Thank you Leslie Swimms from Dallas GA, for the following article!The housing rescue bill, signed into law July 30, 2008, is full of goodies and not-so-goodies for homeowners and those who aspire to be homeowners. Here are some highlights.
First-time homeowner tax credit-The law will extend a tax credit of up to $7,500 to first-time
homebuyers. A first-time
homebuyer is defined as someone who hasn't owned a home in three years. The tax credit is for 10 percent of the purchase price, up to $7,500, but phases out for higher-income homeowners. Homeowners are eligible for the tax credit if they bought after April 8 of this year and before July 1, 2009. This is a tax credit, not a deduction. It reduces the homeowners' tax bill by up to $7,500 for the tax year in which the purchase was made. If you buy a house this year, you get the tax credit for the 2008 tax year -- the one with a filing deadline of April 15, 2009. If you buy a house next year by the end of June, you get the tax credit for the 2009 tax year. It's a one-time credit; you don't get to keep taking it year after year. There is a catch, and that is that the money has to be repaid over 15 years, starting two years after you buy the house. That makes the tax credit an interest-free loan. If you take the full $7,500 tax credit, your income tax bill will increase by $500 a year for 15 years. If you sell the house before then, you'll have to pay Uncle Sam the remaining balance. Complex issues, such as divorce, death, sale of the house at a loss and conversion of the house into a vacation home are accounted for in the law.
Forgiveness to allow refinancing into FHA- A lot of people have fallen behind on their mortgage payments after the rates went up on their adjustable-rate mortgages, or
ARMs. And they can't refinance into fixed-rate loans because their homes have lost value, and they owe more than their houses are worth. The housing rescue law seeks to help these people get out of trouble. It encourages lenders to forgive some of their debt so they can refinance at lower amounts into mortgages insured by the Federal Housing Administration, or FHA. It works like this: The lender has to forgive all the debt above 90 percent of the home's current appraised value. If that leaves you scratching your head, here is a hypothetical example, using round numbers: Sometime before Jan. 1 this year, you bought a house for $125,000 and got an ARM for $110,000 after making a $15,000 down payment. But the house lost value. Now it's worth $100,000, based on an appraisal. Meanwhile, the
ARM's rate went up and you can't afford the full payment every month. Under this law, the lender would forgive everything you owe above $90,000. Let's say that you owe $105,000 of that original $110,000 loan. The lender would forgive $15,000, and let you pay off the loan for $90,000. The lender would not be allowed to seek any of that $15,000 later. That allows you to find another lender who would underwrite a $90,000 mortgage to be insured by the FHA. That loan amount would include the upfront FHA insurance premium of roughly $2,700. Again, there is a catch. If you take refuge in this program, you'll have to share your home-price appreciation with the FHA. If you sell the house (or refinance the loan) less than a year after refinancing into the FHA loan, the FHA gets all of the house price appreciation. The
FHA's cut decreases over the next five years -- but never goes below 50 percent. What does this mean to the borrower? Take the example above. You refinanced when the house was appraised at $100,000. A little over two years later, you sell the house for $120,000. You split that $20,000 difference with the FHA. In this case, because it's between two and three years later, the FHA gets 80 percent. The FHA would get $16,000 and you would get $4,000. The equity-sharing arrangement goes like this: If you refinance or sell less than a year after getting the FHA loan, the government gets 100 percent of the home price appreciation. If it's more than a year but less than two years, the FHA gets 90 percent. The
FHA's cut then decreases by 10 percent until the five-year mark. Anytime after that, the FHA gets half of the appreciation, no matter how long you have the loan or own the house. This arrangement will encourage homeowners to keep their FHA-insured mortgages for at least five years, but to refinance before home prices zoom upward again.
