February 23, 2009 in Mortgages

4 ways stimulus helps homeowner, buyer

A refundable first-time homebuyer tax credit of up to $8,000 is the centerpiece of four housing incentives found in the 2009 American Recovery and Reinvestment Act.

The new credit is designed to boost sales in the nation’s sagging housing market.

Lawrence Yun, chief economist for the National Association of Realtors, predicts homebuyers will purchase an additional 300,000 homes in 2009 as a result of the tax credit.

“The impact will likely not be felt for at least three or four months, because it generally takes buyers that long to qualify for a mortgage and search for a home,” says Yun.

The new credit improves on a first-time homebuyer credit passed in 2008, Yun says. That credit had to be paid back over a period of 15 years, making it more of a loan than a true credit.

“We think this year’s tax credit will certainly have a much bigger impact because it is a true tax credit which is also refundable,” Yun says. “For instance, if you owe $1,000 in taxes and qualify for the first-time homebuyers tax credit, you will receive a tax refund of $7,000.”

Yun believes activity spurred by the new credit will help bring down housing inventory and stabilize prices.

Gibran Nicholas, chairman of the CMPS Institute (which certifies mortgage banker and brokers), says his group was in favor of a more generous tax credit.

However, he still believes the credit will have a positive impact on the housing market.

“This tax credit is more of a half-step, but at least it is in the right direction,” says Nicholas.

Rules for 2009 first-time homebuyers tax credit
  • Does not have to be repaid unless the home is sold within three years.
  • Applies only to first-time homebuyers, defined as those who have not owned a home within the previous three tax years.
  • Available only for homes purchased between Jan. 1, 2009, and Dec. 1, 2009.
  • Restricted by income; phases out for individuals with an adjusted gross income of $75,000 or above and for married couples with a combined adjusted gross income of $150,000 or above.
  • Tax credit is for up to 10 percent of the purchase price, up to a maximum of $8,000. For example, a buyer of a $150,000 home could receive a tax credit of a maximum of $8,000, while a first-time buyer of a $70,000 home would be eligible for a tax credit of $7,000.
  • The credit can be taken on 2008 taxes even when the purchase is made in 2009.

Nicholas especially likes a provision allowing homebuyers to claim their credit immediately.

“The greatest part of this tax credit is that homebuyers can take the credit on their 2008 tax return even when they have purchased the home in 2009,” says Nicholas. “This acts as an immediate stimulus for a lot of people.”

Homebuyers can take advantage of this filing exception in one of three ways: closing on the home prior to April 15, 2009, getting an extension to file taxes later in the year or filing an amended return.

Some state housing programs are introducing programs that allow homebuyers to access the tax credit money at settlement.

For example, the Missouri Housing Development Commission’s Tax Credit Advance Loan Program allows qualified homebuyers to obtain a no-interest second mortgage worth up to 6 percent of the home purchase or $6,750, whichever is less.

This second mortgage can be applied to down payment and closing costs, then repaid with the proceeds from the income tax credit.

The National Association of Home Builders has launched a Web site with detailed information about the first-time homebuyers tax credit.

Credit skeptics

Although Yun and Nicholas are hopeful about the new credit’s impact on the housing market, not everyone shares their optimism.

Greg Smith, a Certified Financial Planner with The Wise Investor Group in Reston, Va., agrees the new tax credit may serve as an incentive for some potential homebuyers.

However, he says it’s important to be realistic about the credit’s potential in light of the increasingly shaky economy and souring job market.

“This incentive only works for people who have complete job security, who know they won’t be transferred within three years, who qualify as first-time homebuyers and have the ability to obtain financing,” he says. “In addition, they need to live in an area with reasonable home prices.”

Michael Dooley, a financial planner with The Patriot Financial Group in Beverly, Mass., is also a skeptic.

“While the theory behind the tax credit is great, I just don’t think $8,000 is enough,” Dooley says. “The people who would benefit from this the most are looking to survive financially or are even leaving their homes because they can’t afford them.”

While the tax credit is meant to cover 10 percent of the purchase price (up to $8,000), an $8,000 credit covers only about 4 percent of the purchase price of a home with the 2008 national median single-family price of $197,000, Smith says.

