economic stimulus

Real Estate’s New Strategic Focus | April 30, 2010

Revised to include new 5405 instructions

The world of residential real estate in the U.S. is facing an expiration date of historic proportions in 2010 that buyers and sellers need to pay attention to for a variety of reasons. April 30, 2010 is the last day that buyers and sellers can “enter into a binding contract” for a real estate transaction to qualify for the two, limited time, federal tax credits for buyers of residential real estate.

Having a strategic real estate plan in early 2010 is essential for both sellers and buyers of primary residences especially before the ship has sailed… and it will. Hey, I’m just a real estate agent so ask your tax adviser what’s best for your tax situation.

Attention home Sellers, it ain’t just for first-time home Buyers this time!

Way back in November ’09 when first-time buyers were in a frenzy to close on a home before November 30th, Congress passed The Worker, Homeownership, and Business Assistance Act of 2009 to extend the first-time home buyer tax credit and add a new tax credit for “long-time resident” homeowners. So now the move-up home seller group or downsizing home seller needs a clear strategy for getting a contract on their existing home and then a contract on their new home. These tax credits are for principal or primary home purchases and not intended for investors or people buying second homes.

Home Sellers, if you had planned on moving-up or down this year, then you should realize that buyers this winter have a deadline or extra motivation to snatch-up your home. This is important especially since home inventories are low in many areas (supply vs. demand). And then, once you have that contract in hand,  you can put in a contract on your new home before the April 30th deadline for the “long-term resident” credit if you qualify.

If you are thinking of just waiting until the Traditional Spring Market in 2010, then you really need to think again. Waiting until May to put your home on the market is a strategic error. The motivation of the tax credit can act a little like rocket fuel to qualified buyers to enter into contracts by the April 30 deadline, and I witnessed that phenomenon in the Northern Virginia real estate market last fall as the original deadline approached. This credit is essentially up to $8,000 cash to the first-time home buyer… and that will buy a lot of home furnishings!

I forecast 45% of 2010′s real estate sales are “in escrow” during this period

Here are the important dates as posted on IRS.gov:

• Binding Contract by April 30, 2010
• Must Settle on the Purchase by June 30, 2010

First-Time Homebuyer Credit details:

• Buyer who have not owned a primary residence during the three years up to date of purchase
• No one under 18 years old
• Modified Adjusted Gross Incomes up to $125,000 for single filers (reduced credit $125,000-$145,000)
• MAGI up to $225,000 for joint filers (reduced credit $225,000 – $245,000)
• No credit on homes with a purchase price over $800,000
• Maximum Credit of $8,000 or 10% of Purchase price (smaller of the two)
• Need to file IRS Form 5405
• New instructions as of January 15th, 2010: Revised 1/10 5405 Instructions

Long-time Resident Credit details:

• Must have used the same home as a principal or primary residence for at least five consecutive years of the eight-year period on the date of purchase of a new home as a primary residence.
• Credit up to $6,500
• Modified Adjusted Gross Incomes up to $125,000 for single filers (reduced credit $125,000-$145,000)
• MAGI up to $225,000 for joint filers (reduced credit $225,000 – $245,000)
• Need to file IRS Form 5405
• New instructions as of January 15th, 2010: Revised 1/10 5405 Instructions

Members of the Armed Forces and certain Federal Employees serving outside the U.S.:

• You will have an extra year to qualify for the credit

This information is intended as strategic advice to help give readers an overview of the upcoming 2010 real estate market, and you should always consult a professional tax adviser to discuss your tax situation and if you qualify for this tax credit, and how much you are entitled to receive at your price-point.

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economic stimulus

Upcoming Changes to Conforming Loan Limits

This is a post of special interest to many of us in the Washington D.C. metropolitan area. I was in a NVAR Finance Forum meeting discussing the Economic Summit and Sweth started to talk about the upcoming expiration of the current $ 729,750 conforming loan limit on December 1st and how it may impact the health of the Northern Virginia real estate market.

So I decided to invite him to tell the story… enjoy!

by: Sweth Chandramouli, an Alexandria, VA mortgage broker, blogger and yet another former retired high-tech guy now with Ethical Homes.com

Conforming loan limits in the metro DC area may be changing significantly in coming months, potentially dropping by nearly half by the end of the year.

The Housing and Economic Recovery Act of 2008 (HERA) increased the conforming mortgage loan limit to $417k, and also created “high-balance” conforming loans in high cost areas, which would have rates that were slightly worse than “regular” conforming loans but still better than traditional “jumbo” mortgages. The high-balance limits were based on median sales prices in those high-cost areas, and for the metro DC area, the limit for 2009 was set at $625,500. In February 2009, Congress passed the American Recovery and Reinvestment Act of 2009 (ARRA, aka the economic stimulus bill of 2009), which temporarily increased the limit for high-cost areas such as DC to $729,750.

