Credit After Foreclosure, Bankruptcy or Short Sale

One of the concerns a consumer has after experiencing a bankruptcy, foreclosure, or short sale (referred to as a "preforeclosure sale" by Fannie Mae when the owner is in default) is the ability to obtain credit to purchase another home.  Fannie Mae has updated its credit guidelines in the FNMA Selling Guide, June 30, 2010. [ Note: This is a 1,234 page PDF document that takes a long time to download.]  This legal article summarizes those guidelines in Part I.  In addition, since lenders use FICO scores in order to determine the creditworthiness of a borrower, this article covers the impact of a bankruptcy, foreclosure or short sale on FICO scores in Part II. 

I.  Fannie Mae Credit Guidelines

A.  Credit after Foreclosure

Q 1.  How long is the time period after a foreclosure before a consumer can be eligible to obtain credit to purchase a home?

A  Seven years from the date the foreclosure sale was completed as reported on the credit report or other foreclosure documents provided by the borrower.  See Question 2 below for exceptions. 

(Source: FNMA Selling Guide, 6-30-10 at 426  )

Q 2.  Does a shorter time period apply if the borrower has "extenuating circumstances" that led to the foreclosure?

A  Yes. The borrower may again be eligible for a loan three years from the date the foreclosure sale was completed if the borrower has "extenutating circumstances" as defined in Question 3.  

Additional requirements that apply after 3 years and up to 7 years following the completion date are as follows:

• The purchase must be of a principal residence.  Purchase of a second home or investment property is not permitted until the seven-year waiting period has elapsed.  
• The consumer is limited to a maximum loan to value ratio of 90 percent.  If the Eligibility Matrix(https://www.efanniemae.com/sf/refmaterials/eligibility/pdf/eligibilitymatrix.pdf ) sets forth a lower maximum loan-to-value ratio for the transaction at hand, then the consumer is limited to the lower maximum loan-to-value ratio. 
• Limited cash-out refinances are permitted for all occupancy types. (Cash-out refinances are not permitted until a seven-year waiting period has elapsed.)

 (Source: FNMA Selling Guide, 6-30-10 at 426-7 .)

Q 3.  What are"extenuating circumstances"?

A  Fannie Mae describes "extenuating circumstances" as follows:

Extenuating circumstances are nonrecurring events that are beyond the borrower's control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.
If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower's claim.  Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree, medical bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower's inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, listing agreements, lease agreements, tax returns (e.g., covering the periods prior to, during, and after a loss of employment).
The lender must obtain a letter from the borrower explaining the relevance of the documentation.  The letter must support the claims of extenuating circumstances, confirm the nature of the event that led to the bankruptcy or foreclosure-related action, and illustrate the borrower had no reasonable options other than to default on his or her financial obligations.

(Source: FNMA Selling Guide, 6-30-10, 6-30-10 at 429 .)

Q 4.  What are the requirements to re-establish a credit history after a foreclosure?

A  After a foreclosure, a credit history must meet the following requirements to be considered re-established:

• The elapsed time and the related requirements are met (as discussed in this article).
• The loan receives a recommendation from Desktop Underwriter (an automated underwriting system) that is acceptable for delivery to Fannie Mae.  If manually underwritten, then the loan must meet the minimum credit score requirements based on the parameters of the loan and the established eligibility requirements.

• The borrower has traditional credit as outlined in the Selling Guide, B3-5.3, Traditional Credit History (https://www.efanniemae.com/sf/guides/ssg/sg/pdf/sel043010.pdf).  Nontraditional credit or “thin files” are not acceptable. A “thin file” exists where the borrower does not have a sufficient number of credit references to develop a traditional credit report.

(Source:  FNMA Selling Guide, 6-30-10, 6-30-10 at 428).

B.  Credit after Deed-in-Lieu (DIL) of Foreclosure

Q 5.  How long is the time period after a deed-in-lieu of foreclosure before a consumer can be eligible to obtain credit to purchase a property?

