Option 1st Financial Blog

This blog is devoted to discussing the original Federal Tax credit for "first time home buyers" and the new Federal Tax Credit for repeat home buyers. Both tax credits translate to good news all around for anyone interested in purchasing a home.

The original $8,000 tax credit which was due to expire the end of this month has been extended by Congress through June 30th but last week, Congress passed a New Federal Tax Credit, which is broader than the old tax credit because it provides a $6,500 tax credit to those of you that own a home but would like to purchase a new primary home.  

Let's first review how "first time home buyer" is defined so that you can determine your eligibility for one of two tax credits. The law defines “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the home ownership history of both the home buyer and his/her spouse.

For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit.

If you do not fall into the category, chances are that you fall into the category of repeat home buyer which the law defines as a home owner who has owned and resided in a home for at least five consecutive years of the eight years prior to the purchase date. For married taxpayers, the law tests the home ownership history of both the home buyer and his/her spouse. Repeat home buyers do not have to purchase a home that is more expensive than their previous home to qualify for the tax credit. In fact, purchases of homes priced above $800,000 are not eligible for the tax credit. To qualify, the income limit for single taxpayers is $125,000; the limit is $225,000 for married taxpayers filing a joint return.

The new Federal Tax Credit is available immediately, it took effect on November 6th, the day President Obama signed the legislation. This means that if you meet the criteria-you can claim the credit as soon as you close on a qualifying home. Home buyers who go to closing between November 6th and December 31st, 2009 can claim the $6,500 credit on their 2009 Federal tax returns or amend their 2008 returns. Similarly, eligible purchasers in 2010 will be able to file for the credit on their 2009  or 2010 returns. 

Of course, at Option 1st Financial, we still hold the position that you should never rush into buying a home because of any incentive. We still advocate having an emergency fund equivalent to 3 to 6 months of your income before taking on the new purchase of a home or upgrading. Let's not forgot the past 3 years of massive foreclosures and that many foreclosures could have been preventing with a rainy day fund.

Give us a call for additional details and/or questions about either tax credit.

Are you considering the purchase of a home? Well, my advice is to not even consider buying one unless you have at least 3 months of savings. I understand that homeownership is the American dream but it can quickly become the American nightmare if you have not prepared for homeownership and the many expenses that accompany it. And, the best way to prepare is to establish an emergency fund for those rainy days. We all have rainy days; its just a fact of life that rain falls on all of us and you will be in a much better position to cover yourself when it happens if you have at least 3 months of savings. 

The absence of an emergency fund is one of the primary reasons that I've seen many people default on their loan. What happens; well, someone looses a job; the car breaks down or some other emergency occurs. So, most people do what any rational people would do, which is to take money from their paycheck to handle the emergency. 

What typically happens next is the mortgage payment comes due and the homeowner does not have enough money to make the entire payment because of the emergency the week or month before. And, since the home owner does not have a "rainy day" fund to provide them with coverage during that particular rainy day, the mortgage payment cannot be made (lenders do not accept partial payments). 

My experience with customers is that once they are 1 month behind on their mortgage, it is very difficult to catch up so that one missed payment has a domino affect on all of their finances. That is why an emergency fund of at least 3 months is critical to preparing yourself for homeownership. Under no circumstances should you allow a real estate agent, loan officer or anyone else to convince you that you should purchase before you are prepared which means establishing at least 3 months of savings, equivalent to your take home pay. 

I understand that some of you may want to take advantage of the 2009 $8,000 1st Time Homebuyer's tax credit which is an excellent incentive but I personally would not buy a home prematurely to simply receive an $8,000 tax credit unless I had at least 3 months of savings in the bank. The big picture is making sure that you are positioned to keep your home and having at least 3 months savings is the 1st step in the process. 

Remember that homeownership should be the center piece of your wealth building strategy. So, what purpose does it serve to make your payments on time, build equity (the difference between what you owe the bank and the market value of your home) in your home, only to loose it because you didn't take the time to establish a solid financial foundation in the beginning by saving enough money for emergencies.   

