The clock is ticking on the federal homebuyer tax credit.
The homebuyer tax credit is worth 10 percent of the home’s sale price, up to $8,000 for buyers who haven’t owned a home in the previous three years and $6,500 for buyers who have owned and occupied a principal residence for at least five consecutive years during the eight-year period that ends on the day the new home is purchased.
Here are some tips for last-minute buyers:
Tip: The buyer must enter into a binding contract to purchase the home on or before April 30, 2010. The term “binding contract” isn’t defined in the homebuyer tax credit law and may be subject to interpretation. Generally, the term refers to an agreement that’s signed by both parties and has a deposit in escrow, according to Randi Bennett, an escrow officer at First Centennial Title Co. of Nevada in Reno.
Tip: The purchase must close within 60 days after the binding contract deadline. In this context, that means June 30, 2010, not June 29, 2010, according to the Internal Revenue Service. The discrepancy between 60 calendar days and two months occurs due to a financial fiction that every month equals 30 days.
Tip: Certain U.S. military, foreign service and intelligence service personnel have an extra year to claim the homebuyer tax credit. These buyers must enter into a binding contact on or before April 30, 2011, and close on or before June 30, 2011.
Tip: Buyers should be “upfront with their Realtor about their must-haves and their wish list,” says Allyson Bernard, owner of Real Estate Professionals of Connecticut. Buyers who aren’t realistic could find themselves up against the deadline with fewer houses from which to choose.
Tip: Harsh weather may be “a help or a hindrance,” Bernard says. Buyers who are willing to trudge through snow to find a house may have an advantage over buyers who wait until the weather improves.
Tip: Contract contingencies allow buyers some “breathing room” to take care of big items like financing, inspections and the sale of their current home, Bernard says. But contingencies shouldn’t be an excuse to delay once the deal is pending.
“If you run into a problem and you no longer want to buy that house, it’s great that you had those contingencies to protect you, but you may not have time to find another property,” she says.
Tip: Anecdotal reports suggest that some buyers have included a tax-credit contingency in the purchase contract. Whether that’s a necessary protection to make sure the deal closes on time depends on the situation and local practices. Either way, buyers should read the contract to make sure the closing will occur before the deadline.
Tip: Buyers should be preapproved for a mortgage because glitches such as a mistake on a credit report or a lender’s request for tax returns that must be retrieved from the Internal Revenue Service can cause a delay, according to Patti Ketcham, owner of Ketcham Realty Group in Tallahassee, Fla.
“You don’t want to wait until the last minute because you could end up shooting yourself in the foot over something that’s no one’s fault, but you just run out of time,” she says.
Tip: Buyers also should allow extra time in case the mortgage lender requires a second appraisal, which can delay final loan approval.
“The appraisal process in residential lending is going through some painful changes. It is not uncommon to have a mortgage lender require more than one appraisal,” Ketcham says.
Tip: Buyers should line up homeowners insurance as soon as the house is under contract. Homeowners insurance is usually routine, but some states have special disaster-related issues. A big storm, earthquake or fire can trigger a moratorium on new policies.
Tip: Buyers should be aware that short sales, in which the seller needs a lender’s approval to sell the home for less than the loan balance, are typically subject to lengthy delays. For instance, one typical requirement is that the final closing statement must be sent to the bank for final approval. That can take five to 10 business days, Bennett says.
It’s an unfortunate irony for homeowners who’ve experienced a financial hardship, but Ketcham suggests buyers who want to claim the tax credit should set some firm deadlines or avoid short-sale homes.
“If the home they fall in love with is a short sale, they need to have a very serious talk with their Realtor with the calendar in front of them and say, ‘If we don’t have an answer by this date, we need to look for another house,'” she says.
Tip: The IRS has introduced Form 5405 and instructions for taxpayers who want to claim the homebuyer tax credit.