So I open up my news feeds yesterday, and in big bold letters I see the title “Beware of the $7500 Tax Credit” on a CNNMoney headline. Even though there is an entire website dedicated to explaining the ins and outs of this new ‘tax credit’, I can’t help but feel that buyers out there must be confused by these warnings and poised critics. So in response, I am going to address some of these issues as well as detail the fundamental elements of this “mystery” tax credit.
Who is Eligible?
- First Time Home Buyers or those who have not owned a home in three years
- Individual income must be less than $75,000 and couples with income less than $150,000. Those outside of these income requirements may be eligible for partial credits.
What You Get
- A tax credit is issued for 10% of the sale price with a maximum amount of $7500
- Most will qualify for the $7500 tax credit, but if your house is less than $75,000 you will receive up to 10% of the purchase price. (i.e. $65,000 sale = $6500 tax credit)
- If the tax credit is less than the taxes you owe, you will pay the difference. If the tax credit is more than the taxes you owe, you will receive a refund.
- If you owe $8500 in taxes and received a $7500 tax credit, you will pay $1000. If you owe $5000 in taxes and received a $6000 tax credit, you will receive $1000
How You Pay it Back. Yes, you do have to pay it back.
- Borrowers are required to start paying back the loan after 2 years and it must be paid off within 15 years.
- If you sell the home, the remaining balance is paid for with the profits of the sale. If you sell the house at a loss, your remaining balance is forgiven
- Essentially, the tax credit is a zero percent loan for 15 years.
So there you have it - hopefully this eases any worries and will serve its purpose of stimulating the appetite for this market. While it still might be intimidating for some, it will be interesting to see how these government incentives play out in the future. For more details and some of the FAQs, be sure to check out the First Time Home Buyer Tax Credit website.
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There’s been a lot of news about great bargains, government incentives, and first time home buyers lately. But if you can’t qualify, all this good news is meaningless. Now, I’ve already mentioned the importance of getting your credit and income prepared, but this market demands one more thing - cash.
Why Cash?
Long gone are the days buying a home with zero down - you have to put your money where your mouth is now. While it is certainly not the only criteria, a larger down payment definitely weeds out many potential “trouble” homeowners. Based on the past, exotic loans definitely caused a great deal of defaults - but low down payment requirements also moved a lot of unprepared individuals into homes they were not ready for financially. In a way, lenders determine your seriousness and credibility based on your down payment.
Don’t Be Scared
I hope tighter guidelines filter out certain buyers - but I also hope genuine buyers are not scared away. The good news to remember is that down payment guidelines are still relatively lenient. Sure, we experienced five to six years of lenient guidelines; but truth be told, that was not lenient, it was outrageous. Now, we’re shifting back to qualified homeowners and they should have no problem meeting these “new” standards.
What to Expect
Recently, FHA has eliminated seller financed down payment assistance. In addition, they have also bumped up their minimum down payment requirement from 3% to 3.5%. Fannie and Freddie on the other hand are requiring at least 5% down. In reality, these numbers are quite manageable for those who can actually afford homes. And although sellers DPA has been eliminated, gift funds are still allowed to finance down payments. When you consider all this, proper planning and saving leaves the window of opportunity wide open for many potential homebuyers.
The key is to start planning early and save as much cash as you can for a down payment. If you can save enough, not all of your money has to go towards the down payment either. This extra savings can be left as assets - and banks love to see sizeable assets in your account as well. Remember, your down payment is one aspect of getting qualified; make sure you also take these steps to qualify for your home loan.
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