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By Les Christie, CNNMoney.com staff writer
Last Updated: February 17, 2009: 12:13 PM ET
A big plus is that the credit is refundable, meaning tax filers see a refund of the full $8,000 even if their total tax bill - the amount of withholding they paid during the year plus anything extra they had to pony up when they filed their returns - was less than that amount. But there has been a lot of confusion over this provision. Adam Billings of
"I will qualify as a first-time home buyer, and I am currently set to get a small tax refund for 2008. Does that mean if I purchased now that I would get an extra $8,000 added on top of my current refund?"
The short answer? Yes,
Scenario 1: Your final tax liability is normally $6,000. You've had taxes withheld from every paycheck and at the end of the year you've paid Uncle Sam $6,000. Since you've already paid him all you owe, you get the entire $8,000 tax credit as a refund check.
Scenario 2: Your final tax liability is $6,000, but you've overpaid by $1,000 through your payroll withholding. Normally you would get a $1,000 refund check. In this scenario, you get $9,000, the $8,000 credit plus the $1,000 you overpaid.
Scenario 3: Your final tax liability is $6,000, but you've underpaid through your payroll withholding by $1,000. Normally, you would have to write the IRS a $1,000 check. This time, the first $1,000 of the tax credit pays your bill, and you get the remaining $7,000 as a refund.
To qualify for the credit, the purchase must be made between Jan. 1, 2009 and Nov. 30, 2009. Buyers may not have owned a home for the past three years to qualify as "first time" buyer. They must also live in the house for at least three years, or they will be obligated to pay back the credit.
Additionally, there are income restrictions: To qualify, buyers must make less than $75,000 for singles or $150,000 for couples. (Higher-income buyers may receive a partial credit.)
Applying for the credit will be easy - or at least as easy as doing your income taxes. Just claim it on your return. No other forms or papers have to be filed. Taxpayers who have already completed their returns can file amended returns for 2008 to claim the credit.
Lukewarm reception
The housing industry is somewhat pleased with the result because the stimulus plan improves on the current $7,500 tax credit, which was passed in July and was more of a low-interest loan than an actual credit. But the industry was also disappointed that Congress did not go even further and adopt the Senate's proposal of a $15,000 non-refundable credit for all homebuyers.
"[The Senate version] would have done a lot more to turn around the housing market," said Bernard Markstein, an economist and director of forecasting for the National Association of Homebuilders (NAHB). "We have a lot of reports of people who would be coming off the fence because of it."
Even so, the $8,000 credit will bring an additional 300,000 new homebuyers into the market, according to estimates by Lawrence Yun, chief economist for the National Association of Realtors.
The credit could also create a domino effect, he said, because each first-time homebuyer sale will lead to two more trade-up transactions down the line. "I think there are many homeowners who would be trading-up but they have had no buyers for their own homes," Yun said.
Who won't benefit, according to Mark Goldman, a real estate lecturer at
One state,
Many may look at the tax credit as a discount on the home price, according to Yun. A $100,000 purchase effectively becomes a $92,000 one. That can reassure buyers apprehensive about purchasing and then watching prices continue falling, he added.
And it provides a nice nest egg for the often-difficult early years of homeownership, when unexpected repairs and expenses often crop up. Recipients could also use the money to buy new stuff for their home - a lawnmower, a rug, a sofa - and, in that way, help stimulate the economy.
There are many ways that home owners find themselves in this predicament including job loss, reduction in income, mounting credit card debt, an increase in mortgage payments, a terrible illness, or divorce. There are probably others that I have missed as well.
A home foreclosing doesn't just effect the homeowner directly. It effects you and I and everyone else that lives near the home.
Foreclosures drive down property values! When you are faced with selling your home and you have to compete with the foreclosure down the street that's been marked down in price because the bank has no desire to hold it, you will quickly realize you are part of the epidemic.
There are many home owners that don't know there are other options besides letting their home end up in foreclosure. Some are even too embarrassed to investigate their options.
This is a shame and I would like to help explain some of the things you can do including a short sale or a loan modification.
The short sale and loan modification options would solve the same goal of avoiding a foreclosure but with each providing a different outcome.
The short sale is for those that absolutely need to move and get out from under their debt completely. A loan modification is for those that would really like to remain in their homes but can not do so without assistance.
