In the Midwest, first-time homebuyers are spurring on the market, and we are seeing some “out of the norm” first-time buyers. I am working with a lady who has rented a home for 30 years, and because of the tax credit, has decided to take the plunge into homeownership and buy her first home. She is excited to be able to choose how she wants to decorate, have a little vegetable garden and some flowers of her own. As the time winds down to take advantage of this fabulous credit, Realtors are seeing more action.
Many potential homebuyers are actively pursuing homeownership more than ever before. I have Realtors working long hours trying to find them the right home. Some are purchasing two units (duplex). This allows them to spend more than they qualify for with a single family home, thus becoming a determining factor if they can find something in their price range.
In our market, we are seeing “the investor” with disposable cash gobbling up the lower-end homes that potential first-time buyers are trying to bid on. When going up against the investor, they typically have 3.5 percent down working with a Federal Housing Administration (FHA) loan, and often asking for closing cost assistance. So when going up against a cash offer or an offer with 20 percent downpayment, they are not winning the bid. Banks and sellers are choosing the investors first.
Gloria Spencer, managing broker of Baker Spencer Realty noted that a majority of her first-time homebuyers are pre-approved for a home that is priced right for the area, based on other short sales and foreclosures. Investors are snatching up these properties so fast making the experience for the first-time homebuyers an unfavorable one. Sellers can count on their short sales and foreclosures to be purchased by these investors offering cash. It is my understanding that “blanket loans” are becoming a big thing for investors making it even harder for the Realtors and the first-time homebuyers to find an acceptable property and get an offer accepted.
As a Realtor, I am writing multiple offers in hope that at least one of them gets accepted. I am working harder for less of a commission on these properties. The lenders should find a way to make the process a little simpler for the first-time homebuyers, especially if minimal repairs are needed.
I have spoken to numerous other Realtors and they are experiencing similar issues. Melissa Gray of Remax One Team, has noted more difficulty in dealing with the short sales.
Listings aren’t being entered at what banks are willing to accept. She has written contracts at full price only to find out they are countered with a substantially higher-than-asking price counters. So the buyers you showed homes to and took the time to write offers for don’t qualify for the house you just wrote an offer on. It is frustrating to both the Realtor and the first-time homebuyer, not to mention, the loan officer who has spent the time pre-qualifying them and offering a prequalification lender, waiting for contract approval only to find out the counter is more than they can afford. It is happening in both the suburbs, as well as in the city. I had another scenario on a home in the city. The first-time buyer submitted an offer to purchase and she was putting 25 percent down and was countered at more than $10,000 more. When she refused to match the counteroffer, the Realtor put the listing back in the MLS as an active listing back at the original list price, knowing full well this offer was just declined.
In speaking to other Realtors, Jennifer Barrett also of the Remax One Team explained to me that this is the way they have to work with the banks on the short sales. She said she has seen this happen time and time again, but the Realtor is conditioning the bank for, “What the market will bear, so by sending in the offer and then re-listing it realistically where it should be the bank maybe more apt to accept the second offer coming in at the same price, because they now know, they have just lost a previous buyer by asking for more.”
Jennifer has also stated that she to is seeing many investors trying to lowball the sale of the homes because they are offering cash. She said it is not out of the norm to see a cash offer of $250,000-$350,000 come in on a $500,000 listing. The investors are hoping for an aggressive bank or seller willing to accept their cash offer for well below the market rate. Appraisals are starting to come in slightly higher than sales prices.
Regardless, it is a great time for the first-time homebuyer to be out there looking to purchase their first home, whether it is a condo, townhouse, cooperative (co-op), single-family home or a two-unit this still is the best time. The first-time buyer’s income tax credit from the IRS may go away. I don’t believe they will extend it again. I am not sure all first-time buyers realize what a fantastic opportunity this is. They can still buy a house with 3.5 percent down, ask for seller-paid closing costs, and receive a non-taxed, no interest, no repayment credit from the IRS for up to $8,000 (certain restrictions apply). That is phenomenal. If they only thought about the time and energy they would have to put forth to save $8,000. In today’s employment climate and stock market fluctuations, savings and profit are down. So taking advantage of this opportunity is an American opportunity not to be brushed off.
Let’s review the credits available:
First-time homebuyer credit programs (2008 and 2009)
This credit was available from April 9, 2008 through Dec. 31, 2008. This credit was a refundable credit putting hard cash into the hands of the first-time homebuyer. This could also be claimed on your 2008 (as an amended return) or 2009 tax return. This credit must be repaid over a 15-year period.
