The "New" First Time Home Buyer Tax Credit

Congress voted to extend and expand the $8,000 First-Time Home Buyer Tax Credit on Thursday. The bill is expected to be signed into law Friday.

If you're planning to claim the tax credit, the first thing you'll want to know is the new drop dead dates.

You must be under contract by April 30, 2010
You must be closed by June 30, 2010

Apparently this program worked so well the first time they have given us one more shot. And I really think they mean it this time.

The First-Time Home Buyer Tax Credit was originally part of the American Recovery and Reinvestment Act of 2009. It granted qualifying first-time homebuyers a tax credit of up to $8,000 as a means to stimulate entry-level home purchases.

Since its February 2009 passage, the First-Time Homebuyer Tax Credit helped to place 400,000 new home owners which, in turn, lowered housing inventory, raised home prices, and generated new tax revenues for local cities.

Figures like these persuaded Congress to grant the program a 30-week extension, and also to extend its reach.

The "First-Time Home Buyer Tax Credit" isn't just for first-time home buyers anymore.

Under the new rules, homeowners with at least 5 years in their current residence qualify for the tax credit, too. However, instead of the full $8,000 bonus afforded to first-timers, "move-up" buyers get capped at $6,500.

Most of the program's qualification criteria remains as-is, with a few notable changes:
You may not acquire the home from a mother, father, spouse, or child
You may not acquire the home from an entity in which you're a majority owner
You may not acquire the home by gift or inheritance
You must be 18 years of age or older

The subject property's purchase price may not exceed $800,000

The subject property must be meant for use as a primary residence

All parties to the purchase must be meet the eligibility requirements

And then assuming you qualify, there are two ways by which your credit can be reduced.

First, the tax credit is limited to 10 percent of the home's purchase price. If the subject property sells for $75,000, your credit is limited to $7,500. And, second, your income can affect the credit, too.

Single-filers earning more than $125,000 and joint-filers earning more than $225,500 forfeit 5% of the expected tax credit for each $1,000 in earnings over the program's limit. A single-filer earning $135,000, therefore, gets 50% of the tax credit. A single-filer earning $145,000 gets none.

If you qualify, claiming your tax credit is simple:

Go under contract by April 30, 2010
Close by June 30, 2010

Submit IRS Form 5405 and your HUD-1 settlement with your tax returns

That's it!

But beware -- the First-Time Home Buyer Tax Credit program comes with some sensitive spots. For example, if you sell your home, or stop using it as your "main home" within 36 months of your purchase, the IRS will require a 100% payback. This means flipping properties for resale will be afforded this expense to take into consideration. This policy has few allowable exceptions so don't count on getting one.

Also, I recommend that first-time (and move-up) buyers review the IRS "scenario page" -- it's got every wacky home-buying setup you could think of. Most "Do I qualify for the First-Time Home Buyer Tax Credit" questions are answered pretty clearly from the government guys that make the final call.

If you haven't already, take advantage of this great opportunity to buy a home at bargain basement prices

The First Time Homebuyer Tax Credit Timeline Is Starting To Run Out

The government's First-Time Home Buyer Tax Credit expires December 1, 2009.

If you expect to use the program in conjunction with a home purchase, therefore, you may want to consider yourself officially "on the clock".

Assuming a 60-day window between contract and closing, there are now 77 days left to find a home and go under contract for it.

The First-Time Home Buyer Tax Credit refunds up to $8,000 at Tax Time for qualified home buyers. A few of the program's qualification criteria include:

•Home buyer must not have owned a primary residence in the past 36 months
•The home may not be purchased from a family member
•The household adjusted gross income must be below $95,000 for single tax filers and $170,000 for joint tax filers

The tax credit itself is limited to $8,000 or 10% of the purchase price, whichever is less.

Remember, though: The refund is a true tax credit -- not a deduction. This means that a taxpayer owing $8,000 to the IRS and claiming the $8,000 First-Time Home Buyer Tax Credit would owe the IRS nothing on April 15, 2010.

The Expanded First-Time Home Buyer Tax Credit: 10 Common Questions (and Answers)

In late May, Uncle Sam rolled out a policy change that provided home buyers with expedited access to a recently-enacted tax credit worth up to $8,000. The change allows home buyers to put this tax incentive toward closing costs or part of their down payment, instead of waiting until after tax season to get their hands on the funds. But while helpful, the program to "monetize" the tax credit can be puzzling to consumers. In an effort to help consumers better understand how the program works--and how they can take advantage of it--the National Association of Home Builders has released the following "FAQ on Monetization:"

[See The $8,000 First-Time Home Buyer Tax Credit Program Expands: 5 Things to Know]

1. What exactly does “monetizing” the tax credit mean?

The term “monetization” is defined as the act of converting something into money. In the context of the first time-home buyer tax credit, monetization means to treat the payment of the credit as if it was cash and allow its use as a payment for certain closing and downpayment expenses.

