Nov. 21, 2008 - Is Now Really a Good Time to Buy a House?

Deciding to buy a house is never an easy decision and all of the bad news about the housing market can make even the most optimistic person skeptical.  So, if you've been wondering if now is the time for you to buy a home, it's time to take a look at the reasons why you might want to make your move soon.

Housing Inventory is Very High:

Right here in Fairfield County there are more houses and condos for sale in every price range than there have been in many years, so a buyer can be selective.  In some towns there are so many houses for sale that it will take over a year, at current sales rates, for all of the homes currently on the market to be sold (and new houses continue to come on the market every day).  High inventory also means that there is more competition, so (most) sellers realize that they need to be flexible in the price and terms they are willing to accept for their house.

Prices Have Come Down:

Fairfield County's housing market hasn't been as hard hit as other parts of the country, but prices have come down almost everywhere.  That means that whether you were planning on spending $200,000 or $2,000,000, you'll likely be getting more house for your money.  If you're worried that the price decline will mean that your house will lose value after you buy it - don't. Real estate is an investment, but it's an investment you live in, so how much you gain on the investment is important, but having a home of your own to enjoy is priceless. 

Foreclosures & Short Sales are Everywhere:

Almost 1 in 3 homes for sale in the area are either already a Bank Owned Foreclosure or a possible Short Sale.  If you have a lot of patience and can be flexible about your moving dates, then you should consider looking into a Short Sale or Foreclosure property.  I mention the need for patience, because both Short Sales and Foreclosures usually require more time and paperwork than a typical home purchase.  With a Short Sale, you are at the mercy of the bank and may have to wait months to find out whether or not they will accept the price that you've offered for a house.  And with both types of deals, you're likely to be buying the house in "as-is" condition.  So you want to be sure to hire a licensed, experienced Home Inspector who will give the house a thorough inspection and let you know what work, if any, the house will require.  In either case, you want to be sure to choose a Buyers' Agent and Attorney who are experienced in dealing with these types of deals so that they can walk you through the process and keep on top of all of the details.

Mortgage Rates are Still Low:

Fixed Rate mortgages are still hovering around 6% for a 30 year term, which if you compare it to the rate that you might be paying on other debt, such as credit cards, is really good for the long term.  Talk to a mortgage broker or your local bank to find out what type of mortgage programs they are offering and how much of a mortgage you are qualified to borrow.  You may be surprised to find out that you could buy a condo or house and have mortgage payments that are less than your current rent.

Now that you've got a grasp of the general reasons why now is a great time to be buying a house, you need to think about your personal situation.  Ask yourself these questions to help determine whether now might be the right time for you to buy:

1. Do you plan to stay in the same area for at least 3 years?
2. Do you have any savings you can use for a down payment?
3. Are you confident that you'll stay employed, with the same level of income, for at least another year (longer is always better)?
4. Do you have other debts that you could/should pay off first?
5. Do you have enough income to pay the mortgage, taxes, insurance, common charges (for condos) and maintenance costs without stretching yourself too thin?
6. Are you ready to be a homeowner?

If you can answer all of those questions in the affirmative (except number 4 - you should pay down other debts, if possible, before taking on more debt) and feel comfortable that buying your own home will enhance your life, then go for it.  Find a dedicated Buyers' Agent who is ready to guide you along the path to home ownership and get ready to start your journey.

Oct. 29, 2008 - Guest Post: FAQs About the First Time Homebuyer Tax Credit

A wonderful mortgage broker I know, Nima Rezvan, with LADD Financial , recently posted a comprehensive article on Facebook that answers the most Frequently Asked Questions about the First Time Home Buyer Tax Credit.  With his permission, I'm reprinting it in full below.  If you have any further questions, feel free to post a comment or contact him directly.

Nima Presents: Frequently Asked Questions About the First-Time Home Buyer Tax Credit

The Housing and Economic Recovery Act of 2008 authorizes a $7,500 tax credit for qualified first-time home buyers purchasing homes on or after April 9, 2008 and before July 1, 2009. The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.

