What’s going on with the high-end housing market it Denver?

The top 10% of the homes, pricewise, as those that sell for over $460K. 

–          The top 5% starts at $600K+. 

–          The top 1% of the most expensive homes sold are those over $1.125MM

I took a look at 1/1/2008 to 6/30/2010, for all of the solds that were reports in the MLS for the Denver metro area.  So that doesn’t include Boulder, Ft Collins, Colorado Springs, or the mountain resort areas.  Here’s what’s going on:

–          Sales were up in 2Q 2010 vs. 2Q 2009 (+13%).

–          The number of REO (bank owned foreclosures) sales peaked in 1Q 2009, and has declined since then.

–          The number of S/S (short sales) has been climbing steadily since their debut in 3Q 2008.

–          For the first time, there were more luxury home S/S than REO sales in 2Q 2010.

If you look at the number of distress sales (S/S + REO) relative to the total number of sales, you see that the distress ratio is pretty consistently between 10 – 15% of the market.

Prices for luxury homes fell from $250 per square foot (2008) to $230 per square foot (most of 2009).  They did recently increase +3% in 2Q 2010.

–          While “regular” sales are around $239 / sq ft; distress sales sell at about a 20% discount.  REO homes sold for $196 / sq ft and short sales sold for $201 / sq ft.

Thanks to Lon Welsh for providing the data and information.

Denver – Most improved market according to business week.

Denver is the “most improved U.S. housing market,” according to a new report from Bloomberg Businessweek.

“In Denver, the economy and employment slowed just as other areas did during the recession, but things appear to be moving in the right direction this year,” the report says.

It says Denver-Aurora-Broomfield metro-area home prices increased 5.8 percent in the first quarter from the same period of 2009 as sales grew and distressed sales fell, based on data from CoreLogic of Santa Ana, Calif. And it cites research by Development Research Partners of Littleton forecasting a 5 percent boost in both home sales and prices in the Denver-area this year.

It also notes signs of the area’s reviving economy, including prospects of rising employment.

“An influx of renewable energy companies and the relocation of kidney care giant DaVita’s headquarters to Denver from California in 2009 are expected to create jobs,” Businessweek’s Venessa Wong wrote. “In fact, about one in 25 employers in the Denver-Aurora-Broomfield area plans to add jobs in the second quarter, according to the most recent Manpower Employment Outlook Survey.”

“We never went up as fast in terms of value, and we never came down as fast,” the report quotes Jim Nussbaum, a broker associate for Kentwood Real Estate in Greenwood Village, as saying. “Last year, [buyers] were like deer in headlights—they were afraid to move. When the stock market improved, they started to feel better.”

The report lists 20 other improved U.S. housing markets. “It’s not just Denver. Signs of life have emerged in areas around the country—signs that the worst may have passed,” the report says.

After Denver, the most-improved markets in the report are:

■2. Boston.
■3. St. Louis.
■4. Pittsburgh.
■5. San Jose, Calif.
■6. San Francisco.
■7. Washington.
■8. Cincinnati.
■9. Minneapolis-St. Paul.
■10. Milwaukee

Thanks to Mark harden with the Denver business Journal with the information.

Colorado Foreclosure Timeline explained

This is directly from my new book “The 2011 Guide to Colorado Real Estate Investing”

1. Lender notifies the Trustee of the default, this is the official beginning of the foreclosure process.
2. Trustee files a notice of default with the county courthouse or recorders office.  This document identifies the Trustor, Trustee, and Beneficiary.  This notice also includes amount of loan and amount of default.  A copy of this default is sent to all interested parties including any lien holders, homeowners, and any other entity identified on title.
3. A sale date is set no less than 110 days from Notice of Election and Demand.  This is the cure period and where short sale negotiations take place.
4. The public Trustee sale is advertised.
5. Property is sold to highest bidder or taken back by lender at the Public Trustee auction.
6. Only junior lien holders whose liens were recorded prior to the Notice of Election and Demand have redemption rights and must file intent to redeem within 8 days of Public Trustee Auction.