A  After two years from the date the deed in lieu was executed, but the consumer is limited to a maximum loan-to-value ratio of 80 percent.  If the Eligibility Matrix (https://www.efanniemae.com/sf/refmaterials/eligibility/pdf/eligibilitymatrix.pdf) sets forth a lower maximum loan-to-value ratio for the transaction at hand, then the consumer is limited to the lower maximum loan-to-value ratio.

After four years, the consumer is limited to a maximum loan to value ratio of 90 percent.  If the Eligibility Matrix (https://www.efanniemae.com/sf/refmaterials/eligibility/pdf/eligibilitymatrix.pdf) sets forth a lower maximum loan-to-value ratio for the transaction at hand, then the consumer is limited to the lower maximum loan-to-value ratio.

After seven years, the consumer is limited to the loan-to-value ratios set forth in the Eligibility Matrix. (https://www.efanniemae.com/sf/refmaterials/eligibility/pdf/eligibilitymatrix.pdf)

(Source:   FNMA Selling Guide, 6-30-10, 6-30-10 at 427.) 

Q 6.  Does a shorter time period apply if the borrower has "extenuating circumstances" that led to the deed-in-lieu of foreclosure?

A  Yes.  Two years from the date the deed-in-lieu was executed, but the consumer is limited to a maximum loan-to-value ratio of 90 percent.  If the Eligibility Matrix (https://www.efanniemae.com/sf/refmaterials/eligibility/pdf/eligibilitymatrix.pdf) sets forth a lower maximum loan-to-value ratio for the transaction at hand, then the consumer is limited to the lower maximum loan-to-value ratio.  

(Source:  FNMA Selling Guide, 6-30-10, 6-30-10 at 427.)

See Question 3 for the definition of "extenuating circumstances."

Q 7.  Are deed-in-lieu of foreclosure actions identified on a credit report?

A  A deed-in-lieu of foreclosure may be reported by a remarks code indicating a deed-in-lieu. 

(Source: FNMA Announcement 08-16 Q&A, 8-13-08. )

Q 8.  What are the requirements to re-establish a credit history after a deed-in-lieu of foreclosure?

A  After a deed-in-lieu of foreclosure, a credit history must meet the following requirements to be considered re-established:

• The elapsed time and the related requirements are met (as discussed in this article).
• The loan receives a recommendation from Desktop Underwriter (an automated underwriting system) that is acceptable for delivery to Fannie Mae.  If manually underwritten, then the loan must meet the minimum credit score requirements based on the parameters of the loan and the established eligibility requirements.

• The borrower has traditional credit as outlined in the Selling Guide, B3-5.3, Traditional Credit History (https://www.efanniemae.com/sf/guides/ssg/sg/pdf/sel043010.pdf).  Nontraditional credit or “thin files” are not acceptable. A “thin file” exists where the borrower does not have a sufficient number of credit references to develop a traditional credit report.

(Source:  FNMA Selling Guide, 6-30-10 at 428).

C. Credit after a Short Sale (Preforeclosure Sale)

Q 9.  How long is the time period after a " preforeclosure sale" before a consumer can be eligible to obtain credit to purchase a property?

A  After two years from the date the preforeclosure sale was completed, but the consumer is limited to a maximum loan-to-value ratio of 80 percent.  If the Eligibility Matrix(https://www.efanniemae.com/sf/refmaterials/eligibility/pdf/eligibilitymatrix.pdf) sets forth a lower maximum loan-to-value ratio for the transaction at hand, then the consumer is limited to the lower maximum loan-to-value ratio.

After four years, the consumer is limited to a maximum loan to value ratio of 90 percent.  If theEligibility Matrix (https://www.efanniemae.com/sf/refmaterials/eligibility/pdf/eligibilitymatrix.pdf) sets forth a lower maximum loan-to-value ratio for the transaction at hand, then the consumer is limited to the lower maximum loan-to-value ratio.

After seven years, the consumer is limited to the loan-to-value ratios set forth in the Eligibility Matrix(https://www.efanniemae.com/sf/refmaterials/eligibility/pdf/eligibilitymatrix.pdf).