Establishing at least 3 months (ideally 6 months) of savings is a best practice in the financial industry. And I would recommend that you follow best practices and not the advice of anyone who may not have your best interest at heart which is anyone who advises you otherwise. For tips on saving for an emergency fund, visit some of our previous Blogs.

As always, best of luck and we are here to service all of your financial services needs, from financial planning, to investments, to residential and commercial real estate loans. 

Keeping with our goal to provide timely information on any new details related to the Obama Adminstration's Making Home Affordable Program, we are providing the latest information (announced earlier this week) taken directly from the White House. Please encourage family and friends that could benefit from this program to visit our Blog to keep up to date with the latest developments. As always, best of luck with whatever your situation is and just a reminder that we are here to answer your questions either via email or phone. 

Obama Administration Announces New Details
on Making Home Affordable Program

Parallel Second Lien Program to Help Homeowners Achieve Greater Affordability

Integration of Hope for Homeowners to Help Underwater Borrowers
Regain Equity in their Homes

WASHINGTON – The Obama Administration today announced details of new efforts to help bring relief to responsible homeowners under the Making Home Affordable Program, including an effort to achieve greater affordability for homeowners by lowering payments on their second mortgages as well as a set of measures to help underwater borrowers stay in their homes. 

"With these latest program details, we're offering even more opportunities for borrowers to make their homes more affordable under the Administration's housing plan," said Treasury Secretary Tim Geithner. "Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system overall. Every step we take forward is done with that imperative in mind."

"Today's announcements will make it easier for borrowers to modify or refinance their loans under FHA's Hope for Homeowners program," said HUD Secretary Shaun Donovan.  "We encourage Congress to enact the necessary legislative changes to make the Hope for Homeowners program an integral part of the Making Home Affordable Program."

The Second Lien Program announced today will work in tandem with first lien modifications offered under the Home Affordable Modification Program to deliver a comprehensive affordability solution for struggling borrowers. Second mortgages can create significant challenges in helping borrowers avoid foreclosure, even when a first lien is modified. Up to 50 percent of at-risk mortgages have second liens, and many properties in foreclosure have more than one lien.  Under the Second Lien Program, when a Home Affordable Modification is initiated on a first lien, servicers participating in the Second Lien Program will automatically reduce payments on the associated second lien according to a pre-set protocol.  Alternatively, servicers will have the option to extinguish the second lien in return for a lump sum payment under a pre-set formula determined by Treasury, allowing servicers to target principal extinguishment to the borrowers where extinguishment is most appropriate. 

Separately, the Administration has also announced steps to incorporate the Federal Housing Administration's (FHA) Hope for Homeowners into Making Home Affordable.  Hope for Homeowners requires the holder of the mortgage to accept a payoff below the current market value of the home, allowing the borrower to refinance into a new FHA-guaranteed loan.  Refinancing into a new loan below the home's market value takes a borrower from a position of being underwater to having equity in their home.  By increasing a homeowner's equity in the home, Hope for Homeowners can produce a better outcome for borrowers who qualify. 

Under the changes announced today and, when evaluating borrowers for a Home Affordable Modification, servicers will be required to determine eligibility for a Hope for Homeowners refinancing.  Where Hope for Homeowners proves to be viable, the servicer must offer this option to the borrower.  To ensure proper alignment of incentives, servicers and lenders will receive pay-for-success payments for Hope for Homeowners refinancings similar to those offered for Home Affordable Modifications.  These additional supports are designed to work in tandem and take effect with the improved and expanded program under consideration by Congress.  The Administration supports legislation to strengthen Hope for Homeowners so that it can function effectively as an integral part of the Making Home Affordable Program.

Making Home Affordable, a comprehensive plan to stabilize the U.S. housing market, was first announced by the Administration on February 18.  The three part program includes aggressive measures to support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac; a Home Affordable Refinance Program, which will provide new access to refinancing for up to 4 to 5 million homeowners; and a Home Affordable Modification Program, which will reduce monthly payments on existing first lien mortgages for up to 3 to 4 million at-risk homeowners.  Two weeks later, the Administration published detailed guidelines for the Home Affordable Modification Program and authorized servicers to begin modifications under the plan immediately.  Twelve servicers, including the five largest, have now signed contracts and begun modifications under the program.  Between loans covered by these servicers and loans owned or securitized by Fannie Mae or Freddie Mac, more than75 percent of all loans in the country are now covered by the Making Home Affordable Program.

