Saturday, November 14, 2009

Creative Way to Tap Home Buyer Tax Credit

The extension of the tax credit gives buyers, sellers and industry professionals a bit more time to stabilze the housing market.

The First Time Home Buyer (FTHB) Tax Credit has been extended with new provisions for those that already own a home. So, I guess we need to start calling it the Home Buyer Tax Credit (HBTC).  If you have any questions on qualifying for the tax credit, be sure to read one of my earlier posts.
Combined with bargain basement house prices, this could be the best opportunity to buy a home in many of our lifetimes.
The challenge is, there are many that would like to buy a home, but don’t have a down payment to do so. 
I still get calls from prospects that want to know how to use the Home Buyer Tax Credit for the down payment on the purchase of a home.  In Michigan, there’s no way to get the credit at the closing table to use for the down payment.  So, buyers have to get the down payment in other ways and then AFTER closing, file for the tax credit with the IRS.
Now, let’s look at some ideas to get around the issue of the down payment so a greater number of people can take advantage of the tax credit for buying a home.  By the way, I’m going to make you wait until the end of this post to go over a very CREATIVE (but 100% legal) way to buy a home using the HBTC.
First off, let’s dispel some rumors & myths about zero-down programs.  There are really only two mortgage programs left that require no down payment:
  • VA Guaranteed Loans – these are from the Veteran’s Administration and you must have served in one of the nation’s branches of the military to be eligible.  The VA mortgage program is a great way to finance a home if you’re a veteran.
  • Rural Housing Development Authority Loans (RDA) – these loans are for properties in rural areas only, but are another great way to finance a home.
The lowest down payment available to most home buyers is the department of Housing Urban Development’s FHA program.  FHA requires only a 3.5% down payment, so we’re going to focus on meeting that requirement to buy a home. 
Where can a potential home buyer find the down payment funds for an FHA mortgage?
  • GIFT – FHA allows the down payment, and all funds to buy a home, to be from any blood relative or someone that has a vested interest in the buyer’s well-being.  “Vested interest” is a pretty vague statement, so check with a lender to confirm someone you may have in mind that’s not a blood relative.  What’s interesting about gift funds is that there’s really nothing to stop a relative from borrowing the gift funds from a credit card or getting a loan.  Again, check with a mortgage expert before acting on this, because lenders can have different interpretations of this.
  • BONUS – An employer can choose to give a valued employee a bonus and that bonus can then be used for the down payment.  A bonus can also be given sooner than normal so that a buyer can purchase a home.
  • RETIREMENT PLAN LOAN – most 401(k), 403(b), IRA, etc retirement programs, allow a loan to be taken out for the purpose of buying a home.  A loan is often a better way to go then taking a hardship withdraw that incurs a tax penalty.
  • GRANT – there are many organizations that will give a home buyer a grant to buy a home.  Check with friends & family for the availability of these programs.
  • LOAN AGAINST AN ASSET – just as one can use a loan from a retirement asset for a down payment, so can you also use the proceeds from a loan against any asset you own.  Just make sure the asset’s ownership & value is documented and that you don’t get the loan from a relative or interested party.
  • SALE OF ASSET – you can sell a motorcycle, boat, car or just about anything and use the funds for a down payment.  Just make sure the asset’s ownership & value is documented, you’ll also need a bill of sale and a copy of the check from the buyer of the asset.
  • LIFE INSURANCE POLICY – many life insurance policies allow for borrowing against their built up cash value and these funds can be used for a down payment.  There are also organizations out there that will buy your policy off you, but you’ll want to check with an attorney or financial planner before any such sale.
  • HOME EQUITY LINES OF CREDIT – if you currently own a home and are looking to buy your next one, you can tap into the equity in your current home for the down payment on the next one.  Just be sure to check with a mortgage expert before acting on this to be sure you meet all qualification requirements for the new mortgage.
Ok, so that’s the traditional sources to come up with a down payment for a home purchase, using FHA financing.  Just be sure the seller has owned the property for a minimum of 90 days, as this is an FHA requirement with zero flexibility.
Now let’s discuss a very creative way to use the Home Buyer Tax Credit to buy a home. 
Ever heard of a land contract?  It’s a contract between a buyer and a seller to buy the seller’s property – basically, the seller acts as their own bank and more or less gives the buyer a loan.
Well guess what, land contracts qualify for the HBTC!  That allows for a very interesting way to buy a home with little money out of pocket.  An example will be worth a thousand words:
  • Seller has a house that they’re having a hard time selling as they can’t compete with foreclosure sale prices.  So, the seller offers up land contract terms to potential buyers.
  • An interested buyer makes a land contract offer on the property. 
  • After agreeing on a price, interest rate & monthly payment, the seller takes whatever down payment the buyer has (could be very small), has the buyer pre-approved by a trusted mortgage expert (very important) and executes the land contract transaction. 
  • A clause in the land contract gives the buyer only 90 days to come up with an additional $8,000 deposit.  This money will come from the Home Buyer Tax Credit.  If the buyer files for it right away, that’s all the time it should take to receive it. 
  • Once the Home Buyer Tax Credit monies are received by the seller, the buyer can then apply for a mortgage to pay off the land contract.
  • With FHA financing, the seller can even give a credit for up to 6% of the sales price towards the buyer’s closing costs, prepaids & escrows.
  • Buyer effectively can purchase the property with almost zero out of pocket!
Was that idea worth waiting until the end of this post to read?  Maybe. 
There’ll be a lot of people and industry professionals that will write this land contract concept off as too tough to deal with.  Well, we’re in a tough market and the more ideas the better. 
Is this a perfect solution?  No, but show me a better one.  Some of the issues with this land contract concept:
  • The buyer doesn’t get the tax credit because of an outstanding tax lien.
  • The buyer gets the tax credit, but doesn’t deliver it to the seller.
  • The only interested buyer could have credit issues.
  • The seller has a mortgage on their property with a Due-on-Sale clause.
  • The seller could be upside down in their home and need a short sale.
  • The seller could stop making their mortgage payments and let the property go to foreclosure, leaving the buyer in the lurch.
I have solutions for all the above issues.  Anyone interested though, will have to contact me to discuss.