(Source:  FNMA Selling Guide, 6-30-10, 6-30-10 at 427.)

Q 10.  What is a "preforeclosure sale" mentioned in Question 9 and is that the same as a short sale?

A  "A preforeclosure sale involves the sale of the property by the borrower to a third party for less than the amount owed to satify the delinquent mortgage, as agreed to by the lender, investor, and mortgage insurer"

Although the terms preforeclosure sale and short sale have been used interchangeably, there is a significant difference for purposes of obtaining credit.  For Fannie Mae purposes, a preforeclosure assumes that the borrower has been delinquent in paying his or her mortgage and the lender agrees to accept a lesser amount to avoid the time and expense of a foreclousre action.  A short-sale, however, can also refer to situations in which the lender of the mortgage agrees to a payoff of a lesser amount than is actually owed, even on a current mortgage, to facilitate the sale of the property to a third party. 

(Source: FNMA Announcement 08-16 Q&A, 8-13-08. )

Q 11.  Does a shorter time period apply if the borrower has "extenuating circumstances" that led to the preforeclosure (short) sale?

A  Yes.  Two years from the date the preforeclosure sale was completed, but the consumer is limited to a maximum loan-to-value ratio of 90 percent.  If the Eligibility Matrix(https://www.efanniemae.com/sf/refmaterials/eligibility/pdf/eligibilitymatrix.pdf) sets forth a lower maximum loan-to-value ratio for the transaction at hand, then the consumer is limited to the lower maximum loan-to-value ratio.  

(Source:  FNMA Selling Guide, 6-30-10 at 427 .)

Q 12.  If a borrower sold his or her property as a short sale but was never delinquent on that mortgage and is now attempting to purchase a new primary residence, will Fannie Mae purchase the loan?

A  The loan will be eligible for delivery to Fannie Mae provided that the borrower's previous mortgage history complies with Fannie Mae's excessive prior mortgage delinquency policy--that is the borrower does not have one or more 60-, 90-, 120-, or 150-day delinquencies reported within the 12 months prior to the credit report date--and the borrower has not entered into any agreement with the short sale lender to repay any amounts associated with the short sale, including a deficiency judgment.  

(Source: FNMA Announcement 08-16 Q&A, 8-13-08 ; FNMA Selling Guide, Part X, Chapter 3, Section 302.09. .)

Q 13.  Are preforeclosure sales (short sales) identified on a credit report?

A  Preforeclosure sales may be reported as "paid in full" with a "settled for less than owed" remarks code, and the mortgage tradeline would indicate any recent delinquency.  

(Source: FNMA Announcement 08-16 Q&A, 8-13-08. )

D.  Credit after a Bankruptcy

Q 14.  How long is the time period after a  Chapter 7 or Chapter 11 bankruptcy before a consumer can be eligible to obtain credit to purchase a property?

A  Four years from the discharge or dismissal date of the bankruptcy action.

(Source:  FNMA Selling Guide, 6-30-10 at 425 .)  

Q 15.  How long is the time period after a  Chapter 13 bankruptcy before a consumer can be eligible to obtain credit to purchase a property?

A  Two years from the discharge date and four years from the dismissal date. The shorter waiting period based on the discharge date recognizes that borrowers have already met a portion of the waiting period within the time needed for the successful completion of a Chapter 13 plan and subsequent discharge. 

(Source:  FNMA Selling Guide, 6-30-10 at 425 .) 

Q 16.  Does a shorter time period apply if the borrower has "extenuating circumstances" that led to the bankruptcy (all actions)?

A  Yes.  Two years from the discharge or dismissal; however, no exceptions are permitted to the 2-year time period after a Chapter 13 discharge.

(Source:  FNMA Selling Guide, 6-30-10 at 425-6 .)   

See Question 3 for the definition of "extenuating circumstances."  

Q 17.  How long is the time period after multiple bankruptcy filings before a consumer can be eligible to obtain credit to purchase a property?

A  Five years from the most recent dismissal or discharge date for borrowers with more than one bankruptcy filing within the past 7 years.

