Homebuyer Tax Credit

[Luzon]

I've made a post on my blog regarding the homebuyer tax credit. If you've been thinking about buying a home between now and April 30, 2010, you may find the information useful. My blog is listed below my picture on this post. Feel free to leave comments if you think it was useful or if you'd just like to say hi.

[LightsChromeHorsepower]

Speaking as a real estate agent/investor, my advice to people is still to not buy a home at this time with or without a tax credit. This advice may not hold true for all parts of the country, but I believe it does for California. I don't think prices have bottomed yet. In fact I think we could still have a good ways to go and could take several years to get there.

That's why I'm parking my RE license at the end of the year. I would rather work driving a truck than lie to someone to make a living.

If you want a simplistic metric to know if homes are still overpriced in your area, just look up the median household income for your community. If you can get a decent house for about 2 1/2 or 3 times median income, it's probably OK to buy. Otherwise, wait.

[Luzon]

Speaking as a real estate agent/investor, my advice to people is still to not buy a home at this time with or without a tax credit. This advice may not hold true for all parts of the country, but I believe it does for California. I don't think prices have bottomed yet. In fact I think we could still have a good ways to go and could take several years to get there.

That's why I'm parking my RE license at the end of the year. I would rather work driving a truck than lie to someone to make a living.

If you want a simplistic metric to know if homes are still overpriced in your area, just look up the median household income for your community. If you can get a decent house for about 2 1/2 or 3 times median income, it's probably OK to buy. Otherwise, wait.

It's true that real estate prices in many parts of the country may still have further to fall. Parts of California, Nevada, Arizona, and Florida have been some of the hardest hit. Real estate though, is a local business and folks should do as much homework as possible, in the area that they're interested in, to make informed decisions. LightsChromeHousepower pointed out one good piece of the puzzle - median household income. I'd encourage folks to look further than that, however, before making their decisions.

[Justruckin]

Luzon,

I am not in the market to buy a house, I doubt I could sell mine. Heck, you can't even get a decent appraisal because of what the fed (Barney Frank) has done to the appraisal industry. Look it up, as it has cost many their livelyhood and has turned that particular industry on its head.

One question I would ask regarding the first time home buyer credit, is it, or is it not taxed as income like the cash for clunkers debacle?

And in regards to local real estate pricing, you can buy houses all day long here in MI starting at a dollar. I know our house and property went from $450,000 to less than $130,000 in less than two years, even though the insurance company figures that is what it would cost to just replace our detached garage. My mother's condo which she paid $300,000 for two years ago is now worth roughly $150,000, if she could get it. But, I wonder how much of that has to do with what they did to the appraisal industry?

Mike

On edit: My nephew is a real estate agent here outside of Ann Arbor. We were talking not long ago and he is having his best year ever. The guy is even flipping houses and keeping a crew busy doing the work. I guess some are doing pretty darn good out here in the real estate biz. He walks around with a grin on his face, like that erection pill guy.

[Dejanh]

When you have US government involved in real estate this much, i could not imagine why would anyone want to be a part of it. Our government is the biggest holder of morgage related debt and the biggest lender by far. No one else in the private sector wants to be involved, why should you?

Government is fixing real estate prices and is not letting them deflate the way they should. They need to come down by at least 50% in my opinion for them to make me interested...This tax credit is in the same category with that cash for clunkers nonsense that many people fell for.

[Luzon]

One question I would ask regarding the first time home buyer credit, is it, or is it not taxed as income like the cash for clunkers debacle?

The credit is not taxable, borrowers would actually claim the amount of their credit on their 2009 (or 2010) tax return reducing their effective income by the credit amount. The reason it's not taxable is because it's actually a zero interest loan - repaid at $500 per year over 15 years.

Yes, the folks up in Michigan probably got smacked the hardest by this real estate fiasco. I really feal bad for folks like you and your mom who bought only to get royally stuck due to no fault of their own.