April Housing Stats Denver Metro- Things are looking up!

Sales were looking great if you compare April 2009 to April 2010.  Check out the stats below.  We continue to get out of the “hole”  in the Denver Metro Real Estate Market.

Single Family (Res + Cond)

• Inventory was 21,565* listings at the end of Apr 10
  • Compared with prior month, available inventory is up 5%
  • Up 4% compared with year ago

*Includes Active and Pending listings for historical trending purposes.  See Market Intel reports for Pending count.

• Under contract listings were at 6,616 units
  • Up 12% compared with prior month
  • Up 28% compared with Apr 09
• Sales volume (units) totaled 4,188
  • Up 16% compared to last month
  • Up 24% compared to Apr 09
• Year to Date (YTD) Sales volume (units) totaled 12,579 compared to 11,549 units sold YTD 2009, an increase of 9%
• Average sales price was $250,605, even with prior month
  • 7% increase from Apr 09, $233,482 avg price
• Average Days on Market (DOM) dropped 23% from Apr 09 to 80 days

 

 Residential

• Available inventory was at 16,344* listings, up 6% compared to prior month
  • Inventory was up 5% compared with same month, year ago

*Includes Active and Pending listings for historical trending purposes.  See Market Intel reports for Pending count.

• Under contract listings increased 11% to 5,167 compared with Mar 10
  • Up 24% compared to Apr 09
• Sales were up 18% from month ago to 3,308 units sold
  • Compared with Apr 09, units sold increased 22%
• YTD sales volume was 9,863 units, up 7% compared with YTD 2009 sales of 9,247 units

• Average sales price was $274,253
  • Even with Mar 10, $274,950 avg price
  • Up 8% versus Apr 09, $254,442 avg price
• Median sales price was $230,000, even with prior month, and up 10% from Apr 09
• Average Days on Market (DOM) was at 79 days, a 23% decline from year ago

 

Condo

• Inventory at close of Mar 10, there were 5,221* units
  • Up 1% compared to prior month and up 3% compared to Apr 09

*Includes Active and Pending listings for historical trending purposes.  See Market Intel reports for Pending count.

• There was a 15% increase in under contract units compared with Mar 10
  • Under contract listings were up 41% versus same month year ago

• 880 units sold in Apr 10, up 10% compared to prior month and up 29% from Apr 09
• YTD sales volume was at 2,716 units, up 18% compared with 2,302 units sold YTD 2009
• Average sales price was $161,708, up 2% versus Mar 10 and up 7% compared to Apr 09
• Median price was $139,700, up 6% compared with prior month
  • Median price increased 7% from $130,000 in Apr 09
• Average Days on Market (DOM) was at 84 days, a 24% decline from year ago

Metrics are up for April home sales – sales volume and prices. Be sure to check out DOM as we’re seeing a marked decrease compared with April 2009 – houses are moving faster, possibly due to home buyers wanting to capitalize on the deadline for tax credits.  The next few months will be extremely interesting to watch as the housing market will need to come to terms with the new “normal” for 2010.

Stats courtesy of Lon Welsh, Your Castle Real Estate and Denver Metrolist.

Information on Short Sales – exerpt from my new book

Here is an exerpt from the new book.

There are many common terms that are used in the pre foreclosure process.  We have defined a few of these below.

• Notice of Election and Demand (NED)

–      A notice indicating the time, date, and other particulars or a proposed foreclosure sale date

• Intent to Cure

–      A notice advising the lender or trustee of the intent of a borrower to bring a defaulted loan current or to otherwise cure a pending default.

• Redemption

–      A legal right afforded to foreclosed borrowers that gives them the post-foreclosure right to reclaim foreclosed property after the foreclosure sale upon the payment of all defaulted amounts, costs, and fees.