(Source:  FNMA Selling Guide, 6-30-10 at 426 .)   

Q 18.  What are “multiple bankruptcy filings”?

A This means an individual borrower has filed for bankruptcy more than one time.  Two or more borrowers with individual bankruptcies are not cumulative, and do not constitute multiple bankruptcies. For example, if the borrower has one bankruptcy and the co-borrower has one bankruptcy, this is not considered a multiple bankruptcy. 

(Source:  FNMA Selling Guide, 6-30-10 at 426 .)

Q 19.  Does a shorter time period apply if the borrower has "extenuating circumstances" that led to the multiple bankruptcies?

A  Yes.  Three years from the most recent discharge or dismissal date.  The most recent bankruptcy filing must have been the result of extenuating circumstances.

(Source:  FNMA Selling Guide, 6-30-10 at 426 .)  

See Question 3 for the definition of "extenuating circumstances." 

Q 20.  What is the difference between a Chapter 13 bankruptcy and a Chapter 7 bankruptcy?

A  Chapter 13 permits a borrower with a regular income to propose a plan to repay some or all of his or her obligations over a period of up to five years.  A borrower who files a Chapter 7 is permitted to retain exempt assets and receive a discharge of the borrower's debts.  Chapter 7 is a relatively quick liquidation process that is generally completed within 120 days.  Chapter 7 cases are rarely dismissed. 

(Source: FNMA Announcement 08-16 Q&A, 8-13-08. )

Q 21.  What is the difference between a Chapter 13 dismissal and a Chapter 13 discharge?

A  A borrower who files a Chapter 13 can dismiss the case at any time (voluntary dismissal) or the case may be dismissed by the court based on the borrower's failure to comply with the requirements of the Bankruptcy Code or to make the required payments. If the borrower who files a Chapter 13 case makes all of the payments required by the plan, the borrower receives a discharge at the end of the plan.  A borrower who doesn't make all the payment required by the plan may still receive a discharge if the court finds, among other things, that the borrower made a certain amount of the payments and the borrower's failure to make all of the payments was due to circumstances beyond the borrower's control. 

(Source: FNMA Announcement 08-16 Q&A, 8-13-08. )

Q 22.  What are the requirements to re-establish a credit history?

A  After a bankruptcy, a credit history must meet the following requirements to be considered re-established:

• The elapsed time and the related requirements are met (as discussed in this article).
• The loan receives a recommendation from Desktop Underwriter (an automated underwriting system) that is acceptable for delivery to Fannie Mae.  If manually underwritten, then the loan must meet the minimum credit score requirements based on the parameters of the loan and the established eligibility requirements.

• The borrower has traditional credit as outlined in the Selling Guide, B3-5.3, Traditional Credit History (https://www.efanniemae.com/sf/guides/ssg/sg/pdf/sel043010.pdf).  Nontraditional credit or “thin files” are not acceptable. A “thin file” exists where the borrower does not have a sufficient number of credit references to develop a traditional credit report.

(Source:  FNMA Selling Guide, 6-30-10 at 428).

II.  Bankruptcy, Foreclosure, and Short Sale and the Impact on a FICO ®Score

Q 23.  What is a FICO® Score?

A A FICO® score is a number representing the creditworthiness of a  person or the likelihood that person will pay his or her debts. The three credit reporting agencies, Equifax, Experian, and TransUnion, collect data about consumers in order to compile credit reports. The credit agencies use FICO® software to generate FICO® scores, which are then sold to lenders. Actually FICO® is just one of the several credit scoring systems available. The Fair Isaac Corporation (known as FICO®) created the first credit scoring system in 1958.  Others are NextGen, VantageScore, and the CE Score.  They all evaluate the creditworthiness of a borrower.  However, FICO appears to be the most-used credit scoring system.  A FICO® score is between 300 and 850.  The higher the better the credit.

Each consumer has three credit scores at any given time for any given scoring model because the three credit agencies have their own databases, gather reports from different creditors, and receive information from creditors at different times.

Q 24.  What factors go into determining a FICO® score?