There are issues that no one has any control over:
  • Buyer could lose their job after land contract closing and not be able to qualify for the mortgage.
  • Lender won’t approve the short sale needed to make the deal work.
  • Property values continue to drop and property won’t appraise for needed amount.
  • The world ends on 12-21-2012.
No real estate transaction is a sure thing anymore.  We all just do the best we can.

Saturday, November 7, 2009

Bank of America – Loans & Lies, but no Real Modifications

In July the federal government pressured banks to modify 500,000 mortgages by November 1st.  Bank of America is lying to do its part.


Take a close look at the document image below:

BOA Loan Mod Offer

This is a copy of an actual letter sent to one of my clients who requested a loan modification. 

Note that in several places it alludes to the fact that this IS NOT an approval for a loan modification.  In fact it says, “If for some reason you are not eligible for the Home Affordable Modification Program once you’ve started the trial period, we will contact you and review other options.”

How many tens of thousands of struggling homeowners got letters like this and now think their home is safe from foreclosure? 

My client did – until I pointed out the above sentence. 

I’ve run their numbers and I know they qualify for a loan modification.  With BOA’s track record of incompetency though, I’m very worried they won’t really be approved. 

So, I’ve recommended they send everything that BOA asks for via certified mail or Fed-Ex and keep copies of all cancelled checks to BOA.  It won’t guarantee they’ll be approved for a loan modification or that their home will be protected, but it may help them in a lawsuit against BOA if they get screwed.

I find the wording in the letter, “review other options” particularly frustrating.  Why?  Because it’s more deception.  There are only two other options – short sale (where BOA has a terrible record) or foreclosure. 

BOA is giving homeowners nothing but false hope with this letter.

I’m sure they’re including all the loans they’ve sent these letters out to in the loan modification numbers they’re reporting to the federal government. 

I expect to hear from the “Great Obama” any moment now about how his program has saved so many homes from foreclosure.  Just don’t look behind the curtain or you’ll catch him hiding all these letters.

By the way, BOA (and all the major banks) keep crying that despite their best efforts, they can’t keep up with the flood of loan modification requests. 


Here’s a quote from BOA’s third quarter report (click the hyperlink to read it yourself):

  • Bank of America funded $95.7 billion in first mortgages, helping nearly 450,000 people either purchase a home or refinance their existing mortgage. This funding included $23.3 billion in mortgages made to 154,000 low- and moderate-income borrowers. Approximately 39 percent of first mortgages were for purchases.
  • To help homeowners avoid foreclosure, Bank of America has provided rate relief or agreed to modifications with approximately 215,000 customers during the first nine months of 2009. In addition, approximately 98,000 Bank of America customers are already in a trial period modification under the government's Making Home Affordable program at September 30.