It is important to remember that banks are not in the business of owning Real Estate in their portfolios and would much rather assist a homeowner than to take ownership of their home.
Here is a break down of how both assistance programs work.
A short sale is a legal lender approved solution designed to assist those home owners who are financially strapped to get out from under their mortgage debt.
A short sale is negotiated through the mortgage holder of an owners home where by the mortgage holder agrees to take less than what home owner owes on the property.
An example of a short sale would be if a home owner owes $500,000 on their current mortgage and their home is only worth $450,000. The lender in this example would agree to take a short fall of $50,000 at closing. In many cases the mortgage holder may completely wipe out the debt and the home owner does not have to repay the 50k.
The home owner benefits in this situation because they get out of a sticky financial mess without going to foreclosure which can seriously damage your credit.
You may be thinking why would a mortgage holder want to allow a short sale? There are a number of reasons, most notably the cost involved for the lender going through a foreclosure proceeding. The mortgage holder when all is said and done can easily spend $40,000-$50,000 going through a foreclosure. This avenue can save the lender money they would otherwise lose. The average loss by a bank is about double when a foreclosure is done instead of a short sale.
Most lenders will work with a short sale option to avoid a costly foreclosure.
As a Realtor representing a seller in a short sale scenario there some issues you need to be aware of. See Ethics in a short sale for an explanation.
When selling your home and you know you are going to be faced with a short sale make sure you choose to work with a good Realtor who has some working knowledge of short sale procedures! A good Real Estate lawyer in your corner who has worked with short sales would also be an important consideration. There are also short sale negotiating companies that work directly with the banks as well. There is a lot that goes into the process of completing a short sale. Having professionals to work with is vital when you are going through a short sale.
If you would like to investigate the short sale process and live in the Metrowest Massachusetts area, I would welcome the opportunity to speak with you. I am well versed in the procedures and have been successfully completing short sale closings.
Loan Modification
What you need to understand is that just because you missed a few mortgage payments does not mean that a bank is not going to want to work with you! There are times in people lives where they can come under financial stress, as mentioned previously.
Banks understand that sometimes a persons problems are not permanent and can turn around quickly. You have all the incentive to try to avoid the foreclosure process at all costs.
With a foreclosure on your record you will not be able to buy a property with conventional loan financing for five years. So if you or someone you know is potentially facing a foreclosure because of falling behind in mortgage payments don't just sit back and let it happen. Reach out to your lender and explain your situation right away and ask for their help.
The 1st thing a lender or bank will want to know is exactly where you stand financially at the moment and what you can afford. Let the mortgage company or bank know your exact situation. Speak to them about your desire to remain in the home and how you can work out a payment plan that will be mutually beneficial.
The bank is going to want to know what has caused you to become financially strapped. You can plan on being asked to put this in writing. This is known as a "hardship letter". In the letter you will be asked to explain the circumstances behind your missed payments and an understanding of why you believe you will be able to continue to make payments under the modified terms.
You will be asked to provide documentation to prove your case. Documents that the bank will ask for most likely will include pay stubs, bank and brokerage accounts, W-2's, income tax returns, and a list of your current expenses including things like insurance, utilities, taxes, food and other typical expenses.
The bank has the option to try to keep you in the home in a number of ways including an extension of the length of the mortgage, the interest rate, or a reduction in principal. It potentially could be some combination of all three. Remember the goal is to keep you in the home and the bank is working with you!
One other option that can help those home owners who are under water where the value of their home is less than the mortgage balance is the new bill put into law in October known as the Home Owner Recovery Act of 2008.(read a complete explanation here) This new bill will allow a qualified home owner with the lenders approval, to refinance their home at 90% of the homes newly appraised value. There is one caveat, however, to this new program. The home owner will be required to share in the future appreciation of the property with the government.
Above all else remember there is help available!
______________________________________________________________________________________________________
The above information on Foreclosure ~ Avoiding it Through a Short Sale or Loan Modification was provided
Associate Director
Intergovernmental Affairs
The White House
THE WHITE HOUSE
Office of the Press Secretary
_________________________________________________________________
For Immediate Release October 10, 2008 10:25 A.M. EDT
THE PRESIDENT: Good morning. Over the past few days, we have witnessed a startling drop in the stock market -- much of it driven by uncertainty and fear. This has been a deeply unsettling period for the American people. Many of our citizens have serious concerns about their retirement accounts, their investments, and their economic well-being.
