What you need to know about the $8000 tax credit

WHAT YOU NEED TO KNOW ABOUT THE $8000 TAX CREDIT
AUGUST 27th, 2009

The deadline for qualifying for the American Recovery and Reinvestment Act of 2009 First Time Home Buyer Credit of $8000 is fast approaching. If you are a first time home buyer (defined as someone who has not owned a principal residence in the last three years) and earn less than $75,000 a year (though income up to $95,000 or $170,000 for jointly filing married couples still qualify for a portion of the tax credit) and purchase a home intended to be your primary residence for at least $80,000 and close on or before November 30th, 2009 you will qualify for the $8000 tax credit. This money is not required to be paid back if you live in this home for at least three years, and this money can be used anyway you desire. One note for GLBT couples is that if only one buyer qualifies as a first time buyer, then that buyer can apply for the entire tax credit.

However, since the expiration of this incentive is coming up there are a few things a buyer should consider to ensure that they close in time to receive this benefit.

First, the process of finding homes and making an offer can take several weeks. The inventory is at it’s lowest levels in years. In fact, based on information from the Regional Multiple Listing Service of Minnesota, Inc for the period from January 2003 through July 2009, we are on pace to have fewer new listings in 2009 than we saw in 2003. And, we are also on track to have more pending sales than in 2007 and in 2008. A moderately strong finish of this year could mean that 2009 will have more pending transactions than 2006. Multiple offer situations (where more than one buyer is making an offer on the same property) is more common than not, particularly if the house is priced well, and especially if this well priced home is on the lower end of the price spectrum. Many buyers are writing five or more offers before getting an offer accepted. Buyers who realize that they have to make good offers, and often even offers above list price are more likely to win in these multiple offer situations.

Second, mortgages take time to process. The typical FHA mortgage (which allows for a down payment of only 3.5%) usually takes 30 days from start to finish once you have a signed purchase agreement. A VA mortgage takes about 45 days. An FHA 203k (rehab loan) takes 60-70 days, and a Conventional Mortgage (requiring a minimum of 5% down) takes at least 21 days. Be sure to allow enough time for the processing of your mortgage if you are trying to close before November 30th.

Next, be cautious of closing too close to the end of the deadline. It would be best to give yourself a cushion as the end of the month is typically the most popular time to close on a new home, and it is projected that underwriters and title companies may become backlogged as the deadline approaches. Also, if you are buyer of a bank owned home keep in mind that the selling banks are not always very good at making closing dates. A lot of delays going on right now with bank owned homes come from the banks not getting signed contracts to the buyers in a timely manner so they can get their inspection process started, not getting the utilities turned on in a timely manner so the buyer can complete their inspection and move forward with their mortgage, or not having their title work or power of attorney documents completed in time for closing.

Last, understand how short sales work before embarking down that path. The term short sale has nothing to do with the amount of time it takes to get the transaction done. It means that the seller is selling the home short of what they owe on it, and they are requesting the bank to consider taking the difference as a lost. The majority of these short sales take between 4 and 8 weeks for the bank to make a decision as to whether or not they will consider the buyers offer. There are currently a lot of short sales with offers being considered. As we get closer to the end of September, I foresee many of these buyers abandoning their short sale offers and looking for homes that take less time to get an offer accepted to ensure a closing before the end of November. Short sales can provide buyers opportunities for tremendous deals, and you may have to decide between getting the deal or getting the tax credit.

Anyway you look at it, with low interest rates and low home prices, now is a great time to be a home buyer. The $8000 tax credit sweetens the deal, but even without it the opportunities are incredible. There is still time to take advantage of this incentive, and keeping the above information in mind should help you to successfully close in time to receive the benefit.

And, if you do not qualify as a first time buyer or if you are an investor the best time to throw your hat into the ring just might be after the expiration of the $8000 tax credit as home sales are typically at their lowest in the months of December and January and many of the first time buyers will have completed their sales already to make the November 30th deadline, so some of the current frenzy should be dissipated. Look for tips on how to buy bank owned homes in the winter in the next issue of Q!

This article published in the Fall edition of Q!