Working with home equity debt- The government has been trying all year to encourage lenders to forgive debt so homeowners can refinance their loans for lesser amounts and remain in their houses. Lenders have been reluctant to forgive the debt. The FHA-refinance plan is another way of encouraging debt forgiveness. Among the sticking points: Many homeowners have home equity lines of credit or home equity loans. In most cases, these lenders will lose that entire loan balance under the FHA-refinance plan. The new law is low on specifics, but it gives the FHA permission to give second
lienholders a cut of the home price appreciation proceeds that the FHA collects.
Down payment assistance soon to be a thing of the past- The new housing rescue law bans down payment assistance programs such as the ones offered by Nehemiah and
AmeriDream. The ban goes into effect Oct. 1. Down payment assistance programs took advantage of a loophole in the way the FHA treats down payments. To get an FHA-insured mortgage, the homeowner has to make a down payment of at least 3 percent. Homeowners don't have to save even that much; the 3 percent can come as a gift from family members or nonprofit organizations. Regulations don't allow the home seller to provide the down payment money. That's where down payment assistance programs come in. They are nonprofits. That allows the seller to give the 3 percent down payment money to Nehemiah or
AmeriDream, and then Nehemiah or
AmeriDream can turn around and "give" the down payment to the
homebuyer as a "donation." Fannie Mae and Freddie Mac don't allow sellers to indirectly give down payments to buyers. But the FHA has allowed this type of transaction for years. The FHA has long complained that down payment assistance programs artificially inflate house prices, and that loans using down payment assistance are more likely to default. But prominent congressional democrats have protected the down payment assistance programs on the grounds that they allow many minority families to become first-time
homebuyers. House Democrats wanted to keep the loophole open, and Senate leaders wanted to close it. With this law, the Senate won.
Property tax deductions for all homeowners- Under current law, you can deduct your property taxes from federal income tax -- but only if you itemize deductions on Schedule A. That leaves out people who don't have enough deductions to warrant filling out Schedule A. They have to take the standard deduction -- and that means they can't deduct their property taxes.
The housing law changes that. For homeowners who pay property taxes, it increases the standard deduction by $500 for single filers and $1,000 for couples filing jointly. This will be a boon to people, such as retirees, who own their houses outright, and therefore don't pay any mortgage interest, so they can't itemize. You can't increase the standard deduction by more than the property-tax bill. So if you're married filing jointly and you pay $800 in property taxes, you get an $800 deduction, not a $1,000 deduction.
More regulations on reverse mortgages- A reverse mortgage is an advance against home equity. It's for homeowners age 62 or older, and the reverse mortgage doesn't have to be repaid until the borrowers die or move out. Because reverse mortgages are for elderly borrowers, there is concern that dishonest lenders and brokers take advantage of borrowers. Borrowers are required to get counseling first, to learn the pros and cons of reverse mortgages. The law will result in strengthened qualifications for counselors. The law bars insurance salesmen from originating reverse mortgages and prohibits originators from requiring homeowners to buy annuities or insurance products. (There's one big exception: The FHA insures reverse mortgages, and borrowers will buy that coverage.) Finally, the law limits origination fees on reverse mortgages. They can't exceed 2 percent of a reverse mortgage of up to $200,000. For a reverse mortgage amount above that, the limit is $4,000, plus 1 percent of the loan amount above $200,000. Origination fees can't exceed $6,000 in any case. In future years, this upper limit is indexed to inflation.
Veterans- Service members returning from active duty abroad will be given breaks, effective immediately now that the bill has been signed into law. Some protections apply to service members whose military obligations affect their ability to repay debts -- primarily, reservists and members of the National Guard who are called to active duty. They have to leave their jobs and, in many cases, take pay cuts. For these service members, there are protections having to do with foreclosures and interest rates. If a service member had a mortgage before entering active duty, a lender can't start foreclosure proceedings until nine months after the service member returns from active duty. Formerly, the protection period was 90 days. Also, when someone with a mortgage is called up to active duty, the interest rates on all previously existing debt are capped at 6 percent. That goes for mortgages -- and for home loans, that 6 percent cap extends until one year after the service member returns from active duty. The Defense Department will be required to provide foreclosure-prevention counseling upon request to service members who are returning from active duty abroad.
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