2. What is a “bridge” loan?

A bridge loan is a type of loan that is intended to be outstanding for a very short time period, often only a few days or weeks. Bridge loans are use to provide funds in situations where the borrower is expected to receive funds, such as the payment of this tax credit, within a very short time.

3. What is a state housing finance agency?

A state housing finance agency, often referred to as an “HFA,” is an organization that provides funding for a variety of loan and grant activities related to for-sale and rental housing. HFAs are also typically responsible to distribute grant funds from federal agencies, such as the U.S. Department of Housing and Urban Development (HUD).

4. How do I find out if my state housing finance agency is providing this service?

The best way to locate information about your state’s HFA is via the Internet. The National Council of State Housing Agencies (NCSHA) maintains a directory of state HFAs at: http://www.ncsha.org/section.cfm/4/39/187

5. What kinds of lenders are doing this? How can I find a list of lenders who are providing these short-term loans?

Many state housing finance agencies are either running or sponsoring programs that will use a tax credit for a downpayment. These programs often place a second lien on the home as collateral to secure the eventual repayment of the tax credit funds. Some state HFAs lend directly to home buyers while other HFAs work through networks of state-approved lenders.

In addition to state agencies, FHA-approved lenders may be offering to purchase a first time home buyer’s tax credit in conjunction with an FHA-insured mortgage loan. Interested buyers should check with area lenders, home builders, or real estate agents for the names of participating lenders.

The Federal Housing Administration (FHA) also has an online tool to find FHA-approved lenders: http://www.fhaoutreach.gov/FHALookup/

6. What types of loans qualify?

Any lender could offer a program that would permit a first-time home buyer to apply the tax credit to funds needed for a loan that is obtained in conjunction with a home purchase. At this time, however, only the Federal Housing Administration (FHA) has issued guidance regarding the monetization of the first-time home buyer tax credit in conjunction with FHA-insured mortgage loans.

7. Can this short-term loan be applied to the minimum 3.5% downpayment required by my FHA loan or is it only available above and beyond the initial downpayment required?

If an FHA-approved lender or state housing finance agency is purchasing a tax credit and therefore making a short-term loan that is secured only by the repayment of the first-time home buyer tax credit, these funds cannot be applied to a downpayment in lieu of the home buyer’s funds. A home buyer still has to provide the 3.5 percent downpayment from his or her own funds. The money from the short-term loan can be used to pay closing costs and prepaid expenses, such as escrows for taxes, insurance, and community association assessments. These funds could also be used to make a larger downpayment or to “buy down” the interest rate on the mortgage loan.

However, many HFAs are offering tax credit loan programs that offer home buyers a short-term loan backed by the anticipated tax credit and secured by a second lien, which in general will be paid off after the homebuyer receives their income tax credit from the IRS. The proceeds of these loans may be used to satisfy the 3.5 percent downpayment requirement for FHA-insured loans. The National Council of State Housing Agencies (NCSHA) maintains a list of such tax credit loans programs at: http://www.ncsha.org/section.cfm/3/34/2920.

8. Who should I contact at my state housing finance agency to urge them to participate in this program if they don’t already do so? What should I say?

The best way to locate information about your state’s HFA is via the Internet. The National Council of State Housing Agencies (NCSHA) maintains a directory of state HFAs at: http://www.ncsha.org/section.cfm/4/39/187

Most state HFA web sites include phone numbers and email addresses by which they can be contacted.

9. Is this an interest-free loan or are there fees associated with this type of short-term loan?

If a governmental agency, such as a state housing finance agency, or an FHA-approved lender purchases a first-time home buyer tax credit, they are allowed to charge no more than 2.5 percent of amount of the credit.

10. How can I tell if the short-term loan on the tax credit is being offered by a reputable company?

If the organization is a unit of state government, it is safe to say that it is reputable. Otherwise, a home buyer may want to check with their local Better Business Bureau or through a state or local government’s department of consumer affairs.

