The Government Wants to Help You…Part Two

As I started to explain in yesterday’s post, government is keen to help borrowers and homeowners in need. More than $75 Billion has already been allocated towards helping homeowners avoiding foreclosure. An additional $1.5 Trillion has been deployed by the Federal Reserve Bank; as part of its quantitative easing plan, it has purchased mortgage securities in bulk, which has helped to keep mortgage rates relatively low.

Both of these programs have targeted those who already own homes, by allowing them to lower their monthly payments through loan modification and refinancing. What about those who aspire to own homes but don’t currently have a stake in the system? This is where the tax credit comes in; both the Federal government and select state governments are now offering qualifying homebuyers a break on their taxes if they purchase a home before a certain date.

“As of May 29, 2009, the $8,000 federal tax credit can be used as ‘an additional down payment or closing costs’ for buyers who apply for mortgages insured by the Federal Housing Administration before Dec. 1, 2009″ and must have been purchased after January 1, 2008. There are two key stipulations: first, the credit is limited to first-time home buyers, defined as not having owned a residence in the last three years. Second, there are income limitations: “A phase-out of the credit begins when the taxpayer’s modified adjusted gross income exceeds $75,000 or $150,000 if married filing jointly. The credit is eliminated completely when the taxpayer’s income reaches $95,000 or $170,000 if married filing jointly.”

In an effort to maximize the benefit of the tax credit, the government has the designed to program to be extremely flexible. First of all, qualifying homebuyers have the option of claiming the tax credit in either 2008 or 2009. In addition, the tax is not only deductible but actually refundable; in other words, “This means that even if you don’t owe the government money in taxes, you can still take part in this incentive program,” as the government will simply write you a check for the difference. Finally, the tax credit can be applied immediately in conjunction with the purchase of a home; through the use of a bridge loan, homebuyers can use the credit prior to actually filing their taxes. Consult the First-Time Home Buyer Tax Credit website for more information.

While the federal credit is available to anyone who qualifies during the given time period, some state programs are available on a first-come, first-served basis. California, for example, recently set aside $100 million to be meted out in the form of $10,000 credits. In only four months, most of this money has already been distributed; “Some $94.7 million has been claimed via 9,848 applications, according to the most recent data from the state’s Franchise Tax Board.” Better Hurry!

For those of you neither own a home, nor aspire to own one in the short-term, the government is also watching your back. “The Consumer Financial Protection Agency, if approved by Congress, will have broad authority to protect consumers of credit, savings, payment and other consumer financial products and services…It could write rules, reform mortgage laws, examine financial institutions’ practices, enforce compliance through penalties, ban unfair practices and require that companies be “clear and conspicuous” in informing consumers of costs, penalties and risks.” In addition, lenders would be required to offer a “plain vanilla” mortgage (i.e. 30-year fixed rate). Prepayment penalties and yield-spread premiums would be banned, and lenders would “not be able to issue mortgages…that they knew consumers would not be able to pay back.”