• Deficiency Judgment

–      Imposition of personal liability on a borrower for the unpaid balance of mortgage debt after a foreclosure has failed to yield the full amount of the debt which was due and owing at the time of the foreclosure

• Loss Mitigator

–      Person that is assigned by the lender to negotiate any sales before the foreclosure sale.

• BPO – Broker Pricing Opinion

–      An estimate of the value of real property based on recent sales research by a real estate broker or real estate agent, typically ordered by a bank, lender, or investor to determine the market value of the property.            

• Colorado Foreclosure Protection Act:
• Once the NED is filed and until the foreclosure is discharged, compliance with the requirements of the law is mandatory
• Defines and regulate actions of groups:
• Foreclosure Consultant – charges a fee for service/advice
• Equity Purchasers – acquires ownership interest in the property
• Associate – 3^rd party to the transaction (friend, shill, partner)
• Specific requirements, including specific disclosures and rights of cancellation for the homeowner, must be followed
• Penalties include up to one year in jail, fines of $25,000, and contracts may be void if the law is not followed (including font size requirements)
• Contracts must be written in English, or written by a Certified Translator into the language “Principally spoken by the homeowner” = whatever language is spoken at home
• Specifically affects transactions where the Seller is living in the house, it is their primary residence, and the buyer is not going to occupy the home
• The language of the law is broad and untested…it is STRONGLY RECOMMENDED to seek the counsel of a qualified attorney before getting involved in any transaction in which the property is in foreclosure (after the NED is filed and before redemption period had expired for all parties)
• At time of publishing this is the correct web address with the actual language of the Colorado Foreclosure Protection Act:  http://www.leg.state.co.us/CLICS2006A/csl.nsf/fsbillcont3/D270FC0D5FFAE9AC872570AF007E3BEC?Open&file=071_enr.pdf
• Foreclosure Consultants:  who is exempted under the Colorado Foreclosure Protection Act.
• Lawyers
• A lender, or its attorney, who has a lien or deed of trust on the property while performing services in connection with that lien or deed of trust
• Anyone who is operating under the banking, trust, insurance, or escrow laws
• The person originating or closing a loan if the loan is subject to RESPA
• A judgment creditor where the judgment is recorded and any corresponding legal action started before the foreclosure
• Title insurance companies or agents while performing services
• Licensed real estate agents and brokers so long as they are performing real estate services within the normal scope that they are licensed for
• A non-profit that only gives advice unless that non-profit is associated with someone who is deemed a foreclosure consultant

Who is NOT a equity purchaser:

• People buying for their personal residence to be used for at least 1 year
• Holders of debt, and their associates, who get a deed in lieu of foreclosure and the lien was recorded before the foreclosure began
• Holders of Public Trustee or Sheriff’s deed after the sale
• If a court transfers ownership to you
• If you get the deed from your spouse, close relative, guardian, conservator or personal representative
• If you obtain the property while performing normal business activities, duties, or services under any banking, trust, insurance, title, or escrow regulation

So, an equity purchaser is basically an investor that purchases the home for the purposes of making a profit from the purchase. 

Contact me for more information on the book 2011 Guide to Colorado Real Estate investing.  Short Sales, or purchasing and selling your home.

Fannie Mae Extends Seller Assistance Incentive

Fannie Mae Extends Its Seller Assistance Incentive

As part of its ongoing efforts to stabilize neighborhoods across the country, Fannie Mae announced Tuesday that it has extended its seller assistance incentive on properties purchased through HomePath, the company’s REO disposition operation. Through this program, qualified buyers receive 3.5 percent of the final sales price to be used toward closing cost assistance or their choice of selected appliances. The offer is available to any owner-occupant who closes on the purchase of an REO property listed on the HomePath Web site by June 30, 2010.

Denver Housing Highlights for March 2010

–          Historically speaking, we don’t have a lot of homes on the market to sell.  This is particularly true under $250K.  If you were thinking about selling your home this spring and it’ll sell for under $250, the market is red-hot.  Between $250-$350K is healthy for sellers, too.