See any contradictions here?

How could they have the staff to “help” nearly 450,000 people purchase or refinance in the third quarter, but only modify 215,000 loans in 9 months? 

Let’s see, that works out to 150,000 new loans per month, but only 27,777 loan mods per month.

BTW - anyone pointing to that 98,000 number already in a trial mod as good news, better reread this post from the top as well as realize that the number only represents 11% of BOA customers eligible for a loan mod. 

Let’s remove another excuse banks use. 

They like to claim they’re ramping up staff as quickly as they can, but still can’t keep up with the flood of loan mod requests. 

Hmmm.  The process of evaluating a loan mod request isn’t that much different than evaluating a request for a purchase or refinance mortgage.  You gather the same documents, run the same calculations and it’s either a yes or no.  Loan mods are actually a lot easier to evaluate as credit is not a factor.

Need more staff?  Over one million people have been laid off from the mortgage industry.  What’s more, they all know the business so they’d need very little training.

Can’t afford to hire them?  Baloney.  The federal government is paying $1,000/year per loan mod for up to 3 years – a total of $3,000. 

The bottom line is the same senior banking executives that made the bad decisions that got our country into this housing crisis, have decided that they don’t want to do loan mods.  They’d rather pursue foreclosures and use TARP bailout funds to cover any losses. 

Where is the heart, courage & intelligence of the “Great Obama” on this matter?

Friday, November 6, 2009

Housing Stabilization at Hand?

President Obama signs bill into law that extends the $8,000 first-time buyer tax credit - and expands it.
Well, it’s official.  The home buyer tax credit legislation made it through the political process in Washington D.C. in seemingly record time.  After just passing the Senate Wednesday, the House passed the bill today and Obama signed it soon after.
The bill also extended unemployment benefits for 14 weeks for most states, but for another 20 weeks for hard hit states like Michigan.  This extension will also keep many from losing their homes to foreclosure, so shouldn’t be overlooked.
Now let’s take a look at the “new & improved” homebuyer tax credit.
Who Gets What?
First-Time Homebuyers (FTHBs): First-time homebuyers (defined as not owning a home in the last 3 years) are eligible for up to 10% of the purchase price or a maximum of $8,000.
Single taxpayers and married couples filing a joint return may qualify for the full tax credit amount.
Current Owners: The new tax credit program now gives those who already own a residence incentive to move to a new home. If they’ve owned a primary residence for 5 consecutive years out of the last 8, their eligible for up to a $6,500 tax credit.
Single taxpayers and married couples filing a joint return may qualify for the full tax credit amount.
What are the New Deadlines?
In order to qualify for the credit, all sales contracts need to be in effect no later than April 30, 2010 and close no later than June 30, 2010.
What are the Income Caps?
The amount of income someone can earn and qualify for the full amount of the credit has been increased.
Single tax filers who earn up to $125,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, single filers who earn $145,000 and above are ineligible
Joint filers who earn up to $225,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, joint filers who earn $245,000 and above are ineligible.
What is the Maximum Purchase Price?
Qualifying buyers may purchase a property with a maximum sale price of $800,000.