Both programs for 2008 and 2009 are for first-time homebuyers. This credit is only for first-time homebuyers. A first-time homebuyer is someone who has never owned a home in the past or who has not owned a home in the past three years. Once you have met the first-time homebuyer profile, then the following requirements must also be met:
►Home needs to be your primary residence.
►Cannot be acquired/purchased from a related person; a related person for this first-time homebuyer tax credit is a spouse, parent, grandparent, children or grandchildren, a corporation or partnership that is 50 percent-owned by any above relative. Brothers, sisters, aunts, uncles and step relatives are not considered a family member for this credit.
►Home cannot be acquired as a gift or inheritance.
►No vacant land.
►No rental property.
►Property can be a single family home, multi-family home one- to four-residence, condo, co-op, mobile home, house trailer or boat.
►Closed on the purchase of qualified principle residence during qualification period and prior to claiming the credit.
►Meet income limitations, phase out begins at $75,000-$95,000 for single taxpayers or $150,000-$170,000 for married filing jointly.
►Non-resident aliens are not eligible for this credit.
►New construction closing date is determined by the later of; either closing date or first date owner-occupied.
►Proper completion of IRS Form 5405.
For 2008, the maximum credit is $7500, 10 percent of the purchase price with maximum set at $7,500. For example, if you paid $55,000 for a primary residence, then you could get a $5,500 first-time homebuyer tax credit. If you purchased a $150,000 home, you could get the maximum amount of $7,500.
Only the 2008 credit must be repaid. It is repaid back to the IRS over a 15-year period, with repayment installments beginning in 2010. The repayment period of 15 years equals $500 per year. This will be an additional tax-owed by the tax payer. Use Form 5405 for this credit.
If a single taxpayer should die, then no repayment would be incurred. If married, filing jointly, then the surviving spouse is only responsible to repay their half. If property is transferred due to a divorce, the person transferred to is responsible for making any and all repayments.
If the home ceases to be primary residence, then full repayment is due. Full repayment is due the year the home ceased to be the primary home.
The full repayment is due the year the home becomes a rental or business use.
The qualifying time period for 2008 was between April 9, 2008 and Dec. 31, 2008.
Even though this tax credit must be repaid, it is still a great deal. It’s like getting a $7,500 lump sum cash allowance that has to be paid back over 15 years at zero percent interest. You are free to spend the money any way you want, no strings attached, it is yours.
If you closed on a primary home in 2008 and met the qualifications, but didn’t claim the First-Time Homebuyer Tax Credit, there is still time to do so. You would need to file an amended return.
The American Recovery and Reinvestment Act of 2009 made the following changes to the First-Time Homebuyers Tax Credit: The maximum amount was increased to $8,000, 10 percent of the purchase price with max set at $8,000 and there is no repayment required.
The qualifying dates would be Jan. 1, 2009 through Nov. 30, 2009. They must close on or before Nov. 30, 2009. The credit was raised to 10 percent of the purchase price with a maximum of $8,000. No repayment is required, only a refundable credit. This credit was allowed to be taken on either their 2008 tax returns as an amended return or on their 2009 return, due April 15, 2009. Use From 5405 for this credit.
There are some instances that would trigger the 2009 First-Time Homebuyer Tax Credit to be repaid. The repayment would be due with the tax return filed when the event occurs. The following are repayment triggers:
►If you sell the home to an unrelated person for a gain.
►Sell the home to a related party.
►Convert the home to a rental or business use.
►If the home is disposed of through a foreclosure, repossession or abandonment.
►Still own the home, but no longer use as a main home.
►Transfer home to ex-spouse due to divorce settlement.
►Home was destroyed, condemned or disposed of under condemnation threat.
If any of the above cause a repayment to be triggered and the taxpayer should die, no repayment is to be made; however, if married, filing jointly and spouse dies, then surviving spouse must repay their half.
No repayment is required if you keep the home as your primary home beyond three years from the date of purchase, sell the home to an unrelated person, with no gain, or if the home is transferred to an ex-spouse in a divorce settlement (the repayment requirements are then passed to the ex-spouse).
