Houston Real Estate and Mortgage Blog

Here is an interesting perspective on the real estate markets from Money magazine:

http://money.cnn.com/2009/11/25/real_estate/Glaeser_real_estate.moneymag/index.htm

You may have heard about mortgage loan modifications, both for good and bad reasons. Mortgage modifications can be a cost effective way for a borrower facing economic hardship to resolve current or potential delinquencies. However, many unscrupulous lenders have taken advantage of homeowners in their time of need and charged exorbitant up-front fees with unfulfilled promises of mortgage relief. Fortunately, there is a system available that provides the borrower with the benefits of a modification without any up-front fees.

Let’s start with the basics. A mortgage modification is an agreement with your current mortgage lender to amend the terms of the mortgage. This may mean reducing the interest rate on the mortgage, extending the term of the loan, converting it from a fixed to an adjustable rate, or restructuring the loan. While many borrowers may not qualify to refinance their mortgage traditionally due to negative equity, unstable income or employment, or a poor payment history, a modification can achieve the same goals without the normal qualifying criteria. Furthermore, a modification can be very cost effective as it does not require many of the third party fees involved in a traditional refinance.

Earlier this year, the Obama Administration introduced the “Making Home Affordable” program which included a variety of initiatives aimed at helping homeowners in need avoid foreclosure. Included in this initiative was a modification program but only certain loan qualify. To be eligible for this program, your loan must be a conventional loan originated prior to January 1, 2009, and it must be your primary residence. It also must be serviced by a participating lender. Currently, there are 69 lenders participating in the program representing roughly 75% of all conventional loans, so most mortgages originated over the past several years should qualify. If you have a government loan such as an FHA or VA loan, you can also pursue a modification, but the rules are slightly different. For example, with an FHA loan, you must be behind on your payments by at least 60 days before a modification request will be considered. Under “Making Home Affordable”, there is no requirement that you be past due.

All is not lost for loans that fail the test for qualifying under the “Making Home Affordable”. Your mortgage may still be eligible for modification outside of the government sponsored program if you can demonstrate imminent default, limited assets, and negative cash flow each month.

There are two ways to pursue a mortgage modification. You can contact your lender directly and see if you qualify, but beware, you will likely be working with the bank’s collection department and anything you say and do during the process can be used to collect from you. It might prove more beneficial to work with a mortgage lender that provides these services. They can then act as your advocate in the negotiation process. Be sure to look for a lender that does not charge any up-front fees and that has experience in working with these programs. You should also make sure your lender is accredited by the Better Business Bureau and has a clean track record with your state’s regulatory agency.

The costs involved in a mortgage modification are similar to what you might pay a lender to refinance your mortgage where you would be paying origination fees and other closing costs. In our experience, $2500 - $5000 would represent a reasonable expense depending on the size of your loan.

 

The popular $8,000 First Time Homebuyer Tax Credit has now been extended to April 30, 2010, and expanded to include a $6,500 tax credit for existing homeowners who have been in their cuurrent home five years and decide to buy a new home. There are some little known facts about the tax credit that buyers should be aware of as they embark on their quest to find their dream home.

First, the income limits have been expanded to $125,000 for single taxpayers and $225,00o for joint filers. This means that whether you are single or married, the value of the tax credit is the same. However, spouses who file separately are limited to $4,000 per person. The maximium income limits are not based upon gross income, but adjusted gross income, which is your income after deductions for things like IRA contributions, business or capital losses, and deductions for student loan interest paid. Furthermore, taxpayers can still get a partial credit if their income exceeds the limit based upon the IRs' Modified Adjusted Gross Income formula.

Second, buyers in low priced housing states should be aware that the tax credit is limited to the lesser of 10% of the purchase price, or $8,000. Not an issue for buyers in California, but perhaps an issue for buyers in Mississippi where the average home value is far lower and may be less than the $80,000 required for the maximum tax credit.

