Like me, you might be confused on the new tax credit passed recently. A credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence between January 1, 2009 and December 1, 2009 has been made available under the American Recovery and Reinvestment Act of 2009. The National Association of REALTORS states the home buyer tax provisions included in the approved bill could stimulate up to 300,000 additional home sales. The association also thinks this credit should help stabilize home values and even help some homeowners from facing foreclosure. While I am not sure about either of the two statements, I am optimistic that the credit will be enough to motivate some buyers who have long been sitting on the fence which should help unload some of the housing inventory and stabilize prices.  Personally, I think that happens at least another year from now.

Here are some answers to questions you may have:

So, who is eligible?

First-time home buyers purchasing any kind of home are eligible for the tax credit. To qualify for the credit the purchase must occur on or after January 1, 2009 and before December 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner.

Facts:

• The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
• According to the IRS website “The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts”.
• This tax credit does not have to be repaid and thus is different that the previous “credit” of up to $7500.00 which was essentially an interest-free loan. This tax incentive is a true tax credit.
• Home buyers must occupy the home as principal residence for at least three years or they may have to repay the credit amount. Certain exceptions apply.
• Claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on Line 69 of their 1040 income tax return.
• Any home that will be used as a principal residence will qualify for the credit. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes and houseboats.
• 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 January 1, 2009 and before December 1, 2009.
• Newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.

So, my last post may have caused you to wonder just who are Fannie and Freddie. Fannie Mae and Freddie Mac are America’s two largest mortgage companies.  There names are acronyms for their official names: the Federal National Mortgage Association (Fannie) and the Federal Home Loan Mortgage Corporation (Freddie). The two are key players in the secondary mortgage market.  The secondary mortgage market is where the mortgages are purchased from banks. Once Freddie or Fannie purchase several thousand such loans, they bundle them together into a tradable security and sell the bundle to an institutional investor.

Despite common misunderstanding, Freddie and Fannie are public companies.  There is a false sense that these are government run companies because the companies are so large that the government won’t let them fail.  Is that really a false sense?  Not really.  We saw this recently when the government bailed Freddie and Fannie out to the tune of $400 BILLION dollars as of this writing.

Fannie Mae was born in 1938 as a result of the massive mortgage defaults during the great depression. Fannie Mae began with $1 billion in purchasing power, the agency helped create ways for banks to loan money to lower and middle income buyers who otherwise might not have been considered creditworthy. In 1968, after Fannie Mae grew so large, their debt portfolio was taken off the government balance sheet by President Johnson; Fannie Mae was converted into a publicly traded company owned by investors. Freddie Mac was created and launched two years later mainly to keep Fannie Mae from functioning as a monopoly.  Freddie became publicly traded in 1989.

Fannie and Freddie can only guarantee investment-grade mortgages. Sub prime mortgages are also not an option. In addition, Fannie and Freddie can only guarantee conforming loans. What’s a conforming loan? Well, loans that conform to Fannie and Freddie’s standards and under a certain dollar amount which is set by Congress.  The amount used to be $417,000 but was recently increased to a possible 125 percent of a metro area’s median home price (see table below).   Not all conforming loans are sold to Freddie and Fannie but the guidelines for loans are generally followed by most loan originators.

So, just what are the fees I mentioned in my last post?  According to Michael Amers at Chicago Bancorp:

“Some of the hikes in rate pricing are: 75 basis points for condo units with less than 25% equity stake; 25 basis points for interest-only payments; 25 to 300 basis points for credit scores coupled to loan-to-values; 25 to 300 basis points for cash-out refinancing; and 100 basis points for 2-unit properties.  For example, a condo with 25% down payment might enjoy a 5.25% rate, but the same borrower putting down 24% would get 6.00%.  And that’s not figuring in other adjustments, such as to the credit score which requires the use of a tiered matrix to determine if an additional hike is warranted.”

And who is impacted by these changes?  Just about anyone who is applying for a mortgage.  While Fannie and Freddie are not the only players in the secondary market, most loans are underwritten to the Fannie and Freddie guidelines.  Why?  If the loans are not under the guidelines then the institution will not be able to sell that loan at any point in time.  This is of course the reason why most loan originators use the Freddie and Fannie guidelines.  There are some exceptions. For example, a local credit union might hold the loans themselves.  In which case, the loan would not have to meet the guidelines. However, it is unlikely that the consumer will get the best interest rate when choosing this route.

Below is some additional information on conforming loans gathered from Fannie Mae

“The conforming loan limits apply to all conventional mortgages that are delivered to Fannie Mae on or after January 1, 2009. Please note that the 2009 general conforming loan limits are identical to the 2006, 2007, and 2008 conforming loan limits. The high-cost areas are determined by the Federal Housing Finance Agency. The company may purchase loans up to $625,500 in designated high-cost areas.

	Maximum Original Principal Balance
Units	Contiguous States, District of Columbia, and Puerto Rico		Alaska, Guam, Hawaii, and the U.S. Virgin Islands
	General	High-Cost*	General	High-Cost*
1	$417,000	$625,500	$625,500	$938,250
2	$533,850	$800,775	$800,775	$1,201,150
3	$645,300	$967,950	$967,950	$1,451,925
4	$801,950	$1,202,925	$1,202,925	$1,804,375

*The limit may be lower for a specific high-cost area; use the Loan Limit Look-Up Table above to see limits by location.”

On April 1st, Fannie Mae and Freddie Mac are increasing down-payment rules.

The upcoming changes are as follows:

• Condo buyers with down payments of less than 25 percent will be charged a three-quarter point add-on penalty regardless of their credit score
• Buyers of  multi family units, where one unit is owner-occupied and the other is rented, will be charged a 1 percent add-on
• Refinancers who take cash out will be charged as much as three points if they have a low to moderate equity stake