Continuing to bolster its outreach around the program, the Administration also announced today a new effort to engage directly with homeowners via MakingHomeAffordable.gov. Starting today, homeowners will have the ability to submit individual questions through the website to the Administration's housing team. Members of the Treasury and HUD staffs will periodically select commonly asked questions and post responses on MakingHomeAffordable.gov. To submit a question, homeowners can visit www.MakingHomeAffordable.gov/feedback.html.  Selected questions from homeowners across the country and responses from the Administration will be available at www.MakingHomeAffordable.gov/asked-and-answered.html.

For the past several weeks, my Blog has featured information on President Obama's Home Affordability and Stability Plan. Under this plan, if you own a home and have been late on your mortgage payment, are behind on your mortgage payment, or you owe your lender more than the value of your home, you may be eligible for either a refinance or loan modification. If you are unfamiliar with the provisions of the plan, I would encourage you to review my previous Blogs to educate yourself about the possible options available.

To continue this series in helping homeowners that find themselves in one of two of these situations, this edition of my Blog focuses on the unscrupulous companies, representing to homeowners that they can facilitate a loan modification for an upfront fee, typically in the range of a few thousand dollars. According to the FBI and the U.S Attorney General's Office, beware of these companies. Both agencies are fielding more complaints and pursuing legal charges against such companies that have taken advantage of homeowners already down on their luck and desperate for help to avoid loosing their home.    

First, many of these companies are operating illegally, if they are asking for a fee up front and are doing business in Maryland. If you have been approached by phone or through the mail, please ignore these solicitations! And, if you have already given any company money upfront and you live in Maryland, I would encourage you to contact either the State of Maryland's Attorney General's Office, at 410.576.6300 or 888.743.0023 or the Compliance Division of the Department of Labor, Licensing, and Regulation at 410.230.6100, again if you live in Maryland. 

So, your next question may be, so what should I do if I think that I am eligible for one of the two programs available through the Home Affordability and Stability Plan? First, visit my previous Blog that links you to the self- assessment tool which will give you an indication of whether or not you are eligible for one of the two programs. If you are eligible, it doesn't mean that you are approved; only your lender can approve you for a program. But your next step should be to contact your lender directly!

Your lender will walk you through the process of applying for whichever program is appropriate. Why, there is a financial incentive for them to do so! But, here's a heads up, generally, your lender will require the submission of the following documentation as part of their evaluation process:

• Most recent earnings statement over a 30 day period
• Most recent bank statements over a 3 month period
• A hardship letter, explaining why you are behind on your mortgage, in the case of a loan modification
• The completion of their financial statement which is a record of your monthly income and expenses 

The above requirements is by no means meant to represent an exhaustive list of the documents your lender may require but simply serves as a guide to prepare you for what your lender will probably require at minimum. 

If you think that you might be overwhelmed by the process of negotiating with your lender, there are a number of nonprofit organizations (NPOs) that will assist you for free. You can contact the U.S. Department of Housing and Urban Development (website address http://www.hud.gov/foreclosure/) for their list of approved NPOs. But, you must be patient as so many people are in need of help and therefore, it may take some time for the NPO to get back to you. If time is an issue for you, I would suggest that you contact your lender immediately and negotiate with them directly. 

I hope that you find this information to be helpful and timely. And, as always, best of luck and give a call should you have any questions!

Reminder to visit our home page where you can receive a complimentary copy of the estimated value of your home under the Home Price Index. 

The last few Blogs have been devoted to providing information on President Obama's Home Affordability and Stability Plan which has generated a lot of interest. This interest is certainly reflected in the hundreds that have visited my Blog to read the details of his plan and the many who check back daily for updates on the plan. Well, the wait is over as the Administration has created a website that you can visit (http://makinghomeaffordable.gov/), to determine if you are eligible for either plan.  

The MakingHomeAffordable.gov website offers features including interactive self-assessment tools that empower you to determine if you're eligible to participate in either plan and to calculate the monthly mortgage payment reductions that you could realize under the Making Home Affordable program.