–          Buyers are competing vigorously for the homes that are available.  The number of UC listings is +19% from this time last year, even though inventory is unchanged!  We attribute most of the activity to the tax incentives. 

–          Some of the volume increase is due to the fact that buyers were very inactive in January and February.  YTD (Year to date) Denver sales volume for DSF is dead-even with 2009.

–          We don’t expect the tax credits to be extended.  You must be UC by 4/30 and close by 6/30 to qualify.  If you are eligible, it makes sense for you to buy now.  The more expensive the home, the better the deal will be.

–          We expect interest rates to rise during the course of the year.  If mortgage rates go up 1% (could be more than that), your purchasing power will decline significantly. 

–          The average DSF price in March ’10 was +9% from March ’09.  This was a mix issue; since there are not many low end homes to sell, we’re selling more Cadillacs and fewer Chevy’s.  Well, at least we’re selling Buicks.

be aware that while the economy is slowly pulling out of the recession, we are not creating many jobs.  I personally think we would have had sales volume and prices decline materially (at least 10%) in 1Q 2010 if we didn’t have the tax incentives.  When tax credits expire at the end of 2Q you should expect sales volume for 3Q and possible 4Q to be 10-20% lower than 2009. 

(Information courtesy of Your Castle Real Estate Information research and Lon Welsh)

New book coming soon on Colorado Real Estate investing

Hello Everyone,
First I wanted to apologize for not posting in over a month. I have been very busy with drafting my contribution to our new book, The 2011 Guide to Real Estate Investing. The book goes into detail about market conditions as well as different investing techniques in today’s market. I will have much more detail on what is in the book in future blogs. I attached the photo of the front cover of the book. We expect the book to be printed in the next few weeks. Please look for my interviews and presentations that will be forthcoming.

Great news for fix and flip investors

HUD TAKES ACTION TO SPEED RESALE OF FORECLOSED PROPERTIES TO NEW OWNERS
Measure to help bring stability to home values and accelerate sale of vacant properties

WASHINGTON – In an effort to stabilize home values and improve conditions in communities where foreclosure activity is high, HUD Secretary Shaun Donovan today announced a temporary policy that will expand access to FHA mortgage insurance and allow for the quick resale of foreclosed properties. The announcement is part of the Obama administration commitment to addressing foreclosure. Just yesterday, Secretary Donovan announced $2 billion in Neighborhood Stabilization Program grants to local communities and nonprofit housing developers to combat the effects of vacant and abandoned homes.

“As a result of the tightened credit market, FHA-insured mortgage financing is often the only means of financing available to potential homebuyers,” said Donovan. “FHA has an unprecedented opportunity to fulfill its mission by helping many homebuyers find affordable housing while contributing to neighborhood stabilization.”

With certain exceptions, FHA currently prohibits insuring a mortgage on a home owned by the seller for less than 90 days. This temporary waiver will give FHA borrowers access to a broader array of recently foreclosed properties.

“This change in policy is temporary and will have very strict conditions and guidelines to assure that predatory practices are not allowed,” Donovan said.

In today’s market, FHA research finds that acquiring, rehabilitating and the reselling these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.

The policy change will permit buyers to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, or properties resold through private sales. This will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities.

“FHA borrowers, because of the restrictions we are now lifting, have often been shut out from buying affordable properties,” said FHA Commissioner David H. Stevens. “This action will enable our borrowers, especially first-time buyers, to take advantage of this opportunity.”

The waiver will take effect on February 1, 2010 and is effective for one year, unless otherwise extended or withdrawn by the FHA Commissioner. To protect FHA borrowers against predatory practices of “flipping” where properties are quickly resold at inflated prices to unsuspecting borrowers, this waiver is limited to those sales meeting the following general conditions:

• All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
• In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the waiver will only apply if the lender meets specific conditions.
• The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.

Specific conditions and other details of this new temporary policy are in the text of the waiver, available on HUD’s website.