If a multi-family property is purchased, the tax credit is limited to 10% of the purchase price of the value of the unit in which the buyer resides. As an example, if a $150,000 duplex is purchased and each unit is of equal size and value, the tax credit will be limited to $7,500, or 10% of the $75,000 value assigned to one half of the duplex.

Buyers who purchase a newly built home should be aware that the effective date is the date the homeowner actually occupies the property, rather than the date of purchase or the date construction starts. This could complicate matters for buyers purchasing at year-end to take advantage of year-end builder close-outs. However, a subsequent buyer does benefit from the fact that their exisitng home does not have to be sold in order to qualify for the tax credit.

Home buyers should also be aware of the residency requirement. For example, if a buyer ceases to use the home as their primary residence within 36 months, the amount of the tax credit claimed is due and payable in full in that year. Therefore, if you move regularly with your job, or decide to turn the property into a rental, you might think twice about claiming the credit.

The Internal revenue Service will continue to provide updates to its site at http://www.irs.gov/newsroom/article/0,,id=187935,00.html so homebuyers can make educated decisions regarding their home purchase. All taxpayers should know that the final decision on whether you qualify for the tax credit rests in the hands of the IRS, so be prepared.

With all of the recent discussion of the first-time homebuyer tax credit, more and more homeowners are exploring the tax benefits of home ownership. There are many different ways you can gain tax benefits from a home purchase or a mortgage refinancing. This article will take you through five popular tax reduction opportunities associated with home ownership.

1. First-Time Homebuyer Tax Credit - This is one of the most powerful tax incentives to come along in years for home buyers. Better than a deduction, which just reduces the amount of income you are taxed on, a tax credit provides a dollar-for-dollar offset of your Federal income tax liability. As an example, if you owed $10,000 in taxes, the $8,000 tax credit would reduce your tax liability to $2,000. Furthermore, this is a refundable tax credit, meaning that even if your tax liability doesn't amount to $8,000, you get the balance as a check. To qualify for this tax credit, you must not have owned a primary residence in the past three years, and your income cannot exceed $125,000 as an individual filer, or $225,000 for married taxpayers. The credit is limited to 10% of the purchase price with a maximum of $8,000. A new provision in the bill was the introduction of a $6,500 tax credit for existing homeowners to purchase a new home. To qualify for this credit, you must have lived in your current home for five consecutive years out of the past seven. More details on the credit are available at www.federalhousingtaxcredit.com.

2. Home Mortgage Interest Deduction - Taxpayers are allowed to deduct the interest paid on their mortgage each year. Your lender will provide you with an IRS Form 1098 each year indicating the amount of mortgage interest paid. To utilize this deduction, you need to itemize your taxes. You enter the interest paid on Schedule A of your tax return. The amount of your deduction is limited to $1 million worth of mortgages (i.e. first and second), and your mortgage must have been used to purchase, build or improve a home. Lastly, you can also deduct any late fees or prepayment penalties on your mortgage. If you believe your income will be lower this year than next, you might elect to pay your January mortgage payment on the 1st of the year to roll that interest payment into 2010 when it might be more valuable.

3.Home Equity Loan Interest Deduction - Interest paid on a home equity loan is also deductible provided it does not exceed $100,000 in a year. In addition, your deduction may be limited if your combined first and second mortgage loans exceed the property value

4. Deducting Points on a Mortgage - The "points" you pay on a mortgage loan used to purchase, build or improve your primary residence are deductible in the year you purchased the home. Points paid by the seller are also deductible. There are a few caveats, including the fact that your points must be disclosed on your closing statement and your deductible points cannot exceed the total paid in down payment and closing costs.

5. Deduction for Real Estate Taxes - If you itemize, you are able to deduct your annual property taxes. These might represent a combination of property, school, and utility district taxes. For a high property tax state like New Jersey, California, or Texas, this deduction is particularly valuable.

