First-Time Buyers' Burning Questions
By Peter G. Miller
Q: I'm a first-time buyer. I've heard that I can use the $8,000 first-time buyer credit in place of cash for a down payment. I've also heard that I can't. Which is it?
On May 29, 2009, HUD came out with a revised "mortgage letter" regarding the tax credit that made two main points:
1. "Buyers financing through state Housing Finance Agencies and certain non-profits will be able to use the tax credit for their down payments via secondary financing provided by the HFA or non-profit."
2. "Current law does not permit approved lenders to monetize the tax credit to meet the required 3.5 percent minimum down payment, but, under the terms of today's announcement, lenders can now monetize the tax credit for use as additional down payment, or for other closing costs, which can help achieve a lower interest rate."
So if you're a first-time buyer and qualify for the $8,000 credit you can apply the money to the FHA down payment, provided that the credit advance comes from an approved nonprofit or government agency, such as a state housing program. However, if your financing comes from a private lender - say a bank - then the deal is different. You cannot get an advance on the tax credit to pay the FHA down payment. You must still come up with the 3.5-percent down payment from your own funds or from a gift. However, you can get an advance to pay off other closing costs or to increase your down payment.
Q: I want to borrow $150,000, but the lender says I qualify for $175,000. Why is the qualifying amount higher than what I can realistically afford?
A: Lenders have traditional guidelines that suggest what's affordable based on your income, credit and monthly costs. The lender might say that as much as 38 percent of your gross monthly income can go to housing costs and other expenses. That's fine, and such guidelines likely work for most borrowers. But if you're not comfortable with the level of debt then say so. Look for properties where the maximum loan amount will be no more than $150,000. This is your decision, not the lender's.
Q: We have homes in our community that used to cost $500,000 and are now selling for $300,000. Are these houses a good buy?
A: What homes used to sell for doesn't count. Instead, ask yourself some questions regarding the properties:
• If you bought a property for $300,000 could you resell it now at a higher price? Enough to also cover marketing and closing fees?
• If you bought a $300,000 property could you rent it for enough to pay the costs of mortgage interest and principal, as well as property taxes, property insurance, repairs and other costs? If not, can you afford the monthly negative cost?
• Is this a property you want for your personal use? Do you intend to own it for many years?
• Given your local market, could the price fall even further?
All properties are unique. Speak with local brokers and get more information about local housing, population and job trends. Then see what makes sense in terms of your market, your preferences and your financial situation.
Q: I would like to help my son buy his first home. What methods are available?
A: Helping a family member buy a home is not uncommon. A 2008 study by the National Association of Realtors shows that 26 percent of all first-time buyers had help from a relative or friend. However, it's important to say that with the financial meltdown lender standards have tightened and more cash may be needed to acquire a home. The NAR study shows that a typical 2008 first-time buyer put down 4 percent - that's up from 2 percent in the 2007 study. You can bet that down payment averages will rise in 2010.
Here are some strategies to consider:
1. Anyone can make a $13,000 tax-free gift to anyone else in 2010. For a married couple, that's $26,000 a year to one person. Gifts can be tricky so get specific advice from a tax professional.
2. You can buy with your son as a co-owner under a concept called "equity-sharing." Established under the Black Lung Benefits Revenue Act of 1981, equity sharing allows a property to be owned by an owner/occupant (the resident) and a non-owner/occupant (an investor). The resident gets to write off a portion of the mortgage and property taxes while the investor gets real estate write-offs plus some depreciation. The investor has income from the resident for use of the investor's portion of the property. To get a proper agreement, speak with a real estate attorney.
Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to email@example.com.
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