The website also features resources to find free, HUD-approved counseling services for anyone that has additional questions. But, just a reminder that while the self assessment tools will indicate whether you are eligible for either plan, only your loan servicer can determine if you qualify. To qualify, you will generally need to show sufficient income to make the reduced payments on an ongoing basis.

Just a bit of advice, if you are underwater (meaning that you owe more than the value of your home) on your mortgage or behind in your payments, do not pay anyone to negotiate with your mortgage company. Many of these businesses are operating illegally and HUD offers help for no cost. Many of the companies that offer to help charge a few thousands dollars upfront. Save your money, contact your mortgage company directly and negotiate yourself. Many lenders have packets online that you can access, complete and submit yourself. Go directly to your lender's website or call and request a copy of the packet that you need to complete for consideration of a loan modification or refinance and remember to mention "the Obama plan". As always, best of luck and I am available as a resource should you have questions!   

Complete details of the President's plan have not been released but below are a few more details to provide you with a better understanding of whether you qualify for either provision of the plan and to evaluate your options. 

Q: How do I know if I qualify?

A: Your mortgage must predate the start of 2009, you must live in the home and you’ll have to provide proof of income. Then ask two questions. First, are you already behind on payments or even in the foreclosure process? If the answer is no, then ask yourself whether your current mortgage rate is high enough to make it worth your while to refinance to take advantage of today’s low rates for 15-year and 30-year fixed-rate mortgages.

Q: That’s it?

A: No. If you think it’s advantageous to refinance, you must find out who owns your loan. Most mortgages are bundled together and sold into a secondary market, where investors technically own them. If Fannie Mae or Freddie Mac placed your loan into the secondary market, you can contact the company that sends your monthly mortgage statement to discuss the new program. If your mortgage is in the portion of the secondary market where the private sector issued the mortgage-backed securities, you don’t qualify.

Q: How do I know who owns my loan?

A: You’ll have to ask the company that sends your monthly statement. These companies are sure to be swamped with calls this week, so be patient. And be warned: Borrowers have found in the past that mortgage-bill collectors-called servicers-often are less than forthcoming with answers as to who owns the loans.

Q: What if my loan is owned by Fannie or Freddie but I have negative equity?

A: You’re not alone. One in five homeowners nationwide now owes more than his or her home is worth. To qualify under the refinance portion of President  Obama's plan, you can owe up to 5% more than your home is now worth. 

Homeowners in 250 high-cost U.S. counties can seek help under either track, however, provided that they qualify, even if the mortgage is worth up to $729,750. 

Q: What about those of us who are about to lose our homes?

A: A lot will depend on whether the mortgage bill collectors, the servicers, think that they have leeway from investors to modify the loans. They’re being offered an upfront fee of $1,000 and will get “pay for success” fees for three years if a borrower’s modified loan remains in good standing. They’re being offered even more fees if they get homeowners into this program before they fall behind on payments.

Q: What happens if the servicer agrees to modify my mortgage?

A: First, the servicer has to get your monthly payment down to 38% of your monthly after-tax income. It can do this by taking a loss on the loan or stretching a 30-year loan into a 40-year, for example. It’s allowed to reduce interest rates as low as 2%.

Once the 38% threshold is met, the government matches lenders dollar for dollar to get the payment even lower, to 31% of monthly after-tax income.

This percentage is calculated on the value of a first-lien mortgage. If a home carries a second lien-often called a second, or junior, lien-the servicer will get another $250 if it extinguishes the second mortgage.

Q: Is the modification a permanent fix?

A: The new interest rate would be valid for five years. Afterward, it can rise 1% a year until the lending rate hits the conforming loan survey rate at the time of the modification. Given that mortgage rates today are low by historical standards, the loan survey rate is likely to be well below the punishing adjustable rates that are at the heart of many distressed mortgages.

Q: Do lenders have to participate in Making Home Affordable?

A: If they’re getting Wall Street bailout money and hope to get any more, then they have to play ball. Many mortgage servicers are outside this realm, however, and their trade group, the American Securitization Forum, gave only lukewarm, qualified support to the Obama administration’s plan.

