior to April 15, getting an extension to file taxes later in the year or by filing an amended return after the settlement date.

See IRS Form 5405 for complete instructions.

Brent Mendelson, a senior loan officer with Choice Finance in Rockville, says, “The new tax credit is definitely much better than last year’s simply because it is a true tax credit, not a loan. Potential buyers need to start looking now for a home if they want to take advantage of this tax credit. The cut-off date of Dec. 1 means that the closing must take place by that date. That means contracts may need to be signed by October to make sure the financing is in place and the closing occurs before the deadline.”

Mr. Mendelson points out that the window of opportunity is particularly short for first-time buyers looking at foreclosures and short sales, since it can take three to six months for those transactions to be complete.

Certified financial planner Michael Rebibo, with 1st Portfolio in Vienna, says that one of the most significant elements of the 2009 tax credit is the ability to take advantage of the tax credit when filing 2008 taxes. In addition, the tax credit is fully refundable. Even if a taxpayer expects a refund of $1,000 on his taxes (for either 2008 or 2009), he can receive a refund of $9,000 if he fully qualifies for the first-time homebuyer tax credit.

“The guidelines allow you to take the tax credit in 2008 as long as you buy the house before Dec. 1,” says Mr. Rebibo. “First-time buyers who decide to take the tax credit in 2009 can reduce their tax withholdings down to whatever would be needed to accumulate the amount of their tax credit next year, meaning they can get the money in their pockets now rather than waiting for their 2009 tax refund.”

Mr. Rebibo says that a married couple with the average household income in Fairfax County of about $100,000 (depending on other debts and the credit rating) can qualify to buy a home valued at about $400,000.

“The Washington area housing market has fallen about 30 percent since the peak of the market in the summer of 2006,” says Mr. Rebibo. “For a long time, people with the average income in Fairfax County could not afford to buy a home there, but now the opportunity is there. There are plenty of homes on the market in the $400,000 range in this area.”

Mr. Rebibo points out that the FHA (Federal Housing Administration) loan limits have been raised to $729,750, which means that most buyers in this area can opt for a fixed-rate, 30-year FHA loan with a down payment requirement of 3.5 percent.

“The 2009 homebuyers will likely experience the bottom of the market in this area, so with low interest rates of about 5 percent and motivated sellers, buyers should take advantage of this tax credit,” says Mr. Rebibo. “Even if the market doesn’t come back right away, homebuyers have to stay in the home three years to keep the credit and really should stay in a home five to seven years to see a return on their investment.”

Mr. Mendelson says that while loan commitments are made based on an individual’s debt-to-income ratio and credit scores, a married couple with an adjusted gross income of $150,000 could qualify to buy a $650,000 home if they had no other debts and could make a $25,000 down payment. He says that even if the couple had debts of $250 to $750 per month, they could probably qualify for a $625,000 mortgage.

“But I want to make it very clear that just because they can be approved for that much this doesn’t mean that loan payment is affordable or that they should actually take on a mortgage that large,” says Mr. Mendelson. “The monthly payments of principal, interest, taxes and homeowners insurance would come to about $5,000 per month at 5.5 percent interest.”

For single buyers interested in taking the maximum tax credit, the adjusted gross income limit is $75,000. Mr. Mendelson says that an individual making $75,000 with no debts, or debts of about $350 to $500 per month, could qualify to purchase a $350,000 home with an FHA, fixed-rate loan for 30 years at 5.5 percent. He says the monthly payments would come to about $2,422 for principal, interest, taxes and insurance, plus FHA mortgage insurance.

These loan-qualification scenarios are estimates, since each case depends on the individual’s financial circumstances and the loan programs available. Washington-area first-time buyers with the maximum income levels should be able to find a home within their price range that will also allow them to take advantage of the tax credit for 2009.

LOAD COMMENTS ()

 

Click to Read More

Click to Hide