What is a Tax Credit?
A tax credit is a direct reduction in tax liability owed by an individual to the Internal Revenue Service (IRS). In the event no taxes are owed, the IRS will issue a check for the amount of the tax credit an individual is owed. Unlike the tax credit that existed in 2008, this credit does not require repayment unless the home, at any time in the first 36 months of ownership, is no longer an individual’s primary residence.
How Much are First-Time Homebuyers (FTHB) Eligible to Receive?
An eligible homebuyer may request from the IRS a tax credit of up to $8,000 or 10% of the purchase price for a home. If the amount of the home purchased is $75,000, the maximum amount the credit can be is $7,500. If the amount of the home purchased is $100,000, the amount of the credit may not exceed $8,000.
Who is Eligible fort FTHB Tax Credit?
Anyone who has not owned a primary residence in the previous 36 months, prior to closing and the transfer of title, is eligible.
This applies both to single taxpayers and married couples. In the case where there is a married couple, if either spouse has owned a primary residence in the last 36 months, neither would qualify. In the case where an individual has owned property that has not been a primary residence, such as a second home or investment property, that individual would be eligible.
How Much are Current Home Owners Eligible to Receive?
The tax credit program includes a tax credit of up to $6,500 for qualified purchasers who have owned and occupied a primary residence for a period of five consecutive years during the last eight years.
Can Homebuyers Claim the Tax Credit in Advance of Purchasing a Property?
No. The IRS has recently begun prosecuting people who have claimed credits where a purchase had not taken place.
Can a Taxpayer Claim a Credit if the Property is Purchased from a Seller with Seller Financing and the Seller Retains Title to the Property?
Yes. In situations where the buyer purchases the property, even though the seller retains legal title, the taxpayer may file for the credit. Some examples of this would include a land contract or a contract for deed.
According to the IRS, factors that would demonstrate the ownership of the property would include:
1. Right of possession,
2. Right to obtain legal title upon full payment of the purchase price,
3. Right to construct improvements,
4. Obligation to pay property taxes,
5. Risk of loss,
6. Responsibility to insure the property, and
7. Duty to maintain the property.
Are There Other Restrictions to Taking the FTHB Credit?
Yes. According to the IRS, if any of the following describe a homebuyer’s situation, a credit would not be due:
  • They buy the home from a close relative. This includes a spouse, parent, grandparent, child or grandchild. (Please see the question below for details regarding purchases from “step-relatives.”)
  • They do not use the home as your principal residence.
  • They sell their home before the end of the year.
  • They are a nonresident alien.
  • They are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year. (This does not apply for a home purchased in 2009.)
  • Their home financing comes from tax-exempt mortgage revenue bonds. (This does not apply for a home purchased in 2009.)
  • They owned a principal residence at any time during the three years prior to the date of purchase of your new home. For example, if you bought a home on July 1, 2008, you cannot take the credit for that home if you owned, or had an ownership interest in, another principal residence at any time from July 2, 2005, through July 1, 2008.
Can Homebuyers Purchase a Home from a Step-Relative and Still be Eligible for the Credit?
Yes. As long as the person they buy the home from is not a direct blood relative, the purchase would be allowed.
If a Parent (Who Will Not Live In The Property) Cosigns for a Mortgage, Will Their Child Still be Eligible for the Credit?
Yes, provided that the child meets the other requirements for the tax credit.
Also, be sure not to try and buy a property in the name of a child as the IRS is also pursuing prosecution of an estimated 500 tax filers reported to have done this.

Tuesday, November 3, 2009

FHA Streamline Refinancing – The Government Taketh Away in a Time of Need

After November 16th, HUD is making it a lot harder for borrowers to lower their mortgage payments through refinancing.


Once upon a time, in a land far, far away, HUD had some common sense.  They allowed borrowers with FHA loans to easily refinance to lower their interest rate and payment.

Then came the too big to fail banks & Wall Street, that huffed and puffed and blew the housing market away.

All the Prez’s advisors and all the Prez’s yes men, haven’t been able to put it back together again.

You gotta smile and make light of the situation as it’s better than beating your head against a wall.

The FHA Streamline program has been around since the 1980’s.  It allowed FHA borrowers to refinance their home loans with no appraisal, no income and no asset verification – a borrower just had to have made their last 12 months of payments on time.

The program made sense, as HUD was already on the hook for the loans if they defaulted, so why not make it less likely for these borrowers to default on their mortgages by making it easy to lower their rates and payments?  Makes a lot of sense.  VA does something similar for veterans, FNMA & FHLMC should have embraced this concept with the Obama Housing-O-Rama.

After November 16th though, HUD will now require income verification, asset verification, stricter payment histories and a borrower must have owned the home for a minimum of 6 months.

The worst change is that borrowers will no longer be able to roll closing costs or escrows into the new loan without a new appraisal.

How many more foreclosures do you think this will cause?  Let’s see, you’re upside down in your home, you’re struggling to make your mortgage payments and now you can’t lower your payment to relieve some of this stress without bringing a boatload of cash to closing that you don’t have. 

And our government is supposed to be protecting us and looking out for our best interests?

So why the change in policy? 

Well, HUD feels there are too many streamline refi transactions being done that are not in the best interests of borrowers.  I agree with that it’s happening as I’ve seen it and stopped several occurrences of it.  There are still some bad/desperate players in the mortgage industry churning loans to fill their pockets.  I just got a call today from a past client that was solicited on the phone for a FHA Streamline refi, being promised a 4.25% interest rate with “only” $6,000 in closing costs.  My quick analysis showed her that it didn’t make sense.  Talked myself out of a possible loan, but it wasn’t in her best interests.  I’m hoping she trusts me that much more and will now refer me that much more often and strongly.

Oh by the way, have you seen the bonuses recently paid to the same “experts” on Wall Street that put the housing market into this mess? 