Here's what the American people need to know: that the
The fundamental problem is this: As the housing market has declined, banks holding assets related to home mortgages have suffered serious losses. As a result of these losses, many banks lack the capital or the confidence in each other to make new loans. In turn, our system of credit has frozen, which is keeping American businesses from financing their daily transactions -- and creating uncertainty throughout our economy.
This uncertainty has led to anxiety among our people. And that is understandable -- that anxiety can feed anxiety, and that can make it hard to see all that is being done to solve the problem. The federal government has a comprehensive strategy and the tools necessary to address the challenges in our economy. Fellow citizens: We can solve this crisis -- and we will.
Here are the problems we face and the steps we are taking:
First, key markets are not functioning because there's a lack of liquidity -- the grease necessary to keep the gears of our financial system turning. So the Federal Reserve has injected hundreds of billions of dollars into the system. The Fed has joined with central banks around the world to coordinate a cut in interest rates. This rate cut will allow banks to borrow money more affordably -- and it should help free up additional credit necessary to create jobs, and finance college educations, and help American families meet their daily needs. The Fed has also announced a new program to provide support for the commercial paper market, which is freezing up. As the new program kicks in over the next week or so, it will help revive a key source of short-term financing for American businesses and financial institutions.
Second, some Americans are concerned about whether their money is safe. So the Federal Deposit Insurance Corporation and the National Credit Union Administration have significantly expanded the amount of money insured in savings accounts, and checking accounts, and certificates of deposit. That means that if you have up to $250,000 in one of these insured accounts, every penny of that money is safe. The Treasury Department has also acted to restore confidence in a key element of
Thirdly, we are concerned that some investors could take advantage of the crisis to illegally manipulate the stock market. So the Securities and Exchange Commission has launched rigorous enforcement actions to detect fraud and manipulation in the market. The SEC is focused on preventing abusive practices, such as putting out false information to drive down particular stocks for personal gain. Anyone caught engaging in illegal financial activities will be prosecuted.
Fourth, the decline in the housing market has left many Americans struggling to meet their mortgages and are concerned about losing their homes. My administration has launched two initiatives to help responsible borrowers keep their homes. One is called HOPE NOW, and it brings together homeowners and lenders and mortgage servicers, and others to find ways to prevent foreclosure. The other initiative is aimed at making it easier for responsible homeowners to refinance into affordable mortgages insured by the Federal Housing Administration. So far, these programs have helped more than 2 million Americans stay in their home. And the point is this: If you are struggling to meet your mortgage, there are ways that you can get help.
With these actions to help to prevent foreclosures, we're addressing a key problem in the housing market: The supply of homes now exceeds demand. And as a result, home values have declined. Once supply and demand balance out, our housing market will be able to recover -- and that will help our broader economy begin to grow.
Fifth, we've seen that problems in the financial system are not isolated to the
And finally, American businesses and consumers are struggling to obtain credit, because banks do not have sufficient capital to make loans. So my administration worked with Congress to quickly pass a $700 billion financial rescue package. This new law authorizes the Treasury Department to use a variety of measures to help bank [sic] rebuild capital -- including buying or insuring troubled assets and purchasing equity of financial institutions. The Department will implement measures that have maximum impact as quickly as possible. Seven hundred billion dollars is a significant amount of money. And as we act, we will do it in a way that is effective.
The plan we are executing is aggressive. It is the right plan. It will take time to have its full impact. It is flexible enough to adapt as the situation changes. And it is big enough to work.
The federal government will continue to take the actions necessary to restore stability to our financial markets and growth to our economy. We have an outstanding economic team carrying out this effort, led by Secretary of the Treasury Hank Paulson, Federal Reserve Chairman Ben Bernanke, SEC Chairman Chris Cox, and FDIC Chair Sheila Bair. I thank them and their dedicated teams for their service during this important moment in our country's history.
This is an anxious time, but the American people can be confident in our economic future. We know what the problems are, we have the tools we need to fix them, and we're working swiftly to do so. Our economy is innovative, industrious and resilient because the American people who make up our economy are innovative, industrious and resilient. We all share a determination to solve this problem -- and that is exactly what we're going to do. May God bless you.
END 10:33 A.M.