1. Who is eligible to claim the $7,500 tax credit?

First time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after April 9, 2008 and before July 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs.

2. What is the definition of a first-time home buyer?

The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.

3. How do I claim the tax credit? Do I need to complete a form or application?

Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. No other applications or forms are required. No pre-approval is necessary; however, prospective home buyers will want to be sure they qualify for the credit under the income limits and first-time home buyer tests.

4. What types of homes will qualify for the tax credit?

Any home purchased by an eligible first-time home buyer will qualify for the credit, provided that the home will be used as a principal residence and the buyer has not owned a home in the previous three years. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats.

5. Instead of buying a new home from a home builder, I have hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?

Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been "purchased" on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after April 9, 2008 and before July 1, 2009.

In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.

6. What is "modified adjusted gross income"?

Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.

To determine modified adjusted gross income (MAGI), add to AGI certain amounts such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.

7. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?

Possibly. It depends on your income. Partial credits of less than $7,500 are available for some taxpayers whose MAGI exceeds the phase-out limits. The credit becomes totally unavailable for individual taxpayers with a modified adjusted gross income of more than $95,000 and for married taxpayers filing joint returns with an AGI of more than $170,000.

8. Can you give me an example of how the partial tax credit is determined?

Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phase-out to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $7,500 by 0.5. The result is $3,750.

Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $7,500 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,625.

Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.

9. Does the credit amount differ based on tax filing status?

No. The credit is in general equal to $7,500 for a qualified home purchase, whether the home buyer files taxes as a single or married taxpayer. However, if a household files their taxes as "married filing separately" (in effect, filing two returns), then the credit of $7,500 is claimed as a $3,750 credit on each of the two returns.

10. Are there any circumstances for which buyers whose incomes are at or below the $75,000 limit for singles or the $150,000 limit for married taxpayers might not be able to claim the full $7,500 tax credit?

In general, the tax credit is equal to 10% of the qualified home purchase price, but the credit amount is capped or limited at $7,500. For most first-time home buyers, this means the credit will equal $7,500. For home buyers purchasing a home priced less than $75,000, the credit will equal 10% of the purchase price.

11. I heard that the tax credit is refundable. What does that mean?

The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.

For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that taxpayer qualified for the $7,500 home buyer tax credit. As a result, the taxpayer would receive a check for $6,500 ($7,500 minus the $1,000 owed).

12. What is the difference between a tax credit and a tax deduction?

A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $7,500 in income taxes and who receives a $7,500 tax credit would owe nothing to the IRS.

A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $7,500 in income taxes. If the taxpayer receives a $7,500 deduction, the taxpayer’s tax liability would be reduced by $1,125 (15 percent of $7,500), or lowered from $7,500 to $6,375.

13. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?

No. The tax credit cannot be combined with the MRB home buyer program.

14. I live in the District of Columbia. Can I claim both the DC first-time home buyer credit and this new credit?

No. You can claim only one.

15. I am not a U.S. citizen. Can I claim the tax credit?

Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of "nonresident alien" in IRS Publication 519.

16. Does the credit have to be paid back to the government? If so, what are the payback provisions?

Yes, the tax credit must be repaid. Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit until two years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed. If the home owner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven.

17. Why must the money be repaid?

Congress’s intent was to provide as large a financial resource as possible for home buyers in the year that they purchase a home. In addition to helping first-time home buyers, this will maximize the stimulus for the housing market and the economy, will help stabilize home prices, and will increase home sales. The repayment requirement reduces the effect on the Federal Treasury and assumes that home buyers will benefit from stabilized and, eventually, increasing future housing prices.

18. Because the money must be repaid, isn’t the first-time home buyer program really a zero-interest loan rather than a traditional tax credit?

