As of October 2008 the lenders have changed the way they look at rental income if you are planning on renting out your current home and buying another home. The old rule of thumb where the lender gives you credit for 75% of rental income does not apply any longer.

FANNIE MAE rules as of August 1, 2008

It is much more difficult to qualify for the loan if you are keeping your current home and going to be renting it out and buying a new home. One of these three scenarios must apply:

1. Current home pending sale

• The lender will count both house payments, the old house and the new house in the qualifying ratios unless there is an executed purchase contract on the old house and all the lenders financing contingencies have been cleared
• Required cash reserves after closing; enough to make 6 months house payments on both properties, less if you can document 30% equity in the home you are selling

2. Existing home converts to a Second Home

• Count both house payments, old and new in qualifying ratios
• Require cash reserves of 6 months house payments on both properties, less if 30% equity in home converting to a second home

3. Existing home converts to a rental property

• Count both house payments, old and new in qualifying ratios. Rent may be used to offset payment ONLY if a new appraisal verifies 30% equity, home is leased, and security deposit is verified
• Cash reserves after closing, enough to make 6 months house payments on both properties

Bottom line-

Anytime you are thinking of retaining ownership in your current primary residence and need to close on a new primary residence, you must qualify with both payments and you have cash reserves of 6 months payments for both properties. The only time this does not apply is if you have 30% or more equity in the property you are retaining and a lease with a verified security deposit or the home is sold with a valid purchase contract and all financing contingencies have been removed.

Be sure and speak with your lender as soon as possible if you are thinking of retaining your current primary residence as a rental and purchasing a new primary residence. Your lender can advise you as to the best way to proceed.

Homebuyer Tax Credit Update!

On November 6, 2009, President Obama signed a bill to extend the tax credit for first-time homebuyers April 30, 2010. The bill also opens up opportunities for others who are not buying a home for the first time.

TAX CREDIT OVERVIEW

Who Gets What?

First-Time Homebuyers (FTHBs):First-time homebuyers (that is, people who have not owned a home within the last three years) may be eligible for the tax credit. The credit for FTHBs is 10% of the purchase price of the home, with a maximum available credit of $8,000

Single taxpayers and married couples filing a joint return may qualify for the full tax credit amount.

Current Owners: The tax credit program now gives those who already own a residence some additional reasons to move to a new home. This incentive comes in the form of a tax credit of up to $6,500 for qualified purchasers who have owned and occupied a primary residence for a period of five consecutive years during the last eight years.

Single taxpayers and married couples filing a joint return may qualify for the full tax credit amount.

What are the New Deadlines?

In order to qualify for the credit, all contracts need to be in effect no later than April 30, 2010 and close no later than June 30, 2010.

What are the Income Caps?

The amount of income someone can earn and qualify for the full amount of the credit has been increased.

Single tax filers who earn up to $125,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, single filers who earn $145,000 and above are ineligible

Joint filers who earn up to $225,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, joint filers who earn $245,000 and above are ineligible.

What is the Maximum Purchase Price?

Qualifying buyers may purchase a property with a maximum sale price of $800,000.
  
What is a Tax Credit?

A tax credit is a direct reduction in tax liability owed by an individual to the Internal Revenue Service (IRS). In the event no taxes are owed, the IRS will issue a check for the amount of the tax credit an individual is owed. Unlike the tax credit that existed in 2008, this credit does not require repayment unless the home, at any time in the first 36 months of ownership, is no longer an individual’s primary residence.

How Much are First-Time Homebuyers (FTHB) Eligible to Receive?

An eligible homebuyer may request from the IRS a tax credit of up to $8,000 or 10% of the purchase price for a home. If the amount of the home purchased is $75,000, the maximum amount the credit can be is $7,500. If the amount of the home purchased is $100,000, the amount of the credit may not exceed $8,000.

Who is Eligible fort FTHB Tax Credit?

