Option 1st Financial Blog

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!

Top 10 New Year's Resolutions from Year to Year!!!

• Make more time for family and friends
• Quit smoking and drinking
• Start exercising
• Go back to school / take a class
• Get out of debt/ save more money
• Advance career, make more money
• Get into philanthropy and community involvement
• Take a vacation
• Lose weight
• Get out of a bad relationship / find true love

Are any of these your resolutions for 2009, 2008 or 2007? An article written in the New York Times states that four out of five people who make New Year’s resolutions will eventually break them and that, a third won’t even make it to the end of January. Well, the end of January has come and gone and the burning question is, are you sticking to your New Year’s resolution?

You may be asking yourself how does my New Year’s resolution relate to personal finance which is the focus of this Blog? Well, getting out of debt, saving more money and taking a vacation consistently land as top ten resolutions every year. We can't help with exercising and weight loss, or
getting out of a bad relationship/finding true love (visit Dr. Phil's website for this one) and some of the others but Option 1st Financial can help with 3 of the top 10 resolutions.

Let’s start with an easy one: vacation! The data indicates that many people do not a take vacation because they lack the resources or can’t take the time off from work. Well, the vacation promotion offered through Option 1st Financial's Blog eliminates one of the two barriers (i.e., lack of resources). So, if taking a vacation is one of your resolutions for 2009, you can mark it off your to do list by either subscribing to this Blog or by telling a friend. As a result of either action, you can earn a vacation to any one of twenty-two destinations with your significant other or the entire family. Here’s the best part about the offer: no time share presentation is required!

Now, let’s tackle the more challenging New Year’s resolutions related to personal finance: getting out of debt and saving more money. If you resolved to get out of debt before 2010, you share this goal with millions of other Americans. It probably seems like a fairly overwhelming task and while it can be, it does not have to be at all!

It obviously will require tremendous discipline and sacrifice but it is not impossible! First, you need a plan of action. A well conceived plan does not guarantee success but it does increase the probability of success. The lack of a plan increases the chances of failure because it is hard to reach goals without a roadmap. Your plan of action should have small attainable goals with action steps. If you establish unrealistic goals, you set yourself up for failure! 

I can Blog extensively about this topic but I might loose your interest in the process. If you need help with developing a plan of action and action steps, give me a call and I would be more than happy to assist you with this task. 

As for saving more money in 2009; this too is a challenging but not an impossible task! It certainly is an important goal given the uncertainly of this market;  job insecurity; and a 7.6 percent unemployment rate, the highest since 1974 and projected to grow as high as 9.0.  

Now, how do you start to save; especially when it seems like all of your income is spent paying bills? Well, first, you need to establish a spending plan. The number one rule of a spending plan is that you can't spend more than you make. So, if you earn $2,000 a month, you should not spend $2,050 a month; in other words, all that you earn plus $50 charged to your credit card. 

You can refer to my home page and click the budget tool link for access to an online template that will allow you to develop a spending plan/budget. So, you have a spending plan, now what next: stick to it of course, but also let's talk about a strategy for saving.  

Did you know that if your net pay decreases, that you will adjust your spending habits accordingly? I am not suggesting that you reduce your take home pay but here is what I am suggesting. Enroll in an automatic savings plan; it's referred to as “dollar cost averaging” in the finance world. What does it mean? Well, if you have direct deposit, ask your employer to automatically deposit an amount that you determine (recommend 10% of your net income) into a savings account before you get your hands on it. 

In essence, you would have 10% deposited into your savings account and the remaining balance into your checking account to pay your bills. Unless you are extremely disciplined, it is hard to save money without a built in mechanism such as an automatic deposit into a savings account.

If you are like most people who say “I will deposit the money that I have left over into my savings account after paying my bills”; you generally have what's left over: Nothing, because you spend it all!  

If you are someone who constantly withdraws money from your savings account, you should consider creating a barrier to accessing your money, such as a Certificate of Deposit (CD). A CD is good savings instrument because it is still liquid, meaning that you have immediate access to your money in case of an emergency but a CD should deter you from accessing it for everyday expenses because of the penalties for early withdrawal.

This too is a topic that I could write about extensively but a Blog is not the appropriate forum. Therefore, give me a call if you would like help with implementing a savings plan and I would be more than happy to help you formulate and execute a plan.

As always, I hope that you find these tips helpful and that you continue to come back to our Blog for information on how to improve your personal finances and for wealth building strategies.

Best of Luck!