Instead of trying to remove the few bad apples in the industry, HUD seems intent on throwing out the whole barrel of apples.

That seems to be our government’s new solution to every problem these days – instead of enforcing the laws already on the books to get rid of mortgage crooks, the Madoff Ponzi schemers and the Wall Street scoundrels, they just pass new laws that penalize everyone in entire industries. 

Seems it’s a whole lot easier to pass new laws than to put your friends on Wall Street and bank leaders in jail where they belong.

Sunday, November 1, 2009

Extension & Expansion of Homebuyer Tax Credit

Contrary to what many have reported, it’s not a done deal yet.


The most talked about real estate news of the past week seemed to be all about the First Time Homebuyer Tax Credit getting extended.

I’ve had numerous people contact me asking for the details and have had to tell all of them that nothing has passed yet. 

Given the confusion and misinformation I thought I’d give an actual update on where the extension is.

The big news is that an unofficial voice vote passed the Senate last week, and Senate Majority Leader Harry Reid announced that he’s planning an official November 2nd vote on the extension in the Senate.  Discussions with his counterparts in the House lead him to believe that the House will also pass the bill in the coming week.

This could put the bill on President Obama’s desk by the end of the week.

What could go wrong?  Well, the vote was held up last week by demands for votes on several other amendments, one calling for an end to the Treasury’s TARP program by year end.  An extension of unemployment benefits is also rumored to be causing issues.  Popular bills like this one often have other amendments added to them that might not pass otherwise, so a lot of compromising goes on.

Some New Wrinkles

In its current form, the bill would extend the tax credit to the end of April 2010.  There are several proposed differences from the current tax credit:

  • To qualify, a sales contract would have to be signed by April 30th and the transaction closed by June 30.
  • Income limits would be increased from $75k for single people & $150k for couples, to $125k and $225k respectively.
  • Buyers who have lived in their current home for the last 5 years would be eligible for up to a $6500 tax credit (or 10% of the purchase price).
  • The maximum allowed home purchase price would be capped at $800,000.
  • Military personnel, deployed overseas for a minimum of 90 days in 2008 or 2009, would have until April 30, 2011 to claim the tax credit.
  • To combat fraud, a HUD-1 Settlement Statement will have to be attached to the tax return to secure the credit.

Stabilizing the Housing Market

The Homebuyers Tax Credit is probably the best program passedAffordable house by the government since the financial meltdown started.  Other  measures to stabilize the economy are increasingly under fire for racking up trillions in tax payer debt, while mostly benefiting the elite on Wall Street.

More than 1.25 million taxpayers have taken advantage of the tax credit to pursue the American dream of home ownership.  This has used up approximately $8.5 billion of the $13.6 billion originally set aside for the program. 

Reports show home sales have increased and inventory is down.  Many buyers are finding it difficult to locate a home, being outbid and outhustled.


Even this program has its problems and detractors though.  Recently, the Treasury’s Inspector General for Tax Administration, J. Russell George, told Congress that at least 19,000 filing for the credit hadn’t bought a house when they filed.  Another 74,000 appear to have owned a home in the last 3 years, making them ineligible for the program.  500 plus filers for the tax credit are under 18 years old! 

The IRS is pursuing criminal cases against at least a 100 offenders and is reportedly trying to audit every return where the credit is claimed this year.  They’ll also be auditing themselves as Mr. George is also on record stating that they are investigating at least 53 cases of IRS employees filing illegal or inappropriate claims for the tax credit.

Many detractors are claiming that the tax credit is subsidizing housing values and just pulling forward sales that would have happened anyways. 

One potential problem that the media hasn’t focused on yet, is that the tax credit may be encouraging banks to sit on foreclosed homes.  Many real estate experts have pointed out that the number of foreclosures has been outpacing the number of units entering the market for some time now.  Instead of putting these homes on the market to be sold, banks could be sitting on them to drive down inventory and push up prices – using bailout funds to support this endeavor.  Not a lot that can be done at the “street level” about this, but surely something for our representatives to look into

Don’t Procrastinate

Hopefully, the extension of the tax credit won’t turn more buyers into procrastinators who wait until the last minute to buy.  Buyers should keep in mind that finding a home isn’t like shopping for Christmas items or even a car – where their are multiple copies of the desired item.

Homes are much more unique, rarely are even two homes remotely alike.  Start your search now, as it could take awhile to find what you want.  When you do find it, jump on it or someone else usually will.