As always, we hope that you find this information timely and helpful as you evaluate your options in this challenging market. Please give us a call or send an email should you have any questions. 

With the deadline for filing taxes approaching, we hope that you find this Blog timely and persuasive enough to consider filing your taxes electronically, if you have never done so before or if in the past, you have opted to secure a loan against your refund through your tax preparer or other company. In these tough economic times, the goal is to receive your refund as quickly as possible, without incurring any fees from a third party and to not give the government a tax free loan by waiting several weeks for your return. 

Electronic filing, referred to as e-filing is an option the Internal Revenue Service (IRS) offers to anyone that would like to forgo filing their return by paper. There are many benefits to e-filing your taxes, but for some reason, many people have resisted this option. After reading today's Blog,  we hope that you understand that e-filing offers a way to receive your refund quickly and without the exorbitant fees charged by tax preparers and others. So, here are the Top 5 reasons to at least consider filing your taxes electronically? 

You'll get your tax refund faster. When you e-file, you could get your refund in two or three weeks. When you file on paper, it typically takes a minimum of six to eight weeks.

Your return is less likely to be stolen or get lost in the mail. I know someone who is still in the process of completing the required paperwork for the IRS because his income tax refund was taken from his mailbox in tax year 2008. There are people who target unsecured mail boxes during income tax season. It can be a lucrative business for predators. In addition, the post office has been known to loose mail so why take the risk with your refund. Theft of your check or lost in the mail refund checks are not an issue if you file electronically. 

You may be able to e-file for free. If you earned less than $56,000 in 2008, you probably qualify for the IRS Free File program. If you have a simple return (standard deduction, using 1040EZ), Turbo and TaxAct have free versions, with free e-file, that you may qualify for.

There's no need to wait at the post office. We've either observed, waited in line or heard the stories of long lines on April 15th, to mail taxes. When you file electronically, you do not have to wait in line and can file your taxes late in the evening if you would like, with no lines to wait in but instead, in the comfort of your home if you file yourself or your accountant's office. 

Your return is more likely to be accurate. When you e-file, you typically do so through software that can double-check your math. Any mistakes you may make with a calculator are checked by the software and remedied before you send your return to the IRS. When you e-file, you'll get an electronic confirmation that the IRS received your return.

So, now that you have the facts, for those of you that have never filed electronically, we hope that you will consider doing so this year. As always, it is our goal at Option 1st Financial to provide you with timely information and tips to help you save money and build wealth. 

Updates on the President's Homeowner Affordability and Stability Plan will be detailed in a future Blog, so keep checking back!   

Best of Luck in the decision making process!

We went straight to the source (White House Blog) to secure answers to your most pressing questions. Today's blog is the White House Blog since the questions and answers, many of which you have asked and apparently are the most frequently asked questions across the country, were taken directly from the White House's Blog. 

As always, we are here to answer your questions and to help you explore your options under the new plan.   

Borrowers Who Are Current on Their Mortgage Are Asking:

• What help is available for borrowers who stay current on their mortgage payments but have seen their homes decrease in value?

Under the Homeowner Affordability and Stability Plan, eligible borrowers who stay current on their mortgages but have been unable to refinance to lower their interest rates because their homes have decreased in value, may now have the opportunity to refinance into a 30 or 15 year, fixed rate loan. Through the program, Fannie Mae and Freddie Mac will allow the refinancing of mortgage loans that they hold in their portfolios or that they placed in mortgage backed securities.

• I owe more than my property is worth, do I still qualify to refinance under the Homeowner Affordability and Stability Plan?

Eligible loans will now include those where the new first mortgage (including any refinancing costs) will not exceed 105% of the current market value of the property. For example, if your property is worth $200,000 but you owe $210,000 or less you may qualify. The current value of your property will be determined after you apply to refinance.

• How do I know if I am eligible?

Complete eligibility details will be announced on March 4th when the program starts. The criteria for eligibility will include having sufficient income to make the new payment and an acceptable mortgage payment history. The program is limited to loans held or securitized by Fannie Mae or Freddie Mac.