The new credit, The Worker, Homeownership and Business Assistance Act of 2009 was signed into law Nov. 6, 2009. The new version of the First-Time Homebuyers Credit was revised with this law. The dates were extended; you must buy or enter into a binding contract to purchase a principle residence on or before April 30, 2010. The transaction for this home must close before June 30, 2010. The taxpayer can still claim 10 percent or $8,000 maximum for married filing jointly, or $4,000 married filing separately, single or head of household. The taxpayer is also allowed to take the credit on either 2009 or 2010. An updated Form 5405 will be used. The tax return cannot be filed electronically as additional documentation is required to be attached. The IRS is requiring a settlement statement, signed HUD be attached to the return.
Long-time residents of the same house can now also qualify for a reduced credit of up to $6,500, married filing jointly, or ($3,250 married filing separately) or 10 percent of the purchase price, whichever is less. The long-time resident must have lived in the same house for any five consecutive years during an eight-year period that ends on the date the new home is purchased. The settlement date must be after Nov. 6, 2009 through the April 30, 2010, closing by June 30, 2010.
►Both the first-time homebuyers and long-time residence credit cannot be used for homes that have a purchase price that exceeds $800,000.
►The purchaser must be 18 years old, and if married, one must be 18 years old.
►A dependent cannot claim either credit.
In the case of an audit the following documentation is required:
►Copy of closing HUD-1 Settlement Statement must be signed by (at minimum) the buyers.
►Most recent monthly mortgage statement.
►Occupancy permit, showing date if new construction.
►Cash sale; proof taxpayer paid for it, front and back of cancelled check.
A minimum of two of the following items:
1. Current Driver’s License or other state-issued identification.
2. Recent pay stub (within the last two months showing name and new address).
3. Recent bank statement (within the last two months showing name and new address).
4. Current automobile registration.
If you closed on a primary residence during the correct time frame on 2009, you can claim your credit on either your 2008 tax return you filed in 2009, or your 2009 tax return to be filed in April of 2010.
If you didn’t claim it on your 2008 return, but already sent it in, not to worry, the IRS will allow you to do an amended return to get your tax credit refund now versus waiting until April 15, 2010. Seek the advice of a tax professional to determine which way is the best way for you to claim the credit.
Some common questions related to the first-time homebuyer market
What if one taxpayer owned a home and the other has not?
1. If not married, the tax payer that is eligible may claim the refund.
2. If married, neither tax payer may take the credit.
What about rental agreements with rent-to-buy options, to purchase the home?
The First-Time Homebuyer Tax Credit does not kick in until the taxpayer actually is transferred to the title; therefore, a rental agreement is not a purchase. No closing takes place.
What if the taxpayer owns other property?
As long as the taxpayer’s other property isn’t a primary residence. The taxpayer can own a vacation home or a rental property prior to or during the purchase of their primary residence.
The IRS has stated that they are watching the First-Time Homebuyer Credit with caution. They feel it has the potential for a high risk of fraud. Common errors the IRS has seen:
►First-Time Homebuyer Tax Credit claimed prior to closing or prior to taking occupancy.
►IRS Form 5405 completed incorrectly or incomplete.
►Married filing separately taxpayers each incorrectly claim either the $7,500 or the $8,000 credit on each separate return.
►The taxpayer has owned a home in the past three years.
►Married filing jointly for the First-Time Homebuyer Tax Credit when one spouse was a prior homeowner.
►No purchase on rent-to-own agreements.
►Credit is claimed before the purchase date on IRS Form 5405.
►Splitting the First-Time Homebuyer Tax Credit and exceeding the maximum allowed.
►Claiming more than 10 percent of the purchase price.
I hope first-time homebuyers realize what a fabulous offer this is and really take it seriously. Waiting until the summer or until next year is not a smart move, if the credit goes away. The opportunity is now!
Laura Lynn Burke has been selected from a nationwide search to be featured in Stepping Stones to Success, a highly successful book series. The book features best-selling authors Deepak Chopra (The Power of Purpose), Jack Canfield (Chicken Soup for the Soul), Dr. Denis Waitley (featured in The Secret) and Laura Lynn Burke (Networkolog) who are joined by other well-known authors each offering time-tested strategies for success in frank and intimate interviews. Laura is also the CEO and founder of Footprints International d/b/a The Mortgage Institute, a training and consulting company designed with you in mind. Visit author Laura Lynn Burke’s Web site at www.lauralynnburke.com where she arms you with the information to “Prepare today for tomorrow’s changes, and you will stay one step ahead of the competition.”