I really wish I had some advice for you and others in that situation. Folks can't even call on the shady dude down on the street corner who'd torch the house for a C note because the way the insurance is written is that the insurance company will pay either the appraised value, or the replacement cost, whichever is less. People are stuck six ways to Sunday up there.

The real estate market is definately getting better in a lot of areas, but one has to be careful because what appears to be a mild recovery in many areas right now can very easily turn south. Basically, I strongly believe that people should pay off their credit cards, auto loans, furniture loans, etc before getting into a mortgage. There's nothing wrong with renting for a couple years while paying off debt. I've seen it way too often -people getting into debt immediatly after buying their new homes. They furnish their new home with new furniture, pools, landscaping, etc. Even buying new cars. It's the ol' "keeping up with the Jones" syndrom.

Dejanh makes a good point too, although not entirely correct. Until recently the government (you and I) were not the "holder" of mortgage related debt. The government just guaranteed the mortgages while the banks were the actual the holders of the debt. Then along came the immenant collapse of Fannie Mae and Freddie Mac. The Fed stepped in at that point and accuired the largest portion of each of those companies. So now, we are the largest holders of the debt. Don't forget China. They're neck deep in this too.

[golfhobo]

Speaking as a real estate agent/investor, my advice to people is still to not buy a home at this time with or without a tax credit. This advice may not hold true for all parts of the country, but I believe it does for California. I don't think prices have bottomed yet. In fact I think we could still have a good ways to go and could take several years to get there.

If you want a simplistic metric to know if homes are still overpriced in your area, just look up the median household income for your community. If you can get a decent house for about 2 1/2 or 3 times median income, it's probably OK to buy. Otherwise, wait.

Okay, I admit I know nothing about buying a house. Not real good in all financial matters. I got my reasons, but I won't bore y'all.

I AM thinking of buying now... to take advantage of the credit... so, I have some questions.

(1) If you say we haven't hit bottom, and it could take awhile, IF the average price for a house in MY area doesn't fall MORE than 8,000 dollars more, wouldn't I be smart to buy now and get that tax credit?

(2) Let's assume that I CAN get a good house in my area for 2.5 times the median income. Does that mean they probably won't fall farther enough to outweigh the tax credit advantage of buying now?

(3) Forgetting the "median" income for a moment.... Is it a good idea to cap the purchase price that I would pay to 2.5 times MY income? Since I am single, I can buy ALOT of house for $125k in this area!

Luzon said:

The credit is not taxable, borrowers would actually claim the amount of their credit on their 2009 (or 2010) tax return reducing their effective income by the credit amount. The reason it's not taxable is because it's actually a zero interest loan - repaid at $500 per year over 15 years.

I was wondering if it was a credit against gross income, taxable income, or taxes owed based on taxable income. If it were the last on that list.... what would happen if you owed LESS than 8,000 dollars? Would you lose some of the credit?

But, it sounds like you are saying it comes off the TAXABLE income figure.... is that right? So, regardless of whether I currently itemize or take the standard deduction, I would deduct 8k from my taxable income, lowering the amount of taxes owed and inceasing my refund.... right?

Now.... explain this zero interest loan stuff for a dummy like me. You mean I'm somehow paying this money BACK over time? If so.... what is the advantage of it in the first place?

Basically, I strongly believe that people should pay off their credit cards, auto loans, furniture loans, etc before getting into a mortgage. There's nothing wrong with renting for a couple years while paying off debt.

Oh yeah? I've been renting this same apt for over 20 years now. I could have BOUGHT this duplex by now! That's about 60k that I could borrow against at lower than credit card interest to pay them off!

I have some high interest credit card debt (much less than the average,) and I agree that paying it down quickly is my best move financially at THIS moment.... but....

(4) Could I include that total (less than 8k) into the mortgage and reduce my interest rate on it to that of the mortgage rate I could get? Keep in mind that if I did, I could STILL make additional payments on the principle in an amount at least equal to what I am currently paying on the cards. That way I would be concurrently paying down my card debt at a lower interest rate, while building equity in a home.