• I have both a first and a second mortgage. Do I still qualify to refinance under the Homeowner Affordability and Stability Plan?

As long as the amount due on the first mortgage is less than 105% of the value of the property, borrowers with more than one mortgage may be eligible to refinance under the Homeowner Affordability and Stability Plan. Your eligibility will depend, in part, on agreement by the lender that has your second mortgage to remain in a second position, and on your ability to meet the new payment terms on the first mortgage.

• Will refinancing lower my payments?

The objective of the Homeowner Affordability and Stability Plan is to provide creditworthy borrowers who have shown a commitment to paying their mortgage with affordable payments that are sustainable for the life of the loan. Borrowers whose mortgage interest rates are much higher than the current market rate should see an immediate reduction in their payments. Borrowers who are paying interest only, or who have a low introductory rate that will increase in the future, may not see their current payment go down if they refinance to a fixed rate. These borrowers, however, could save a great deal over the life of the loan. When you submit a loan application, your lender will give you a "Good Faith Estimate" that includes your new interest rate, mortgage payment and the amount that you will pay over the life of the loan. Compare this to your current loan terms. If it is not an improvement, a refinancing may not be right for you.

• What are the interest rate and other terms of this refinance offer?

The objective of the Homeowner Affordability and Stability Plan is to provide borrowers with a safe loan program with a fixed, affordable payment. All loans refinanced under the plan will have a 30 or 15 year term with a fixed interest rate. The rate will be based on market rates in effect at the time of the refinance and any associated points and fees quoted by the lender. Interest rates may vary across lenders and over time as market rates adjust. The refinanced loans will have no prepayment penalties or balloon notes.

• Will refinancing reduce the amount that I owe on my loan?

No. The objective of the Homeowner Affordability and Stability Plan is to help borrowers refinance into safer, more affordable fixed rate loans. Refinancing will not reduce the amount you owe to the first mortgage holder or any other debt you owe. However, by reducing the interest rate, refinancing should save you money by reducing the amount of interest that you repay over the life of the loan.

• How do I know if my loan is owned or has been securitized by Fannie Mae or Freddie Mac?

To determine if your loan is owned or has been securitized by Fannie Mae or Freddie Mac and is eligible to be refinanced, you should contact your mortgage lender after March 4, 2009.

• When can I apply?

Mortgage lenders will begin accepting applications after the details of the program are announced on March 4, 2009.

• What should I do in the meantime?

You should gather the information that you will need to provide to your lender after March 4, when the refinance program becomes available. This includes:

• information about the gross monthly income of all borrowers, including your most recent pay stubs if you receive them or documentation of income you receive from other sources
• your most recent income tax return
• information about any second mortgage on the house
• payments on each of your credit cards if you are carrying balances from month to month, and
• payments on other loans such as student loans and car loans.

Borrowers Who Are at Risk of Foreclosure Are Asking:

• What help is available for borrowers who are at risk of foreclosure either because they are behind on their mortgage or are struggling to make the payments?

The Homeowner Affordability and Stability Plan offers help to borrowers who are already behind on their mortgage payments or who are struggling to keep their loans current. By providing mortgage lenders with financial incentives to modify existing first mortgages, the Treasury hopes to help as many as 3 to 4 million homeowners avoid foreclosure regardless of who owns or services the mortgage.

• Do I need to be behind on my mortgage payments to be eligible for a modification?

No. Borrowers who are struggling to stay current on their mortgage payments may be eligible if their income is not sufficient to continue to make their mortgage payments and they are at risk of imminent default. This may be due to several factors, such as a loss of income, a significant increase in expenses, or an interest rate that will reset to an unaffordable level.

• How do I know if I qualify for a payment reduction under the Homeowner Affordability and Stability Plan?

In general, you may qualify for a mortgage modification if (a) you occupy your house as your primary residence; (b) your monthly mortgage payment is greater than 31% of your monthly gross income; and (c) your loan is not large enough to exceed current Fannie Mae and Freddie Mac loan limits. Final eligibility will be determined by your mortgage lender based on your financial situation and detailed guidelines that will be available on March 4, 2009.

• I do not live in the house that secures the mortgage I’d like to modify. Is this mortgage eligible for the Homeowner Affordability and Stability Plan?

