Tri-City Area and Real Estate Blog

More homeowners facing foreclosure are turning to short sales as a way of getting out of a troubling financial situation and with the shaky real estate market, more banks are accepting short sales from troubled borrowers.

At the beginning of November, there were about 1,600 homes on the market in the Tri-Cities and about 30 of those are seeking bank approval for short sale. With the average cost of foreclosure around $38,000, the short sale is one way banks can cut their losses, and it’s a growing trend that was relatively rare a few years ago.

A short sale occurs when a homeowner sells a home for less than its current mortgage. The bank or mortgage company agrees to discount the loan balance due to economic or financial hardship of the mortgage holder. The homeowner sells the mortgaged property for less than the outstanding balance of the loan and turns over the proceeds of the sale to the lender. In some cases, but not always, the lender writes off the remaining portion of the debt.

Although Benton and Franklin counties didn’t see big spikes in the real estate prices before the nationwide bubble burst, the area is seeing a slowdown. While sales are slow, notice of trustee sales, the first step in the foreclosures prices are up 5.5 percent for the year.

Unfortunately, many homeowners facing foreclosure aren’t aware of the options available to them and if they file bankruptcy, reasonable options they did have disappear. To make matters worse, more homeowners than ever will likely face foreclosure in 2009.

Existing home sales prices plunged 18.5 percent in the West region in September, according to the National Association of Realtors, driven by rising foreclosures and distressed sales, like short sales, which represent 35 percent to 40 percent of total sales nationwide, and as many as half the homes are in California, Nevada and other former bubble regions.

Whatever the reasons for pursuing foreclosure, homeowners needs to be careful and make sure they know and understand all of their options. In June, a new state law went into effect that was intended to protect homeowners facing foreclosure from equity skimming and foreclosure rescue scams. The law, proposed by Attorney General Rob McKenna, requires those buying ‘distressed’ homes to provide homeowners with a written contract completely describing the terms of the sale - and giving the homeowner the right to cancel the transaction for up to five days following the sale.

Because licensed real estate professionals are not exempted from the law, as they are in similar statutes in other states, the Realtors may have to limit their involvement in distressed sales, or face unanticipated liabilities. Homeowners can receive up to $100,000 in damages for violations of the law. Normally, real estate buyers and sellers have different goals, so under the law, foreclosure or short sale buyers could be sued if they later resell the property at a profit. That fear is keeping real estate investors who delve in the foreclosure market at bay. But the law likely will help homeowners facing foreclosure receive better advice. Realtors, by law, are not allowed to negotiate short sales.

The Real Estate and Lending industries are in fact going through a necessary correction.  The industries became saturate with fly-by-night companies looking to make a quick but short monetary gain, without offering any real value.

Contrary to numerous reports in the media, mortgage funds are still readily available. The credit markets are tight, but it has yet to have any real significant impact on the availability of mortgage financing. Although 100% loans are all but gone, 3% down loans are still available, even for buyers with less than perfect credit. Most of the reports your are hearing about the rapidly disappearing mortgage products have to do with loan programs that were very common in coastal areas.

There has never been a better time to purchase real estate. With inventories at a higher than average level and extremely low interest rates this truly is a wonderful time to move-up or purchase a vacation home. For first-time home buyers there is a window of opportunity that has never before existed to take advantage of a $7500 tax credit.

Interest rates may be on the decline in the next few months. Economic conditions are ripe for improvement. Interest rates can and do move swiftly so it is imperative that your mortgage professional notify you of market conditions.

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.

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 buyers? the law defines ‘first-time home buyers’ as a buyer who has not owned a principal residence during the three-year period prior to this purchase. For married taxpayers, the law test 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 has 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 of 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 phaseout limits. The Credit becomes totally unavailable for individuals taxpayers with a modified adjusted gross income of more than $95,000 and for married taxpayers filing joint returns with an AGI or 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 phaseout 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 $7,5000 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 $7,5000 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 $7,5000 is claimed as a $3,750 credit on each of the two returns.

10. Are their any circumstances for which buyers who 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 $7,5000 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 $75,000. For most first-time home buyers, this means the credit will equal $7,5000. For home buyers purchasing a home priced less that $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 of 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. Supposed now that taxpayer qualified for the $7,5000 home buyer tax credit. As a result, the taxpayer would receive a check for $6,5000 ($7,5000 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 $7,5000 in income taxes and who receives a $7,5000 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 on the 15 percent tax bracket and owes $7,500 in income taxes. If the taxpayer receives a $7,5000 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 only claim 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 owed a principal residence in the previous three year 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 $7,5000 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 resources 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 housing prices.

18. Because the money must be repaid, isn’t the first-time home buyers 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 $4,2000 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 $8,1000 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 phaseout 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.

Is there any way for a home buyer to access the money allocatable 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 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 downpayment. 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.

Brought to you by Distinctive Properties, Inc serving you only in the Greater Tri-City area Kennewick, Pasco, Richland, W-Richland, Finley and Burbank, WA we can connect you to the world through “Leading Real Estate Companies of the Wold”. Real Estate is local, we specialise in this local market.