Anyone who has not owned a primary residence in the previous 36 months, prior to closing and the transfer of title, is eligible.

This applies both to single taxpayers and married couples. In the case where there is a married couple, if either spouse has owned a primary residence in the last 36 months, neither would qualify. In the case where an individual has owned property that has not been a primary residence, such as a second home or investment property, that individual would be eligible.

As mentioned above, the tax credit has been expanded so that existing homeowners who have owned and occupied a primary residence for a period of five consecutive years during the last eight years are now eligible for a tax credit of up to $6,500.

How Much are Current Home Owners Eligible to Receive?

The tax credit program includes a tax credit of up to $6,500 for qualified purchasers who have owned and occupied a primary residence for a period of five consecutive years during the last eight years.

Can Homebuyers Claim the Tax Credit in Advance of Purchasing a Property?

No. The IRS has recently begun prosecuting people who have claimed credits where a purchase had not taken place.

Are There Other Restrictions to Taking the FTHB Credit?

Yes. According to the IRS, if any of the following describe a homebuyer’s situation, a credit would not be due:

• They buy the home from a close relative. This includes a spouse, parent, grandparent, child or grandchild. (Please see the question below for details regarding purchases from “step-relatives.”)
• They do not use the home as your principal residence.
• They are a nonresident alien.
• They owned a principal residence at any time during the three years prior to the date of purchase of your new home. For example, if you bought a home on July 1, 2008, you cannot take the credit for that home if you owned, or had an ownership interest in, another principal residence at any time from July 2, 2005, through July 1, 2008.

 Can Homebuyers Purchase a Home from a Step-Relative and Still be Eligible for the Credit?

Yes. As long as the person they buy the home from is not a direct blood relative, the purchase would be allowed.

If a Parent (Who Will Not Live In The Property) Cosigns for a Mortgage, Will Their Child Still be Eligible for the Credit?

Yes, provided that the child meets the other requirements for the tax credit.

As always regarding tax talk, check with your own personal tax advisor to discuss your situation to confirm you qualify.

Senators Say Homebuyer Tax Credit Is “In the Bag”

10/28/2009 By: Carrie Bay

Article provided by DSN news on 10/29/09

Well, there are a couple of different options they are working on right now in the Senate so it is extremely hopeful that the $8,000 tax credit will be extended or a modification of the current tax credit. Good news for everyone! I will keep you posted as I hear more next week.

Can you help me? I need suggestions from potential Buyers and Sellers on how as Realtors we can provide better service to our clients. What can we do to improve as an industry?

I know one of my pet peeves are Realtors that don’t answer their phones or bother to call you back if you do leave a message.

What are your pet peeves?

One of my clients asked me,  ”Ok, what do I have to do to buy a house in this market? ” We have been looking at homes that are priced under $140,000 in Sacramento and making offers over asking prices and not getting accepted. This first time buyer is an FHA buyer that needs credits from the Seller for closing costs.

Some of the homes we have looked at do not qualify for FHA financing as the appliances are missing, the air conditioner is missing or the property is just too damaged. Then we see other homes that are beautiful! The kitchens have been recently upgraded and the paint and carpet are all new. The majority of these homes are not eligible for FHA financing for 90 days as the current owner just purchased the home and has fixed it up and is now reselling it at a profit.

What I explained to my client is in this market, the first time home buyers and the investors are competing for the same homes. If a Seller receives an offer of all cash, close in 10 days or an FHA first time home buyer close in 30 days, requesting funds back for closing costs, typically the Seller will select the all cash offer. So, it is not always the price but also the terms of the offer that make the difference.   

So, if you can reduce the amount of credits for closing costs, be ready for a quick close and offer a fair price, you will get that dream home eventually. The first time home buyer is making approximately 25 or more offers before getting an offer accepted.

 So hang in there and don’t get discouraged. There is a reason for everything. You will eventually get an offer accepted on a dream home for you and your family!