Monday, June 01, 2009

Quicker Access to First-Time Buyer Tax Credit

From Suze

As you have heard me tell you, there’s a terrific tax break available to first time homebuyers this year. And just so you know, the federal government defines anyone who hasn’t owned a principal residence for three years as a first timer. Individuals with modified adjusted gross income (MAGI) below $75,000 and married couples filing a joint tax return with income below $150,000 are eligible for the maximum $8,000 credit in 2009. (You may be eligible for a reduced credit if you are single with income between $75,000 and $95,000 and joint filers with income between $150,000-$170,000. Above those amounts you are not eligible for any credit.) To grab the credit this year you must close on a home purchase before Dec. 1.

Now here’s where it gets interesting. Typically you get a tax credit “back” when you file your tax return. The credit either reduces the amount of tax you owe, or if you owe no additional tax then you are sent a refund check for the amount of the credit. And I want to remind you how valuable a tax credit is: It is a dollar for dollar deal. For every dollar of credit your tax liability is reduced by one dollar. That’s seriously better than a tax deduction, where the value of the break depends on your income tax bracket. For instance an $8,000 tax credit reduces your tax liability by $8,000. An $8,000 tax deduction for someone in the 15% tax bracket reduces his or her tax bill by $1,200 ($8,000 x. 15).

But one obvious issue is that if you are buying a house in 2009, you won’t get your tax credit until you file your 2009 tax return in early 2010. That doesn’t really help you make the purchase right now.

Instant Access to Tax Credit for FHA-insured Loans

So the Dept. of Housing and Urban Development made a change in how the credit works: If you take out an FHA-insured loan and you qualify for the first-time buyer tax credit your lender can essentially get you access to the money today so it can help you pay for certain loan costs. The new rule allows you to get an “advance” on the value of your tax credit, rather than having to wait until you file your ’09 return.

There are some rules you need to understand, so read this carefully: The tax credit can not be used to finance the minimum 3.5% down payment required on all FHA loans; you still need to come up with that yourself. That’s good news as far as I am concerned; if you can’t afford to put some money down that is a sign you are not ready to own a home. But the credit can be used to increase your down payment; the bigger your down payment, the lower your monthly housing costs. Or you can use the credit to “buy down” the interest rate; typically paying 1 point (1% of your mortgage value) will reduce your interest rate by 0.25% or so. The credit can also be used to cover closing costs.

Now I want to stress that this advance is typically only good for FHA-insured loans, so you want to work with a lender who specializes in the FHA program. (A few states, including Colorado, Idaho, Missouri, New Jersey and Ohio have programs in place to advance the credit for other types of mortgages.) And please know that the 2009 loan limits for FHA-backed mortgage have been raised significantly. The limit is based on where you live. You can find your region’s loan limit here. (Note: You only need to input your State and then hit “Send” to get a list of limits for your state.) You can learn more about the “advance” of the First Time Homebuyer tax credit at the FHA website.

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