The housing market in the Tri-Cities is still strong as is the supply of homes as well. And for those first-time homebuyers there is added incentive. Recently, President Bush signed into law, the housing tax credit bill. Here are some of the details:

• A temporary first-time home buyer tax credit. the tax credit wills timulate home buying, reduce excess supply in housing markets and shore up home prices.
• FHA modernization and expansion. A revitalized FHA will have greater flexibility to respond to the needs of borrowers, enable more working families to become home owners and play an important role in the mortgage markets. To address the foreclosure crisis, the FHA is given additional authority to insure up to $300 billion of mortgages to refinance loans headed for foreclosure.
• GSE (goverenment-sponsored enterprise) reform. The law reforms the regulation of Fannie Mae and Freddie Mac and permanently increses the conforming loan limit to help buyers in high-cost markets. To reassure financial and global markets, the government will temporarily expand its line of credit to Fannie and Freddie and permit the U.S. treasury to purchase an equity stake in the companies through the end of 2009.
• Mortgage Revenue Bond Program. The measure gives states the ability to issue an additional $11 billion in mortgage revenue bonds, which will help strapped borrowers seeking to refinance their home loans.
• Low Income Housing Tax Credit. Enhancing this program will expand the supply of much-needed affordable rental housing.

A new website, www.federalhousingtaxcredit.com, which includes a set of comprehensive questions and answeres about how the credit works and how consumers can put it to their advantage.

If you watch only national news of financial turmoil and declining housing prices you may fear that this is not the time to buy a home. While that may be the case in other states, it’s not an accurate picture of the market in the Tri-Cities area. We have a unique set of positive economic variables that sets us apart from other parts of the country, and even other parts of the state.

Long-term mortgage rates are in historically low ranges and, contrary to what you may think, our banks, credit unions, consumer loan companies and mortgage brokers have money available for buyers with reasonably good credit. Also, Congress acted to expand a number of home loan programs. Our financial institutions have a strong presence in the community and have excellent financing options for buyers, including great programs for first-time homebuyers.

Additionally, there is a good selection of new and existing homes in the Tri-Cities right now. The reports heard in the media about plummeting home prices are in areas far from our Tri-City area. Home values here are strong. Perhaps another important factor to consider is the reality that the State’s and Tri-Cities area economy continues to outperform the national economy.

For many buyers looking for that perfect home in the Tri-Cities area, NOW may be the time to buy and get comfortably situated in your new home as Fall approaches. Kennewick, Pasco, Richland and the surrounding areas have many beautiful homes throughout and one of these could be yours!

By Paul A. Smith, TCAJoB

Only July 30, President Bush signed into law a massive housing bill designed to stabilize failing housing markets across the country.  The highlight of the legislation is a $7,500 tax credit for “first-time homebuyers,” who purchase a home between April 9, 2008 and close before July 1, 2008. The measure also includes approximately $15 billion in tax cuts and significant expansion of the low-income housing credit.

But proponents are lauding the 47,5000 credit the loudest because they believe it will move a large amount of potential buyers off the fence about purchasing a home; and those people who felt they couldn’t afford a home before will now consider moving forward because of the credit.

The idea is to create a “trickle-up effect” to jump start the real estate economy by giving incentive for the surplus of renters to take the plunge and buy a house. Sellers then would have buyers and be able to move on and begin purchasing the surplus of unsold high end and new construction homes.

Supporters also believe the bill will eventually lighten the load on banks with a large inventory of foreclosure homes by providing more qualified homebuyers. Naysayers stop short of calling the $7,500 a true credit because of the fact that the amount received would have to be repaid over 15 years, making it in essence a no-interest loan. That calculates out to a $500 minimum payment added to the mortgage and taxes due each year. According to analysts, the average first-time homebuyer will save at most a few hundred dollars a year.

The tax credit isn’t going to help people qualify for a home loan. the banks are still setting the guidelines, and unless the buyer can qualify, the tax credit doesn’t apply. the other stumbling block to the credit is the fact that taxpayers don’t get the money up front. It can only be claimed after a homebuyer files his or her taxes, which most likely does not coincide when they are buying a house and need the cash.

The bill is aimed at low- to middle-income tax payers. High-income earners aren’t eligible for the tax credit, which is worth the smaller of $7,500 or 10 percent of a home’s purchase price. the credit starts to phase out for married couple with income over $150,000 and ends completely at $170,000. For singles, the credit i phased out from $75,000 to $95,000.

On the plus side, the definition of a “first-time homebuyer” is somewhat liberal, meaning people can qualify even if they’ve owned homes before. the legislation defines first-time buyers as someone who has had “no ownership interest in a principal residence during the three-year period” before a home was purchased.

The tax credit carries a cost of an estimated $4.8 billion over 10 years - nearly one-third of the bill’s total incentives. The government’s hope is that the credit will get people into homes now and give them time to sort their finances out.