Look for the full digest of the Housing and Economic Recovery Act of 2008 (HR 3221) in the October issue of the first tuesday Journal Online.
First-time homebuyer tax credit
For first-time homebuyers who closed escrow on or after April 9, 2008 and before July 1, 2009, a tax-credit loan limited in amount to the smaller of 10% of the purchase price of a home or $7,500 ($3,750 for married individuals filing separately) is now available as a source of downpayment funds.
The home is considered “purchased,” when escrow closes.
The tax credit is an interest-free loan from the government. It must be repaid in equal installments over 15 years, commencing two years after the year of purchase.
Further, a resale or failure to occupy the home as a principal residence before the tax-credit loan is repaid triggers a call in the year the home is sold or no longer used as a principal residence. The payoff amount is limited to the profit from the sale of the home, unless it is sold to a related person.
A first-time homebuyer is a person who has not owned a principal residence during the three-year period before the new home is purchased. The home cannot be acquired from a related person.
Renters who own a vacation home qualify for the credit. The three-year ownership rule only applies to principal residences, not vacation or second homes.
There are income limitations in place as well. The credit phases out for married couples filing jointly with a modified Adjusted Gross Income (AGI) between $150,000 and $170,000, and for single taxpayers with a modified AGI between $75,000 and $95,000.
Property tax deduction for non-itemizers
Owners of real property who are non-itemizers are allowed an increase in the amount of their standard deduction for state and local real property taxes paid during the year 2008, limited to the lesser of:
- the amount of real property taxes paid during the year; or
- $500 ($1,000 for a married couple filing jointly).
In other words, the standard deduction for joint filers and surviving spouses would increase to a maximum of $11,900. The deduction for single individuals would increase to a maximum of $5,950; head-of-household to $8,500.
Homebuyer’s down payment assistance programs (DAPs)
Seller-funded down payment assistance programs (DAPs) are now banned. [See September 2007 first tuesday journal article “The Scam behind ‘nonprofit’ downpayment assistance charities“]
FHA-backed mortgages for distressed borrowers
The FHA will create a program to back FHA-insured mortgages to distressed owner-occupants of principal residences. These mortgages will be available to owner-occupants who are at risk of losing their homes to foreclosure.
Owner-occupants do not qualify if they intentionally default on their loan to qualify for the program. The owner-occupant’s debt-to-income ratio must also be greater than 31% as of March 1, 2008. Lenders must document and verify the borrowers’ income with the IRS.
Also, all junior liens must be removed before a owner-occupant in foreclosure may apply for the new FHA loan under this program.
The loans will be 30-year, fixed rate loans and the size of the loan is limited to the lesser of:
- the amount the borrower can afford to repay; or
- 90% of the current value of the home.
Further, the FHA-insured loan will be structured as an appreciation-participation loan with the FHA sharing in the future increased value of the property.
The foreclosure-refinance program will be available on October 1, 2008 and will end on September 30, 2011.
The Foreclosure Prevention Act of 2008
The FHA loan limit is increased from 95% to 110% of area median home price with a cap at 150% of the Freddie Ace/Fannie Mae limit minimum. Downpayments of 3.5% will be required for any FHA loan.
Help for Veterans
A lender must wait nine months after a soldier or sailor returns from service before starting foreclosure proceedings. Also, returning soldiers and sailors are provided with one year’s worth of relief from increases in mortgage interest rates, ending on December 31, 2010.
The VA loan guarantee amount will also be increased.
Other veteran benefits include:
- increased benefits paid to veterans with disabilities for the purpose of adapting their housing to their disability;
- a relocation payment to veterans who are forced to move out of rental housing because the owner lost the property to foreclosure;
- eligibility for monthly housing assistance benefits; and
- improvements and structural alterations to homes for veterans with service-connected disabilities.