No. For example, if you own a house that you use as a vacation home or that you rent out to tenants, the mortgage on that house is not eligible. If you used to live in the home but you moved out, the mortgage is not eligible. Only the mortgage on your primary residence is eligible. The mortgage lender will check to see if the dwelling is your primary residence.

• I have a mortgage on a duplex. I live in one unit and rent the other. Will I still be eligible?

Yes. Mortgages on 2, 3 and 4 unit properties are eligible as long as you live in one unit as your primary residence.

• I have two mortgages. Will the Homeowner Affordability and Stability Plan reduce the payments on both?

Only the first mortgage is eligible for a modification.

• I owe more than my house is worth. Will the Homeowner Affordability and Stability Plan reduce what I owe?

The primary objective of the Homeowner Affordability and Stability Plan is to help borrowers avoid foreclosure by modifying troubled loans to achieve a payment the borrower can afford. Lenders are likely to lower payments mainly by reducing loan interest rates. However, the program offers incentives for principal reductions and at your lender’s discretion modifications may include upfront reductions of loan principal.

• I heard the government was providing a financial incentive to borrowers. Is that true?

Yes. To encourage borrowers who work hard to retain homeownership, the Homeowner Affordability and Stability Plan provides incentive payments as a borrower makes timely payments on the modified loan. The incentive will accrue on a monthly basis and will be applied directly to reduce your mortgage debt. Borrowers who pay on time for five years can have up to $5,000 applied to reduce their debt by the end of that period.

• How much will a modification cost me?

There is no cost to borrowers for a modification under the Homeowner Affordability and Stability Plan. If you wish to get assistance from a HUD-approved housing counseling agency or are referred to a counselor as a condition of the modification, you will not be charged a fee. Borrowers should beware of any organization that attempts to charge a fee for housing counseling or modification of a delinquent loan, especially if they require a fee in advance.

• Is my lender required to modify my loan?

No. Mortgage lenders participate in the program on a voluntary basis and loans are evaluated for modification on a case-by-case basis. But the government is offering substantial incentives and it is expected that most major lenders will participate.

• I'm already working with my lender / housing counselor on a loan workout. Can I still be considered for the Homeowner Affordability and Stability Plan?

Ask your lender or counselor to be considered under the Homeowner Affordability and Stability Plan.

• How do I apply for a modification under the Homeowner Affordability and Stability Plan?

You may not need to do anything at this time. Most mortgage lenders will evaluate loans in their portfolio to identify borrowers who may meet the eligibility criteria. After March 4 they will send letters to potentially eligible homeowners, a process that may take several weeks. If you think you qualify for a modification and do not receive a letter within several weeks, contact your mortgage servicer or a HUD-approved housing counselor. Please be aware that servicers and counseling agencies are expected to receive an extraordinary number of calls about this program.

• What should I do in the meantime?

You should gather the information that you will need to provide to your lender on or after March 4, when the modification program becomes available. This includes:

• information about the monthly gross income of your household including recent pay stubs if you receive them or documentation of income you receive from other sources
• your most recent income tax return
• information about any second mortgage on the house
• payments on each of your credit cards if you are carrying balances from month to month, and
• payments on other loans such as student loans and car loans.

• My loan is scheduled for foreclosure soon. What should I do?

Contact your mortgage servicer or credit counselor. Many mortgage lenders have expressed their intention to postpone foreclosure sales on all mortgages that may qualify for the modification in order to allow sufficient time to evaluate the borrower's eligibility. We support this effort.

As always, best of luck and please continue to come back for the latest updates on the financial and real estate news! 

We received an significant number of phone calls at Option 1st Financial on Thursday, February 19th, asking about the nuts and bolts of how the home buyer tax credit works. So, in an effort to reduce call volume over the next several days, we have provided answers to many of the questions asked, anticipating that many of you have similar questions.  

As always, we hope that you find this information timely and helpful. Please feel free to email (Lcurtis@1stoption4u.com) or call 240.784.6861 if you do not find the answer to your question below. I must warn you, however, that this blog is longer then usual but we wanted to provide as much information as possible give the intensity of calls received. 