A Credit scores are designed to measure the risk of default by taking into account various factors in a person's financial history. Although the exact formulas for calculating credit scores are closely-guarded secrets, FICO® has disclosed the following components and the approximate weighted contribution of each:

35% — Payment History – Late payments on bills, such as a mortgage, credit card or automobile loan, can cause a consumer’s FICO® score to drop. Paying bills as agreed over time will improve a consumer’s FICO® score.

30% — Credit Utilization - The ratio of current revolving debt (such as credit card balances) to the total available revolving credit (credit limits). Consumers can improve their FICO® scores by paying off debt and lowering their utilization ratio. The closing of existing revolving accounts will typically adversely affect this ratio and therefore have a negative impact on the FICO® score.

15% — Length of Credit History – As a consumer's credit history ages, assuming the consumer pays his or her bills, it can have a positive impact on the FICO® score.

10% — Types of Credit Used (installment, revolving, consumer finance) – Consumers can benefit by having a history of managing different types of credit.

10% — Recent search for credit and/or amount of credit obtained recently - Multiple credit inquiries for a consumer seeking to open new credit, such as credit cards, retail store accounts, and personal loans, can hurt an individual’s score. Applying for lots of new credit in a short period of time is also viewed as risky and can cause a drop in an individual’s score. However, individuals shopping for a mortgage or auto loan over a short period will likely not experience a decrease in their scores as a result of these types of inquiries.

(Source: http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx)
 

Q 25.  How does a mortgage modification affect my FICO® score?

A FICO® credit scores are calculated from the information in consumer credit reports. Whether a loan modification affects the borrower's FICO® score depends on whether and how the lender chooses to report the event to the credit bureau, as well as on the person's overall credit profile. If a lender indicates to a credit bureau that the consumer has not made payments on a mortgage as originally agreed, that information on the consumer's credit report could cause the consumer's FICO® score to decrease or it could have little to no impact on the score.

(Source: http://www.myfico.com/crediteducation/questions/Mortgage_Modification.aspx)  

Q 26.  How does a bankruptcy affect my FICO® score?

A  A bankruptcy is considered a very negative event regardless of the type. A bankruptcy is factored into your FICO® score until it is removed from your credit report.  As long as the bankruptcy is listed on your credit report, it will be factored into your score. If you are considering bankruptcy as an alternative to foreclosure, keep in mind that it may have a greater impact on your FICO® score.

Typically, you can expect bankruptcies to impact your FICO® score, from the date filed, as follows:

(1)  Chapter 11 and Chapter 7 bankruptcies up to 10 years.
(2)  Completed Chapter 13 bankruptcies up to 7 years.

These time periods refer to the public record item associated with filing for bankruptcy. All of the individual accounts included in the bankruptcy should be removed from your credit report after 7 years. 

(Source: http://www.myfico.com/crediteducation/Questions/Bankruptcy-Types.aspx)

If you plan to file a bankruptcy, here are some things you should do to make sure your creditors are accurately reporting the bankruptcy filing:

(1) Check your credit report to ensure that accounts that were not part of the bankruptcy filing are not being reported with a bankruptcy status.

(2) Make sure your bankruptcy is removed as soon as it is eligible to be "purged" from your credit report.

After a bankruptcy has been filed, the sooner you begin re-establishing credit in good standing, the sooner you can expect your FICO® score to rebound. A good practice is to obtain a secured credit card and continually make all of your payments on time. As time passes and the impact of the bankruptcy lessens, you might apply for a traditional credit card and also continually make all of your payments on time.

(Source: http://www.myfico.com/crediteducation/questions/Bankruptcy-Reach.aspx) 

Q 27.  How does a short sale, deed-in-lieu-of foreclosure. or a foreclosure affect my FICO®score?

A  The alternatives to foreclosure, such as a deed-in-lieu of foreclosure or a short sale, aren’t any better as far as a FICO® score is concerned.

The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure are all "not paid as agreed" accounts, and considered the same by your FICO® score. This is not to say that these may not be better options for you from a financial or tax perspective, just that they will be considered no better or worse for your FICO® score.