Homebuyer Tax Credit Frequently Asked Questions

Frequently Asked Questions
About the Move-Up/Repeat Home Buyer Tax Credit

The Worker, Homeownership, and Business Assistance Act of 2009 has established a tax credit of up to $6,500 for qualified move-up/repeat home buyers (existing home owners) purchasing a principal residence after November 6, 2009 and on or before April 30, 2010 (or purchased by June 30, 2010 with a binding sales contract signed by April 30, 2010).

The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.

1. Who is eligible to claim the $6,500 tax credit?
2. What is the definition of a move-up or repeat home buyer?
3. How is the amount of the tax credit determined?
4. Are there any income limits for claiming the tax credit?
5. What is “modified adjusted gross income”?
6. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
7. Can you give me an example of how the partial tax credit is determined?
8. How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008? How is this different than the rules established in early 2009?
9. How do I claim the tax credit? Do I need to complete a form or application? Are there documentation requirements?
10. What types of homes will qualify for the tax credit?
11. I read that the tax credit is “refundable.” What does that mean?
12. Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
13. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
14. I am not a U.S. citizen. Can I claim the tax credit?
15. Is a tax credit the same as a tax deduction?
16. Is there a way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 or 2010 tax return?
17. HUD allows “monetization” of the tax credit. What does that mean?
18. If I’m qualified for the tax credit and buy a home in 2009 (or 2010), can I apply the tax credit against my 2008 (or 2009) tax return?
19. For a home purchase in 2009 or 2010, can I choose whether to treat the purchase as occurring in the prior or present year, depending on in which year my credit amount is the largest?

1. Who is eligible to claim the $6,500 tax credit?
   Qualified move-up or repeat home buyers purchasing any kind of home are eligible to claim this credit.
2. What is the definition of a move-up or repeat home buyer?
   The law defines a tax credit qualified move-up home buyer (“long-time resident”) as a person who has owned and resided in the same home for at least five consecutive years of the eight years prior to the purchase date. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. That is, both spouses must qualify as long-time residents, with at least five years of principal residency for each. Repeat home buyers do not have to purchase a home that is more expensive than their previous home to qualify for the tax credit.
3. How is the amount of the tax credit determined?
   The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $6,500. Purchases of homes priced above $800,000 are not eligible for the tax credit.
4. Are there any income limits for claiming the tax credit?
   Yes. The income limit for single taxpayers is $125,000; the limit is $225,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) above those limits. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $145,000 (single) or $245,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.
5. What is “modified adjusted gross income”?
   Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine “adjusted gross income” or AGI. AGI is total income for a year minus certain deductions (known as “adjustments” or “above-the-line deductions”), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and the first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.

   To determine modified adjusted gross income (MAGI), add to AGI certain amounts of foreign-earned income. See IRS Form 5405 for more details.

6. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
   Possibly. It depends on your income. Partial credits of less than $6,500 are available for some taxpayers whose MAGI exceeds the phaseout limits.
7. Can you give me an example of how the partial tax credit is determined?
   Just as an example, assume that a married couple has a modified adjusted gross income of $235,000. The applicable phaseout to qualify for the tax credit is $225,000, and the couple is $10,000 over this amount. Dividing $10,000 by the phaseout range of $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $6,500 by 0.5. The result is $3,250.

   Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $138,000. The buyer’s income exceeds $125,000 by $13,000. Dividing $13,000 by the phaseout range of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $6,500 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,275.

   Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.

8. How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008? How is this different than the rules established in early 2009?
   The previous tax credits applied only to first-time home buyers and were for different amounts of money.
9. How do I claim the tax credit? Do I need to complete a form or application? Are there documentation requirements?
   You 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 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns).

   No other applications are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and repeat home buyer tests. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase. Home buyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed home purchase.

10. What types of homes will qualify for the tax credit?
    Any home that will be used as a principal residence will qualify for the credit, provided the home is purchased for a price less than or equal to $800,000. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.

    It is important to note that you cannot purchase a home from, among other family members, your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse or your spouse’s family members. Please consult with your tax advisor for more information. Also see IRS Form 5405.