Meanwhile, more affluent homeowners will not be able to take advantage of the new credit, which phases out for individuals with an adjusted gross income of $75,000 or above and for married couples with a combined adjusted gross income of $150,000 or above.

“The conundrum of the tax credit is that the people who can most afford to purchase a home are the ones who are most restricted in taking advantage of the tax credit,” Smith says.

Nicholas cites another shortcoming of the income limitations. He says some of the same places where the housing market has been hit hardest, such as Southern California, are also communities where incomes are high.

Because of the income caps, homebuyers in such markets — which are most in need of a boost in sales — will be unable to take advantage of the credit.

Other incentives

In addition to the first-time homebuyer tax credit, the stimulus legislation includes three more measures that could have a positive impact on homeowners, homebuyers and home sellers.

Expansion of the home improvement tax credit. The tax credit for making energy-efficient home improvements has been raised to 30 percent of the cost of the improvements, up to a maximum of $1,500.

Eligible improvements — which must meet the standards established by the federal government — include replacing doors and windows, adding insulation, and installing new heating and air conditioning systems and water heaters.

“The tax credit on home improvements works as a great incentive for homeowners who need to make energy-efficient improvements to their homes,” Smith says.

The fact that these incentives are “credits” rather than “deductions” makes them even more appealing, Smith says.

“It is well worth taking advantage of a tax credit (as opposed to a deduction), since you get 100 percent back on your taxes from a credit,” he says. “In this case, the homeowners will also have the benefit of reduced utility bills in future years.”

Dooley agrees the home-improvement tax credit could motivate some homeowners to make energy efficiency improvements. But he also cautions that people who fear unemployment are less likely to take advantage of the incentive.

“The theory is great, but people need to be able to pay for these improvements upfront,” says Dooley.

Higher FHA reverse mortgage loan limits. Loan limits for reverse mortgages insured by the Federal Housing Administration have been increased to $625,500 across the country.

“The loan limits for reverse mortgages have been too low for some time, so this increase could have a big impact,” Nicholas says.

The previous limit was $417,000 across the country, which meant that in markets where homes are more costly — such as the San Francisco area, New York City and its suburbs, and Washington, D.C. — FHA-insured reverse mortgages were not available for many homes.

Many private reverse-mortgage programs have disappeared, making FHA loans “virtually the only game in town,” Nicholas says.

Nicholas says the higher FHA reverse-mortgage limits are especially important in light of the “HECM for Purchase” program passed into law as part of 2008 federal stimulus legislation.

The program — which took effect Jan. 1 — allows older homeowners to use the proceeds from a reverse mortgage to purchase a new principal residence. To qualify for a new purchase reverse mortgage, buyers need to be seniors over age 62 and presently own a home.

“Senior citizens who want to move have been stuck in this market, but now they can take a reverse mortgage on a new purchase and pay it off when their existing home sells,” Nicholas says. “They don’t have to wait until their current home sells to move.”

Nicholas thinks the changes to reverse mortgage rules, which took effect Jan. 1, could improve markets in places popular with retirees, such as Florida and Arizona.

Higher FHA and conforming loan limits. The maximum FHA loan limit for high-cost areas has been restored to the 2008 level of $729,750.

Stimulus legislation passed by Congress in the first half of 2008 temporarily raised the FHA loan cap from $362,790 to $729,750 in cities where housing is particularly expensive. However, the higher loan limit expired in January and was replaced by a lower loan limit of $625,000.

The stimulus package restores the 2008 limits through the rest of 2009. This will help keep a greater percentage of loans in expensive cities (such as New York and San Francisco) in the “conforming loan” category.

Conforming loans are eligible for guarantees from mortgage giants Fannie Mae and Freddie Mac. Such guarantees help reduce mortgage rates on conforming loans. The guarantees also make it easier for first-time and low-income borrowers to qualify for mortgage loans.

“This could help places like California see an increase in home sales, but it is not likely to move people off the sidelines if they are still waiting for home prices to drop further,” says Nicholas.