As we have referenced here, most of these deductions are only available to taxpayers who itemize their taxes. In addition, your tax credits and deductions begin to phase out at higher income levels.

In conclusion, there are many ways a homeowner can benefit from the Federal tax code. Combining these benefits makes home ownership even more attractive than it already is. As with any tax related items, you should check with your tax advisor to find out how to maximize homeownership tax reduction strategies.

Now that the first-time home buyer tax credit has been extended into mid-2010, many future homeowners may be tempted to take advantage of record low mortgage rates and year-end builder incentives. After all, a builder’s loss in a struggling housing market is your gain, right?

Well, maybe. There are certainly fewer new homes available today than just a couple of years ago. Let’s take a look at the pros and cons of new home construction.

Pros:

• You can customize the home to your family needs and stylistic preferences.
• New homes have more energy efficient features than homes built just a few years ago.
• New communities usually offer more neighborhood amenities like swimming pools, a clubhouse, tennis courts, athletic fields, and bike trails.
• Builder-funded incentivesfor upgrades, closing costs, or cash rebates are widely available.
• New home warranties are often more comprehensive than standard home warranties and may include foundation and structural coverage for 10 years or more.
• New homes carry fewer maintenence and repair items.

Cons:

• Development plans may change if your developer goes belly-up, or sells out to another company with far less ambitious plans. This could mean fewer amenities, or the introduction of lower-end homes not part of the original plan.
• New construction tends to take place on the outer fringes of development, meaning longer commute times and a public infrastructure (i.e. roads) that has not caught up to the population.
• With a new home, you are usually buying at the top of the market, so plan on taking a loss on your home if you move in five to seven years. You may also be competing with new construction when you do sell.
• Your builder may be subsidizing your Homeowner’s Association dues, which may end up much higher than where they start out.
• New Municipal Utility Districts (MUDs) often mean higher property taxes for new home communities than for older neighborhoods.
• Builder title and mortgage incentives create an inherent conflcits of interest becuase you have to use a builder-owned title or mortgage company. While it may appear more convenient or, they are working for the builder, not for you. Incentives offered are typically just offset with a higher purchase price, higher fees, or higher rates. 

Ultimately, your choice of a home should be driven by the things that are important to you. Schools, amenities you will actually use, commute time, taxes, crime, and quality of life. This being said, when viewing your home as an investment, keep in mind an important rule of successful real estate investment: Buy low and buy location.

It's finally a done deal. After considerable debate and compromise the Senate and House of Representatives passed a bill this week that both extended unemployment benefits as well as the popular first-time homebuyer tax credit which was set to expire at the end of November. An economist for the National Association of Realtors has estimated that the tax credit, combined with low mortgage rates, has generated $22 billion in economic activity this year, and will have helped 2 million people buy a home in 2009. In Houston, home sales have climbed dramatically since the post-Ike lows of last Fall.

Here are the specifics:

• The tax credit remains at $8,000 for first-time hombuyers, which is defined as a buyer who has not had an ownership interest in a primary residence for the past three years.
• The income limitations have been increased from $75,000 for single taxpayers and $150,000 for joint filers, to $125,000 for single filers and $225,000 for joint filers.
• The credit has been extended to homes that are under contract by April 30th, 2010, and that are closed by July 1st, 2010.
• A tax credit has been added which will provide $6,500 to existing homeonwers, who have been in their current home at least five years, towards the purchase of a new home.

The tax credit now also carries a five year residency requirement, meaning that if the home is sold within five years, a prorated portion of the tax credit must be repaid. Lastly, to prevent the many cases of fraud that have been associated with the tax credit, proof of purchase must be provided.

Beyond the stimulation of the housing sector, the tax credit also drives consumer spending, as new homeowners will likley use at least a portion of the tax credit towards home improvements or home furnishings.

The extension of the tax credit, combined with continued low mortgage rates, should continue to drive the housing sector through the second quarter of next year.