What is the definition of a first-time home buyer?
The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.

How is the amount of the tax credit determined?
The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.

Are there any income limits for claiming the tax credit?
The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts. You should consult your tax advisor for your MAGI. 

How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008?
The primary difference is this tax credit does not have to be repaid. Because it had to be repaid, the previous "credit" was essentially an interest-free loan. This tax incentive is a true tax credit. However, home buyers must use the residence as a principal residence for at least three years or face recapture of the tax credit amount although certain exceptions apply.

How do I claim the tax credit? Do I need to complete a form or application?
Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on Line 69 of their 1040 income tax return. No other applications or forms are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and first-time home buyer tests.

What types of homes will qualify for the tax credit?
Any home that is used as a principal residence will qualify for the credit. This includes single-family detached homes, attached homes like townhouses and condominiums, and manufactured homes (also known as mobile homes).

Is the tax credit is "refundable" and what does "refundable mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.

For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed).

I purchased a home in early 2009 and have already filed to receive the $7,500 tax credit on my 2008 tax returns. How can I claim the new $8,000 tax credit instead?
Home buyers in this situation may file an amended 2008 tax return with a 1040X form. You should consult with a tax advisor to ensure you file this return properly.

Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes, for the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been "purchased" on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after January 1, 2009 and before December 1, 2009.

Is a tax credit the same as a tax deduction?
No, a tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS.

A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,200 (15 percent of $8,000), or lowered from $8,000 to $6,800.

Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 tax return?
Yes, prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment.

Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.

Further, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. Some state housing finance agencies, such as the Missouri Housing Development Commission, have introduced programs that provide short-term credit acceleration loans that may be used to fund a downpayment. Prospective home buyers should inquire with their state housing finance agency to determine the availability of such a program in their community.

As always, best of luck and keep coming back, we plan to answers questions about what President Obama's new Home Affordability and Stability plan means for you! That Blog will be posted the early part of next week!

As expected, President Obama signed the $787 billion American Recovery and Reinvestment Act (aka “the stimulus”) into law on Tuesday, February 17th.  You may or may not be aware that contained in the law, is a provision that allows first-time homebuyers (you can qualify as a first-time homebuyer if you have purchased a home in the past) to receive a tax credit. Details of the homebuyer tax credit are as follows:  

• The tax credit is 10% of the purchase price, up to $8,000;
• The tax credit is only valid for first-time homebuyers (call for a definition of first-time homebuyer as owning a home in the past does not necessarily exclude you from qualifying) purchasing principal residence;
• The tax credit can be applied to purchases made from 1/01/09-12/01/09;
• The home purchased must be a principal residence for 3 years or the credit will be recaptured, in other words, investment properties do not qualify for the tax credit; and 
• The tax credit only applies when taxable income for the year is less than $75,000 (file single return) or 150,000 (file join return).

This tax credit of course is good news for anyone thinking about buying a home and that meets the guidelines outlined in the American Recovery and Reinvestment Act! Unlike the tax credit signed into law last July, this tax credit would not have to be repaid and buyers could claim it against their 2008 or 2009 tax returns. 

So, if you have been thinking about purchasing a home as your principal residence (again, this tax credit does not apply to the purchase of investment properties), this tax credit offers an excellent opportunity to reduce your tax liability in 2008 or 2009, the net result of which would be less taxes owed; a refund of some sort; or a larger refund.     

The question is, are you in position to take advantage of the tax credit? Remember, you must still qualify for the loan by meeting lender guidelines before you can use the tax credit. Your credit profile, which includes your credit scores, must meet guidelines, as well as your debt to income. In addition, you need a minimum of 2 years of employment with the same employer or within the same industry. Of course, other requirements must be met and should you have any questions about lender guidelines or any questions about qualifying for a loan, please do not hesitate to give us a call at 240.784-6861 or send an mail to LCurtis@1stoption4u.com. 

In addition, I would encourage you to read our prior Blog posts: Top 5 Ways to Improve Your Credit Scores and Is this the Perfect Time to Buy?, if you are considering a home purchase.   

As always, best of luck and we hope that you find this information to be timely and helpful!