First-time Homebuyer Tax Credit Advances to Finance Costs From FHA

FHA has approved the use of bridge loans up to $8,000 against the "refundable" first-time homebuyer tax credit (FTHBC) to finance downpayment and closing costs:

"The government today gave the green light to the financing of bridge loans of up to $8,000 to first time home buyers who qualify for tax credits under the Obama Administration's economic stimulus plan. However, the new mortgagee letter stipulates that only government agencies and non-profits can give advances on the tax credits, which means lenders and loan brokers are left out in the cold."

First-time homebuyers receiving an "advance" under these new guidelines will still be required to pay back the funds. And similar to an income tax refund advance, there may be fees and charges for the advance that HUD states must not exceed "a nominal amount necessary for preparing and administering the loan."

For more details, a pdf version is available here. (or see below)

The First Time Homebuyer Tax Credit For 2009

As part of the American Recovery and Reinvestment Act of 2009, Congress authorized a first-time homebuyer tax credit of up to $8,000. The $8,000 credit replaces the $7,500 tax rebate program that was included in last year's stimulus.

The $8,000 tax credit is a boon to first-time home buyers in places like Cincinnati or Chicago because, unlike its 2008 counterpart, the government doesn't require the 2009 version of its tax relief to be paid back over time. Buyers closing on their home in 2009 can take the credit and never look back.

Calculating your eligibility is pretty simple, too.

See the snippet from IRS Form 5405 above. It's the worksheet portion of the First-Time Homebuyer Credit. There are 10 fields of entry. Just fill in the 10 fields and -- voilà -- you've figured out your tax credit (or lack of tax credit, as the case may be). What's nice about the 5405 form, though, is that on the IRS website, the form comes standard with 3 pages of instructions about how the First-Time Homebuyer Credit works and details about who is (and who is not) eligible.

The IRS definition of "first-time homebuyer" may be different from what you expect.

According to the IRS, a first-time homebuyer is anyone who has not owned a "main home" in the last 3 years. It defines "main home" as a home in which a person has lived for most of the time.

It can include traditional homes, houseboats, trailers and other residence types.

The IRS defines what it means to be a first-time homebuyer with respect to couples. Based on its definition, there's no clean way for spouses or soon-to-be-married types to "cheat the system". Because both owners must be considered first-time homebuyers in order to claim the $8,000 credit, the IRS stymies tax filers that try to get crafty to take a tax credit when a tax credit may not be due.

Furthermore, the IRS instructions show that not every homebuyer will be eligible to claim an $8,000 credit. Some notable, exclusionary cases include first-time homebuyers who:

* File taxes separately and whose adjusted gross income exceeds $95,000
* File taxes jointly and whose adjusted gross income exeeeds $170,000
* Acquire property from a family member
* Acquire property from a corporation/partnership in which they're a majority owner
* Acquire the home by gift or inheritance

And for some buyers, the available credit may not even reach the full $8,000 limit.

The first reason why the full $8,000 may be out of reach is because the rules of the First-Time Homebuyer Tax Credit limit the credit to 10 percent of the purchase price. A home purchase price of $65,000, therefore, gets capped at $6,500. The second reason is because the amount of the First-Time Homebuyer Tax Credit starts to phase out as homebuyer income levels rise.

Tax credit phase-outs start at $75,000 for homebuyers filing separately and $150,000 on joint returns.

If you're lucky enough to get the First-Time Homebuyer Tax Credit, though, don't start singing "We're In The Money". Keep in mind that the IRS will make you repay that credit in full if the home you bought ceases to be your main home within 36 months of purchase. This is, again, to prevent people from gaming the system.

There are a few notable exceptions to the repayment rules, however. For one, provided that you sell your home to a non-relative, the tax credit repayment is limited to the amount you gain on the sale. An accountant can help you with the math on that.

In the weeks leading up to the passage of the stimulus plan, there were a lot of first-time home buyer tax credit ideas floating before Congress and most of them picked up, then subsequently twisted, by newspapers and bloggers. And, unfortunately, Google's job is to store information -- not determine whether or not it's accurate. If you're still seeing stories about a $15,000 tax credit, you know exactly what I mean.

In the end, Congress could only pass one "official" program and it's the one detailed herein.

There's a lot of misinformation out there on the Internet so, if nothing else, let Form 5405 can be your "official documentation".

Also, don't just take my word for it on tax issues. I am a loan officer and not an accountant. I can offer opinion and guidance, but paying a professional for expert advice is often the right way to go. If you don't have an accountant you trust, call or email me for a recommendation.