The ARRA limits expire on 12/1/09, however, at which point the limit for the DC area will drop back down to the HERA limit of $625,500. (12/1/09 is also the deadline for first-time home buyers to take advantage of the $8000 tax credit, so first-time buyers who need loans in the $626k-$729k range should be especially motivated to close their purchases by December 1st.)

That change will affect many people in the DC area, but far more widespread will be the change that will probably occur on January 1, 2010. HERA resets the conforming and high-balance limits each January according to a specific formula; that formula does not allow the basic conforming limit to decrease from year to year, but it does allow the high-balance limit to decrease or vanish entirely, and based on current calculations, that’s exactly what will happen in most parts of the U.S., including the metro DC area–on January 1st, barring any new stimulus bills passed by Congress between now and then, any loan in the DC area above $417k will probably be treated as a “jumbo” loan with significantly higher rates and tighter qualifying requirements.

We’re going to be monitoring this situation closely, and have contacts at Fannie Mae, Freddie Mac, and in Congress who are trying to get more information on whether there are in fact any plans to enact another temporary stimulus bill that would increase the limit for 2010, but for now, borrowers should assume that the high-balance loan limit in the DC area will drop to $625,500 on 12/1/09, and go away entirely on 1/1/10.

For the detail-oriented people out there:

• HERA sets the high-balance limit at the lesser of 115% of the median MSA sales price (as published by FHFA each October) or $625,500, which means that all MSAs w/ median sales prices above $544k are capped at $625,500, and all MSAs w/ median sales prices below $363k are not considered high-cost and are capped at the regular conforming limit (currently $417k). In October 2008, FHFA’s published median MSA sales price for the DC MSA was more than $544k, so the limit for 2009 was $625,500.
• The exact FHFA numbers for 2010 won’t be published until October 2009. NAR does publish very similar statistics, however, and based on NAR’s numbers for the last quarter, as well as FHFA’s own HPI numbers, most MSAs (including DC) will have median sales prices below $363k, which is why we are assuming that high-balance loans will effectively be eliminated as of 1/1/2010.
• The exact history of high-balance conforming limits in the last few years is actually more even more complicated. In Feb 2008, Congress passed the Economic Stimulus Act of 2008, which raised the conforming limit to $729,750 in the highest-cost areas, but which expired on 1/1/2009. Also, Fannie Mae, Freddie Mac, and the lenders that work with them took some time to implement the changes in ARRA 2009, during which time the practical limit was still the HERA limit of $625,500. So the high-balance limits in the highest-cost areas such as DC were $729,750 from 2/2008-1/2009, $625,500 from 1/2009-2/2009, then legally $729,750 but still practically $625,500 from 2/2009-4/2009, and then $729,750 from 4/2009 to the present. Expect a similar series of confusing changes in late 2009 and early 2010, especially if new legislation is passed to change the limits yet again.

economic stimulus

The short-term loan for the first-timer tax credit program…

We want our $8,000 first-timer tax credit at closing! And we aren’t gonna wait!

“Okay”says HUD Assistant Secretary Montgomery in the “Mortgagee Letter 2009-15″ that is dated May 11th.

Of course you can’t take out the whole $8,000 at closing since there are fees and expenses that need to be paid, and the $8,000 hard limit can’t be exceeded. So watch your step first-timers and don’t lose your whole credit to outrageous fees.

Could this be another ticking time-bomb for potential fraud and consumer abuse? Setting up an unwitting newbie for an IRS tax penalty?  Tread carefully with your mortgage lender.

The memo uses terms like “short-term credit advance loan” and “bridge loan” seem like family members of the “pay-day loan” and we all know how hit-or-miss that industry turned out. And the “Instant Refund” loans ran into a few problems with the California Attorney General.

Better yet, there aren’t any set interest rates or fees in the memorandum. So it is up to the market to figure out what “fees and charges” are not to exceed a nominal amount necessary really means. Even the biggest lenders haven’t digested this one yet and I plan on keeping tabs on the subject.

Okay America, you demanded your money right now and permission has been granted… just don’t let your nice credit get eaten up in fees or get you in trouble with the IRS.

economic stimulus

Best home buyer’s market in 20 years!

Revised: The Home Buyer Tax Credit was extended and home buyers need to have written contracts by April 30, 2010 and close by June 30, 2010.

I wrote an update post on the expanded tax credit for home buyers and you need to take a look at that too if you hope to use it when buying a home this year.

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• Real Estate’s New Strategic Focus | April 30, 2010 (dougfrancis.com)

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