Now.... one last question for now (while I have you two real estate experts at hand for free.)

(5) I am eligible for a V.A. loan, but they do NOT allow any amount over the sale price to be included in the mortgage. I would not have to make a down payment but the interest rate MIGHT be a point higher than a conventional mortgage. Should I take the V.A. loan and apply the money NOT spent as a down payment to my credit cards to pay them off and erase the high interest rate even tho it might add to the interest on my mortgage? Again.... this would free up monies that could then be applied to the principle to pay off the mortgage sooner.

My many thanks in advance for BOTH of you taking the time to educate me on this matter of great import and urgency (due to the expiration date of the credit.)

Luzon.... I read your blog and it was of SOME help. However.... a first time homebuyer is more likely to have the type of questions I posted here... and you didn't cover any of them on your blog. Just sayin'.

[Luzon]

Ok, that's a lot of questions. Forgive me if I miss some of it but I'll try my bestestestest.

1. Here's the deal on market timing, as I see it, in all areas of finance. Picking the bottom, or top (if you're a short seller) is 98% luck and 2% educated guess. Most "financial experts" spend their entire working lives in the financial industry in one capacity or another an get it wrong more times than not. You can read the paper almost daily and hear stories of folks striking it rich because they got in and out at the right time. Believe me, that's the exception rather than the rule.

If your situation is right, and if the housing market in your area has gone down significantly, and if it appears that the market is rebounding, you may want to seriously consider making a move. I'd encourage you to talk to several experts, not just realtors. Talk to realtors of course, but go talk to the flooring store owner, the appliance store owners, landscapers, etc. Are they seeing increased business? If everyone says "NO", it may not be time in your area. If everyone's saying "YES", things are improving, then maybe it's time.

Another major consideration you should answer for yourself is: how long do you plan on staying in the house? If it's 2 or 3 years - wait. If it's the house you want to retire in, and you received good answers as I described above, then maybe you would do well to move forward. If after you purchase, the real estate market goes down a bit, I wouldn't panic because you hopefully bought with long-term goals in mind.

2. Regarding your price range of $125k with a VA loan. First off, you can finance 100% (assuming the price and assessed value are accepted) and you can even finance the VA Funding fee. This fee is anywhere from 1.5% - 3.3% depending on if this is your first ever use of the VA entitlement, if you're in the reserves or NG, etc. Lets say for the sake of argument that you're interested in 100% financing but you're prepared to pay out of pocket the funding fee. Also, lets say that your loan amount is $125k and that you have good credit and want a 30 year loan. Your principle and interest payment would be:

5% - $671.03
4.75% - $652.06

Remember, this does not include tax and insurance.

Now what you want to figure out is: What percentage of your total gross income does $671 represent. If it's 30% or less, I'd say you're ok. If it's 40% - find a cheaper house. Idealy, you want to stay at 25% or less of your total gross income for your housing payments, INCLUDING tax and insurance. I'm going to guess your tax and insurance at $225/month. Divide $896 ($671 + $225) by .25 and you'll need a gross income of $3584/month. My guess is that you have that, but that's not my business. If you're comfortable with 30% then your gross needs to be $2987.

3. The tax credit goes against your taxable income. Lets say you earn $45,000 this year, but the house, get the total $8,000 credit. You'd report on your taxes an income (not counting any other deductions) of $45,000 - $8,000 = $37,000 total income that you'd owe taxes on.

4. If your taxable income was less than the $8000 credit, you could actually get a refund that you wouldn't otherwise get due to this credit. (Consult a tax professional - of which I am not) but I stated it as I understand it.

5. This tax credit is not a gift from good ol' Uncle Sam. It's a loan at 0% interest. It needs to be paid back at a rate of $500/year over 15 years. If you sell the house down the road - before the 15 years is up, and make a capital gain on the home, they would require complete repayment of the remaining debt out of your gain. If, on the other hand, you sold the home at a loss, whatever amount is left over form the credit repayment would be forgiven.

