August 19th, 2008 11:02 PM

I've had several realtors ask about the changes that are coming due to the Housing and Economic Recover Act so I thought I'd send out an overview of changes that are set to occur on October 1st on FHA loans. There are three major points of interest:

1)Minimum contribution will increase from 3.0% to 3.5% of the appraised value.

2)Seller funded Down Payment Assistant Programs (“DAPs”) or funds from any other interested party to the transaction will be prohibited on all loans where final credit approval has not been established by September 30, 2008.

The FHA Modernization Act includes a provision where the seller or interested third parties cannot participate in a down payment assistance programs unless the borrower’s loan application is final approved prior to October 1st. Our government Lending leaders met with HUD this afternoon and FHA has confirmed the definition of "borrower approved" (loans would need to be input by Sept 5 to get approval by Sept 30.)

3)Tax credits for First Time Homebuyers:

H.R. 3221, the Housing and Economic Recovery Act of 2008 — which has just been passed by the Congress and now is on its way to President Bush for his signature — allows first-time home buyers to take a $7,500 tax credit from the purchase of a single-family home, townhome or condominium apartment.

Any home buyer who has not owned a home during the past three years and is a U.S. citizen who files taxes is eligible to participate in this program. (Some home buyers who are not citizens may also qualify; see #14 in the questions and answers below.)

To qualify, buyers must actually close on the sale of the home on or after April 9, 2008 and before July 1, 2009. The original eligibility period expired in April 2009, but following a major grassroots campaign from NAHB members, the period was extended to enable home builders to include the credit in their sales and marketing next spring and into the early summer — the peak home buying season.

The program does have income limits. Single or head-of-household filers can claim the full $7,500 credit if their adjusted gross income (AGI) is less than $75,000. For married couples filing a joint return, the income limit doubles to $150,000.

Single or head-of-household taxpayers who earn between $75,000 and $95,000 are eligible to receive a partial first-time home buyer tax credit. The same applies to married couples who earn between $150,000 and $170,000.

The credit is not available for single taxpayers whose AGI is greater than $95,000 and married couples with an AGI exceeding $170,000.

A refundable credit means that if a taxpayer pays less than $7,500 in federal income taxes, the government will write them a check for the difference. For example, if $5,000 in federal taxes is owed, the taxpayer would pay nothing and a $2,500 payment would be received from the IRS. If a qualifying home buyer were owed a $1,000 tax refund, they would receive $8,750.

Buyers can take the tax credit on their 2008 or 2009 tax return. Those who close in 2008 take the credit on their 2008 return. Buyers in 2009 have the option of taking the credit on their 2008 or 2009 returns.

The tax-credit program also has payback provisions.

The credit essentially serves as an interest-free loan to be repaid over 15 years. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. If the home owner sold the home, then the remaining credit would be due from the profit of the home sale.

If there is insufficient profit, then the remaining credit payback would be forgiven.

Paula New
Mortgage Loan Officer
Bank of America Mortgage

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