Category — First Time Homebuyers

The widely watched released their home price numbers yesterday and   show that the U.S. National Home Price Index improved in the second quarter of 2009. The data covers 20 cities across the US and reports that the index rose quarter-over-quarter by 1.4% but fell 15.4% year-over-year.

While these numbers may be reassuring to some it has not been without a huge price tag as mentioned here. Can it continue when the stimulus money stops or will it just fizzle out as it did last year? It is hoped that it will create a sense of urgency among buyers that they must act now before they miss the bottom which is being experienced in many housing markets reporting multiple contract offers on listings, something we have not seen in a very long time.

So while this report gives cause for hope, there are still issues in unemployment, foreclosures, new housing inventory, first time homebuyer tax credit ending and Alt-A option arm resets all showing we still have a long road to recovery but could the worst be behind us?

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National Association of Realtors last week reported existing home sales had increased for the fourth month in a row. Existing homes, or homes that are previously owned, were up 7.2% to an annualized rat of   5.25 million compared with June and 5% from July 2008.

While many are standing on their soap boxes preaching the end of the crisis as we know it there is strong evidence that we are not out of the woods yet. While yes prices are down, mortgage rates are historically low and strong government incentives; these are exactly the issues in the marketplace.

* Prices are still down 32% from their peak and have not turned
* 30% of home sales in July were First Time Home Buyers
* 31% of home sales were distressed sales or sales of homes in foreclosure (First time in history)

Look at it; we still have huge amounts of “known” inventory on the market. We have government intervention that is artificially reducing this inventory through first time home buyer incentives, loan modifications, short sales and BILLIONS being spent weekly to keep mortgage rates low. You have lenders suspected of withholding foreclosed inventory off the market, by some accounts only about a third of repossessed houses are being actively marketed. Many home sellers above $250,000 taking their unsold home off the market and we may have another round of foreclosures due to “Alt-A” and option arm mortgages that will begin resetting and unemployment levels and underwriting guidelines are still tightening.

While sales of homes to first time home buyers has been a huge drag on home prices I don’t think we can conclude a turn around until prices collectively, actually start to increase, government intervention stops and monthly inventories are reduced.

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For first time homebuyers out looking for homes that will utilize the $8,000 tax credit, times a running out. November 30th, 2009 is the final day to close and with the new Truth in Lending MDIA disclosure it could take up to 45 days to close on the loan.

The First Time Homebuyer Tax Credit was passed as part of Obama’s American Recovery and Reinvestment Act of 2009, signed into law by President Obama on February 17, 2009, crediting up to $8,000 in tax payments to qualified first time home buyers. The maximum tax credit for an individual first time home buyer is 10% of the purchase price, up to $8,000.

Who qualifies for the $8,000 First Time Home Buyer Tax Credit?

• Must be a first time home buyer defined as no home ownership in the last 3 years, so prior ownership does not disqualify them only home ownership in the last 3 years
• No repayment is required if the buyer owns and occupies the property for 36 months
• The tax credit starts to phase out for an individual taxpayer with a modified adjusted gross income from $75,001 to $95,000 for single filers and $150,001 to $170,000 for joint filers.

Who does not qualify for the $8,000 First Time Home Buyer Tax Credit?

• The property is acquired from a related person
• The property is acquired by gift or inheritance
• The buyer is a nonresident alien
• The buyer disposes of the property before the end of such taxable year

A common misconception about the $8,000 First Time Home Buyer Tax Credit is that it is a true credit and not a deduction. So if you typically get a refund you would get $8,000 above and beyond your typical refund. Conversely if you owe every year your $8,000 would be deducted from the amount you owe.

You can check out the IRS publication at your convenience and remember if you do not have a ratified contract and make loan application by October 15, 2009 chances are your will not close by the November 30, 2009 deadline and you will end up at the short end of the stick.

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During the past couple of years as mortgage guidelines have tightened, home buyers have had to come up with larger down payments when purchasing a home. Whether the application is for a conventional home loan or an FHA loan, banks want the home buyer to contribute more money to the purchase. Sad to say, not all buyers have the money.

This is one reason that more and more home buyers are requesting “down payment gifts” from family members. Many potential home buyers don’t want to miss their opportunity now that home prices have dropped, mortgage rates are low and a generous first-time home buyer tax credit is available.

But if a monetary gift will be in the mix for financing the purchase of your home, you should understand that there is a right way and a wrong way to proceed. So before you run out to your parents and say “show me the money“, it is just not possible to simply put the funds from your parents in your bank.

A three step process is involved when you accept cash for a down payment. If you fail to follow these steps precisely, it is quite likely that an underwriter will disallow the gift as a source of down payment potentially delaying closing or killing the deal altogether.

The first thing to do is to create and endorse an acceptable gift letter. While there are a number of variations of the “Down Payment Gift Letter,” the basic format is pretty much the same in each.

• States the amount of the gift
• Specifies the subject property address
• States the gifters name, address and phone
• Specifies the relationship of the gifter to the giftee
• Specifies that the gift is an actual gift and not a loan
• Endorsed and dated by all parties

If you do not have a lender gift letter I would be glad to send you one that I use for my clients. Its universal and accepted by all lenders. Just send me an email.

Once the gift letter is in place, the person making the gift should create a strong paper trail for the money that is being provided as a gift. This is one reason why it is preferable to use certified checks rather than wire transfers. While both methods are acceptable forms of gifting, a certified check provides documentation in the form of a teller receipt, making it easier to prove.

Be sure that the amount specified in the gift letter matches the amount of the actual gift.

Finally, when a giftee accepts the gift, it has to be “as is.” Make the deposit directly to a bank teller at a branch of the bank, being careful not to merge the deposit with other monies. For a gift in the amount of ten grand, for instance, you should deposit exactly that amount. That is to say, don’t add any other money to the deposit. If you follow these three steps, you should not have any problem.

In the meantime, you could face legal and tax ramifications if gifts of money are exchanged among relatives. In case you don’t know how a donation or gift receipt would affect you, remember to discuss this with your lawyer or accountant.

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