New Housing Bill…Lot’s of Good, But it Has a Few Catches

Westcoe Realtors, Riverside California…The new housing bill that has just been signed into law this morning by President Bush contains many interesting elements…elements that have been designed to help people who have been affected by the current downturn of the housing market.  However, there are a couple of “catches” that have not yet been reported by the mainstream press (wow…there is a new thought…the press has only part of the story) that everyone who may consider using this bill should know.  Specifically, I will discuss the two main components of the bill that will affect the most people:  The FHA loan rescue for troubled homeowners, and the $7,500 Tax Credit for first time home buyers.

FHA HOME LOAN RESCUE…

BASIC IDEA…to have FHA help homeowners who wish to refinance out of their high-rate loans into a fixed, 30 year loan payment at today’s current rates.

COMPONENTS OF THIS PLAN

1.  The loan you want to replace has to have been originated before January 1, 2008.

2.  The property in question must be your residence…no helping investors on their rental properties.

3.  As of March 1, 2008, your existing loan payment on the loan you want to get rid of must be at least 31% of your monthly household income.  For example, if your household income is $4,500 per month, then your house payment MUST be at least $1,395 per month.  It can be higher, but not lower.  It cannot be lower than that because the government feels if it is lower than 31% of your monthly income, then you should have been able to afford the payment in the first place.

4.  FHA will only finance 90% OF THE CURRENT VALUE OF THE HOME.  Again, for example, if you owe $375,000 on your loan(s), and the current value of your home is now $300,000, then FHA will only lend $270,000 for your new loan ($270,000 is 90% of the current value of $300,000).  That means your existing lender must agree to waive/lose the difference between your new loan and the old loan…in this example, $105,000.  If your existing lender will not do this, then you cannot refinance.  The theory here is that your existing lender would rather lose the $105,000 than foreclose, which in many cases would cost them more than the $105,000.  Your existing lender must also agree to pay a 3% loan origination fee to FHA…which in our example above, would be $8,100 (the 3% is calculated on your new loan amount of $270,000.)

The above are the basics of the FHA refinance program…BUT THERE IS ONE ADDITIONAL ASPECT TO THIS REFINANCING THAT HAS YET TO BE REPORTED BY ALMOST EVERYONE…AND THAT IS THE FOLLOWING:

5.  If you get the new FHA loan above, THEN IF YOU SELL YOUR HOME WITHIN 5 YEARS, YOU WILL HAVE TO PAY FROM 50% TO 100% OF ANY MONEY YOU MAKE ON THE SALE OF THE HOUSE.  The idea here is that if the government is going to bail you out, and your existing lender is going to lose/waive/forgive the money necessary for you to get your new loan, then the government does not want you selling at a profit anytime soon.  So…if you are going to go down this road, you better stay put, or you cannot make any money if your home value rises in the next 5 years.

$7,500 TAX CREDIT FOR FIRST TIME HOME BUYERS…

BASIC IDEA…To help first time buyers get a new home at what are now more affordable prices.  Understand that at tax credit is much better than a tax deduction.  A tax deduction simply lowers your income by the amount of the deduction…a tax credit lets you take that amount right off the taxes you owe.

COMPONENTS OF THIS PLAN

1.  The first time home you are buying must be your primary residence…no rentals.

2.  Tax credit will be 10% of the sales price of your new home, or $7,500, whichever is smaller.

3.  A single individual cannot make more than $75,000 annual income, or the credit begins to phase out.  If a single individual makes $90,000 or more, there is no tax credit available at all.  For married couples, the numbers double to $150,000 and $180,000.

 The above represents the basics of the tax credit program, BUT AS IN THE FHA REFINANCE PROGRAM, THERE IS ONE ASPECT TO THIS TAX CREDIT PROGRAM THAT HAS YET TO BE REPORTED BY THE MEDIA…and that is as follows:

4.  If you qualify and receive a tax credit for the purchase of a new home, YOU WILL BE REQUIRED TO PAY BACK THE TAX CREDIT TO THE GOVERNMENT OVER THE NEXT 5 YEARS IN EQUAL INSTALLMENTS.  That means that instead of receiving an actual tax credit, you are basically getting an interest free loan that is to be repaid on an annual basis.  There is no “free” with this program…just some help to get you started now…help that will be repaid over the next 5 years.

In the end, whether you want to use any of the provisions described here or not, all we care about is that you truly understand what you are agreeing to do…because failure to fully understand all aspects of real estate financing are what got many people into the situation they now face.  Good communication between you and your new lender is critical in this process. 

Good luck, and let us know if you have any questions.  There will lots of bugs to work out as this legislation gets implemented at the street level, but we will help you in any way we can.