Yes. Because the tax credit must be repaid, it operates like a zero-interest loan. Assuming an interest rate of 7%, that means the home owner saves up to $4,200 in interest payments over the 15-year repayment period. Compared to $7,500 financed through a 30-year mortgage with a 7% interest rate, the home buyer tax credit saves home buyers over $8,100 in interest payments. The program is called a tax credit because it operates through the tax code and is administered by the IRS. Also like a tax credit, it provides a reduction in tax liability in the year it is claimed.

19. If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?

Yes. The law allows taxpayers to choose ("elect") to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.

20. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?

Yes. If the applicable income phase-out would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.

21. Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2008 tax return?

Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the future home buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the down payment. Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.

Aug. 7, 2008 - If I Could Do It Over, Would I Do It Differently?

In an earlier blog post I told the story of when my husband and I bought our first home.  Now that we are getting ready to move from there, I've started thinking...if we were starting over, would we still buy the same condo?  To gain some insight, I logged in to my MLS and took a look back at what other condos sold during the same time we purchased ours.

And what did I find?  Well, there were lots of options at the time that we should have explored.   Some condos had the same (or more) space for lower prices and were still close to a train station (the most important factor for us).  There were even some condos right down the street from us that were almost $100,000 less than what we paid.  Granted, those condos didn't have as much space, but they were still larger than our Manhattan apartment, so they would have seemed big to us.    The only big difference between our condo and the competition was that ours was brand new, which I now know isn't always as great as you would expect.

So, do I have buyer's remorse 6.5 years later?  Absolutely not.  Our condo has been a great home for us over these years and that's really the most important thing.  And if we had bought something smaller, we likely would have moved a few years ago before our son turned into an over-active pre-schooler.  For us, being able to stay in one place for almost 7 years was a good thing (we'd both moved way too often through our college & early post-college years) and I'm glad that we were able to move when we wanted to and not because we had to move.

What can you learn from my experience?  Don't make the same mistakes we did.  Be sure you're making the right decision for you by:

• Exploring all of your options - look at different styles, sizes and price ranges
• Thinking of it as home, not just an investment
• Buying for the long term so you won't feel like you've outgrown it before 3 - 5 years
• Planning for the inevitable - taxes will go up, common charges may raise, insurance will increase - make sure these cost increases won't cost you your home

Take all of these factors into account so you'll be making a choice that makes you happy and makes good sense.

Jul. 9, 2008 - My First-Time Home Buying Experience

As I mentioned in my first post, my husband and I bought our first home - a condo - six years ago in February 2002.  Here's our story...

Our original plan was to rent an apartment so we could get used to the area.  We didn't even think about buying until the first real estate agent we talked to asked us if we had been qualified for a mortgage.  Boy was she a smart one  - we got on the phone with the mortgage broker she recommended and were qualified for a mortgage right away just in case we saw something we wanted to buy.  Although we were qualified for up to $300,000 we told her we only wanted to spend about $150 - $200K to stay well within our budget.

1. We didn't even attempt to negotiate the builder's price, ask for upgrades or changes to the standard fixtures.  The builder's agent told us the price was what was listed and we believed him (we later learned that other buyers had negotiated lower prices and some upgrades).
2. We didn't do a Home Inspection - it was new, we thought, and the builder has to give us a 1 year warranty, so what could be wrong?  Even though nothing major has gone wrong in 6 years - a home inspection would have found some issues that we didn't find until well after the 1st year and would have taught us some valuable information about home maintenance.
3. We didn't really explore all of our options and we could have gotten more for less.
4. We had no idea how many things could change or go wrong with a new condo association.  Our common charges jumped up by $20/month as soon as the association was formed, we've had numerous increases since then totaling over $80/month along with paying almost an extra year's worth of common charges in special assessments for emergency repairs and budget shortfalls over the 6 years we've lived here.  There's no guarantee that things like that wouldn't have happened in a more established complex, but a long financial history gives more chance for things to remain stable.