11. I read that the tax credit is “refundable.” What does that mean?
    The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.

    For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $6,500 home buyer tax credit. As a result, the taxpayer would receive a check for $5,500 ($6,500 minus the $1,000 owed).

12. Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
    Yes. 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 after November 6, 2009 and on or before April 30, 2010 (or by June 30, 2010, provided a binding sales contract was in force by April 30, 2010).

    In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date. Be sure to check with a tax advisor in cases where a HUD-1 form is not used at settlement to be sure you have sufficient documentation to attach to IRS Form 5405.

13. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
    Yes. The tax credit can be combined with an MRB home buyer program.
14. I am not a U.S. citizen. Can I claim the tax credit?
    Perhaps. Anyone who is not a nonresident alien (as defined by the IRS) and who has owned and resided in a principal residence in the United States for at least five consecutive years of the eight years prior to the purchase date can claim the tax credit if they meet the income limits. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. The IRS provides a definition of “nonresident alien” in IRS Publication 519.
15. Is a tax credit the same as a tax deduction?
    No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $6,500 in income taxes and who receives an $6,500 tax credit would owe nothing to the IRS.

    A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $6,500 in income taxes. If the taxpayer receives a $6,500 deduction, the taxpayer’s tax liability would be reduced by $975 (15 percent of $6,500), or lowered from $6,500 to $5,525.

16. Is there a way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 or 2010 tax return?
    Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment.

    Buyers should adjust the withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.

    In addition, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. As a result, some state housing finance agencies have introduced programs that provide short-term second mortgage loans that may be used to fund a downpayment. Prospective home buyers should check with their state housing finance agency to see if such a program is available in their community. To date, 18 state agencies have announced tax credit assistance programs, and more are expected to follow suit. The National Council of State Housing Agencies (NCSHA) has compiled a list of such programs, which can be found here.

17. HUD allows “monetization” of the tax credit. What does that mean?
    It means that HUD will allow buyers using FHA-insured mortgages to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 or 2010 income taxes to receive a refund. These funds may be used for certain downpayment and closing cost expenses.

    Under the guidelines announced by HUD, non-profits and FHA-approved lenders are allowed to give home buyers short-term loans. The guidelines also allow government agencies, such as state housing finance agencies, to facilitate home sales by providing longer term loans secured by second mortgages.

    Housing finance agencies and other government entities may also issue tax credit loans, which home buyers may use to satisfy the FHA 3.5 percent downpayment requirement.

    In addition, approved FHA lenders can purchase a home buyer’s anticipated tax credit to pay closing costs and downpayment costs above the 3.5 percent downpayment that is required for FHA-insured homes.

    More information about the guidelines is available on the NAHB web site. Read the HUD mortgagee letter (pdf) and an explanation of the FHA Mortgagee Letter on Tax Credit Monetization (pdf). An FAQ about monetization (pdf) is available at the NAHB web site.

18. If I’m qualified for the tax credit and buy a home in 2009 (or 2010), can I apply the tax credit against my 2008 (or 2009) tax return?
    Yes. The law allows taxpayers to choose (“elect”) to treat qualified home purchases in 2009 (or 2010) as if the purchase occurred on December 31, 2008 (or if in 2010, December 31, 2009). This means that the previous year’s income limit (MAGI) applies and the election accelerates when the credit can be claimed. A benefit of this election is that a home buyer in 2009 or 2010 will know their prior year MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.

    Taxpayers buying a home who wish to claim it on their prior year tax return, but who have already submitted their tax return to the IRS, may file an amended return claiming the tax credit using Form 1040X. You should consult with a tax professional to determine how to arrange this.

19. For a home purchase in 2009 or 2010, can I choose whether to treat the purchase as occurring in the prior or present year, depending on in which year my credit amount is the largest?
    Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in the present year and a larger credit would be available using the prior year MAGI amounts, then you can choose the year that yields the largest credit amount.