6. Including credit card debt (or any other kind of debt) with a purchase is usually not possible for several reasons. It used to be done from time to time if the appraisal came back with wiggle room, but since all this mess has happened, the banks are much more strick on following the rules. The other thing is that banks generally won't lend money for a mortgage above the apraised value of the home. That is especially true for VA loans. There are still 103% loans available, but they're tough to get through, especially with the appraisers/appraisals being scrutinized so tightly. If you have the means to pay off those credit cards, I'd do it asap.

As for you living in the apartment for 20 years, I'm assuming buying a house wasn't high on the priority list, nor was getting out of debt. For some reason, the debt didn't "hurt enough" at the time. It sounds though, that now, things have changed for you and your priorities have changed. Even though you've been there for 20 years, I'd probably say stay a couple more to get out of debt and make a strong financial picture for yourself before buying a house. You may be in the position to pay off debt AND buy the house. If that's the case, and if as I pointed out in the first section, the conditions look favorable, I'd probalby go for it.

7. I'm no real estate expert. I know a bit about it, but that's because I was a mortgage broker for 3 years before going off to drive a truck for another 3 years while the market worked itself out. I lost my job last month driving and have decided the time is right to reenter the mortgage market. I was planning my blog before my job loss so I went forward with it and I just thought the post on the Tax Credit may be useful to some folks. That post was intended to put out basic information for the drivers who are my target audience. I'm happy to answer your questions, it's a great refresher for me too.

8. Lastly, If your decision is between a conventional loan with a down payment and keeping the credit card debt or a VA loan with no down payment and you're committed to paying off the credit cards, do the VA loan. But do yourself a huge favor and pay those bastards off. Don't renege on yourself.

Hope all that helps ya. Thanks for visiting the blog.

[BanditsCousin]

Good thread. I like when issues are brought up and you have knowledgeable people and people with questions asking the right questions and getting the right answers. I might have some advice to lend, as well as a lot of questions in this thread.

My buddy who is a HHG o/o, also owns a mortgage company in Vegas. Business was booming a few years ago, now it is in the crapper for him. Part of the reason he never quit trucking like his 2 business partners that relied on it soley for income and later became physically ill watching the bottom fall off. Literally.

I did ask him if the mortgage companies were responsible for the housing problem. He told me a small portion was predatory lending/lenders, but that the gov't was the main problem and not requiring strict proof of income and whatnots to new buyers. Anyone could get a house on a Taco Bell part time salary.

[Justruckin]

Yep, the no income loan. Essentially that is still going on with this tax credit that is really a loan, if I read the above correctly. I honestly don't know if I would buy a house right now unless I could pay cash. At the rate this current administration is piling on the debt and all of these new entitlement programs, whew...

And the other issue that few even talk about, is the coming collapse of the commercial real estate market. Now when that hits, starting next month, I think we will really see some excitement in the real estate markets as credit dries up again due to all of the losses. And of course the bailouts will begin again, that is a given with the likes of who is calling the shots economically in the White House.

Here is one tidbit out of the health care bill that no one is reporting. A married couple making sixty thousand a year and filing jointly will be taxed twenty thousand dollars for their free health care.

With little items like the above, and myself living in the democrat utopia of Michigan, where everything under the sun is taxed and business is still fleeing in droves, meaning jobs, I don't think I would be buying a home unless I could pay cash as I said above.

Right now we are fine, having a small house note and my mom paying cash for her condo. What we are all concerned about is the coming taxation. I spoke with my accountant the other day and she is just as up in the air as everyone else. Her advice was to sit tight and don't make any rash moves and liquidate any debt.

Our goal right now is to live as inexpensively as possible and stay under the taxman's radar. No big purchases like cars or real property. We are all living off of the markets right now and doing quite well. We just need to keep the state and feds out of our wallets and attempt to keep what we have while growing our capital, not spending it.

