In the last two days we have received numerous flyers in our e-mail from some local mortgage representatives telling us that First Time Home Buyers can receive their $8,000 credit UP FRONT and use this money as a DOWN PAYMENT. This sounded too good to be true so we checked it out - this was too good to be true.
My wife, Linda, personally phoned the IRS this morning, February 27, 2009 and spoke with an IRS expert on the First Time Home Buyers Credit. This is what we learned:
- The 2009 tax credit is for $8,000 and for properties purchased in 2009 by first time home buyers and does not have to be paid back provided the buyer lives there for 3 years.
- The buyer can apply for the 2009 tax credit on their 2008 income tax return if they have not filed yet. If the buyer has already filed their 2008 return and received their refund or paid their taxes, they can file an amended return and receive the $8,000 tax credit without having to wait to file the 2009 taxes. Of course, the buyer can wait and apply for the $8,000 tax credit when they file their 2009 income taxes next year.
- This provision, while a little confusing, was designed to jump start housing market. However, under NO CIRCUMSTANCES can a buyer apply for this $8,000 credit BEFORE THEY CLOSE ON THE PROPERTY AND USE THIS MONEY FOR A DOWNPAYMENT. They are not a FIRST TIME HOME BUYER until they have (bought) closed on the house and have the keys in their hands.
If you think about this logically, you would realize that if in fact this was an $8,000 gift for a down payment, it would be all over the news. We wouldn't need some mortgage representative to tell us about it. This very loose interpretation of the First Time Home Buyers credit is just another attempt to get around the rules.
We can think of some serious ramifications of applying for a tax credit you have yet to earn. We can sum it up in two words TAX FRAUD. We do not want any mortgage representative telling our buyers to commit fraud. We can imagine some nightmare scenarios that we do not wish to be involved, the least of which the buyer does not settle, for whatever reason, and has applied for and received the $8,000 credit. The worst of this is that when the ‘buyer' is audited the following year, for applying for a tax credit that they did not earn and they tell the auditor that their real estate agent told them to file for the money.
We suggest that anyone who is interested in finding out the FACTS regarding this $8,000 tax credit for first time home buyers, that they call the IRS directly at 1-800-829-1040 and ask to speak to an agent who is familiar with the FIRST TIME HOME BUYERS CREDIT and ask the direct question, "Can a first time home buyer apply for the $8,000 credit before they close on a property and use this money for a down payment?" The answer will be NO. But check it out for yourself. If you have a buyer who has been told this by a mortgage rep and does not believe you when you tell them they cannot apply for this credit before they close on the property, give them the IRS number. Keep in mind that you are calling the Federal Government and will be on hold for 15-20 minutes. But it is worth the wait to learn the facts. Use your speaker phone, the time will fly by.
If something sounds too good to be true, it is our responsibility to wade through the muck and verify, verify, verify. The last thing we need is another mortgage catastrophe a few years out.
Central A/C
We just read a news article that both Fannie Mae and Freddie Mac are planning on toughening up their credit score and downpayment rules. As of April 1, they will implement new guidelines for loans backed by them. The new guidelines will require buyers that are putting down less then 25% for a downpayment to be charged a penalty of 3/4 of a point (a point equals 1% of the loan amount). It won't matter what the buyer's credit score is, if they are putting less then 25% down for a mortgage loan, they will be penalized 3/4 (0.75%) of a point.
Many major lenders are already factoring in these higher fees, which reduces the effectiveness of the stimulus efforts. Brad German, Freddie Mac's spokesman, said that the loan categories & credit risk combinations targeted by these fees "default at four to eight times" the rate of other mortgages that were backed by Freddie Mac. The reason for these fees, according to German, "We have to manage these risks appropriately,".