Mike

[Justruckin]

Here is an interesting article to read, ashame it has to come from the Rolling Stone magazine.

Obama's Big Sellout

The president has packed his economic team with Wall Street insiders intent on turning the bailout into an all-out giveaway

Obama's Big Sellout : Rolling Stone

Read the above, it is rather lengthy, but gives one of the better breakdowns with what this administration is up to and fits in well with this particular thread and what our future may hold.

And this is not the only place this has been reported, as this info has been out there for quite awhile. The above author does a good job of putting it all together and spelling it out. To bad this is not on the msm, someone might win a Pulitzer.

[GMAN]

Yep, the democratic party is for the people.

[geeshock]

Yep, the democratic party is for the people.

mabe at one time but I haven't seen it in my lifetime, all governments eventualy fall, I just hope I'm not around when ours crumbles to the ground.

[GMAN]

The democrats haven't found a tax that they don't like. I read something a few years ago. It was about governments. The author basically stated that the life cycle of a democracy is about 200 years. As the democracy matures it evolves into socialism and so on. According to the writer, democracy starts on it's down slide once the people find that they can get something for free from the government. The government starts redistributing wealth by taking from those who are productive and giving it to those who are not. Citizens find that they no longer need to work or produce to live so the government keeps giving more and more to those who are non-productive. It takes the incentive away from those who are producing and eventually you have a total disintegration of the democracy. It moves into socialism and then into a dictatorship. I am paraphrasing. It is looking as though this guy may have been correct.

[golfhobo]

Hey GMAN.... since you're a Mod, why don't you just change the title of this (and every OTHER) thread to "Let's bash Obama and the Democrats again!" That way I'll know not to expect anything different from this one.

Sure am glad I got my question in under the wire, and got a helpful answer before YOU and others ruined it like you do every thread on this site!

[golfhobo]

Here is one tidbit out of the health care bill that no one is reporting. A married couple making sixty thousand a year and filing jointly will be taxed twenty thousand dollars for their free health care.

Sure would like to see the proof of this outrageous claim.

[TimberWolf]

Hey GMAN.... since you're a Mod, why don't you just change the title of this (and every OTHER) thread to "Let's bash Obama and the Democrats again!" That way I'll know not to expect anything different from this one.

Sure am glad I got my question in under the wire, and got a helpful answer before YOU and others ruined it like you do every thread on this site!

Amen to that...


timberwolf

[Fredog]

Sure would like to see the proof of this outrageous claim.

it says so on the internet, isnt that proof enough?

[BanditsCousin]

I have to agree with you hobo. I wouldn't say the thread is ruined, or that Gman has a habit of talking politics.

I know my suggestion for a political area of the forum would be proper. Lots of CAD members have some very interesting views and I've seen it debated maturely.

I'm a member of a car racing/enthusiast forum and they(we) call each other horrible names, make fun of each other's mothers, post tons of NWS stuff, etc. But the political forum is surprisingly mature. Actually it is shocking.

I value a lot of the members opinions here, but I've seen a lot of threads hijacked with really good points of view and facts that I would love to read and participate in.

[GMAN]

Hey GMAN.... since you're a Mod, why don't you just change the title of this (and every OTHER) thread to "Let's bash Obama and the Democrats again!" That way I'll know not to expect anything different from this one.

Sure am glad I got my question in under the wire, and got a helpful answer before YOU and others ruined it like you do every thread on this site!

I don't make every thread political. But the democrats do make it easy. I was responding to something that was said. Any time the government gets involved it is political. This so called giveaway comes from the government and that makes it political. If I remember correctly, it was you who has been blaming Bush for most of what is wrong in the world. Since he was president I believe that is political. You can't have it both ways. You want to dish it out but can't take it. This so called giveaway is nothing but another gimmick to appease the gullible and buy their vote. I am sorry if that makes it political.

If every thread is ruined I am surprised you are still here.