If you are considering bankruptcy as an alternative to foreclosure, that may have a greater impact on your FICO® score. While a foreclosure is a single account that you default on,  declaring bankruptcy has the opportunity to affect multiple accounts and therefore has  potential to have a greater negative impact on your FICO® score.

(Source: http://www.myfico.com/CreditEducation/Questions/foreclosure-alternatives-fico-score.aspx)

Q 28.  What won't affect my FICO® score?

A The following information is not considered by the FICO® scoring formula:

^.  Your race, color, religion, national origin, sex, or marital status

^.  Your age

^.  Your salary, occupation, title, employer, date employed, or employment history

^.  Where you live

^.  Any interest rate being charged on a particular credit card or other account

^.  Certain types of inquiries (such as promotional, account review, insurance or employment-related inquiries)

^.  Credit counseling

^.  Any information not found in your credit report

^.  Any information that is not proven to be predictive of future credit performance

(Source: http://myfico.custhelp.com/cgi-bin/myfico.cfg/php/enduser/std_adp.php?p_faqid=55)

Q 29.  Where can I get more information?

A For a credit missteps comparison (i.e., affect on credit scores after certain events), go tohttp://www.myfico.com/crediteducation/questions/Credit_Problem_Comparison.aspx. 

Sabrina Solesbee 949-226-2744

www.yorbalindaliving.com

The Solesbee Group

$8,000 Tax Credit Rebate

$8000 Tax Credit Rebate for First Time Home Buyer's

SEARCH FOR ALL ORANGE COUNTY, CA HOMES FOR SALE CLICK HERE: WWW.OCHOMESBYSABRINA.COM

The economic stimulus package just passed by Congress and signed into law by President Obama offers up to a $8000 TAX CREDIT for first time buyer's. This is a great opportunity to become a home owner. Below are answers to some of the most frequently asked questions about the new $8000 Tax rebate.

The Solesbee Team is committed to the needs of First Time Home Buyer's. Call us today at 949-226-2744 for your no obligation buyer's consultation & loan pre-approval. Let us help you find the perfect house and get your $8000 credit!

Information provided by The National Association of Realtors
FIRST-TIME HOMEBUYER TAX CREDIT
For 2009, Congress has increased the credit to $8000 and made several additional improvements. This revised $8000 tax credit applies to purchases on or after January 1, 2009 and before December 1, 2009.
Tax Credits -- The Basics
1. What’s this new homebuyer tax incentive for 2009?
The 2008 $7500, repayable credit is increased to $8000 and the repayment feature is eliminated for 2009 purchasers. Any home that is purchased for $80,000 or more qualifies for the full $8000 amount. If the house costs less than $80,000, the credit will be 10% of the cost. Thus, if an individual purchased a home for $75,000, the credit would be $7500. It is available for the purchase of a principal residence on or after January 1, 2009 and before December 1, 2009.
2. Who is eligible?
Only first-time home buyers are eligible. A person is considered a first-time buyer if he/she has not had any ownership interest in a home in the three years previous to the day of the 2009 purchase.
3. How does a tax credit work?
Every dollar of a tax credit reduces income taxes by a dollar. Credits are claimed on an individual’s income tax return. Thus, a qualified purchaser would figure out all the income items and exemptions and make all the calculations required to figure out his/her total tax due. Then, once the total tax owed has been computed, tax credits are applied to reduce the total tax bill. So, if before taking any credits on a tax return a person has total tax liability of $9500, an $8000 credit would wipe out all but $1500 of the tax due. ($9,500 - $8000 = $1500)
4. So what happens if the purchaser is eligible for an $8000 credit but their entire income tax liability for the year is only $6000?
This tax credit is what’s called "refundable" credit. Thus, if the eligible purchaser’s total tax liability was $6000, the IRS would send the purchaser a check for $2000. The refundable amount is the difference
between $8000 credit amount and the amount of tax liability. ($8000 - $6000 = $2000) Most taxpayers determine their tax liability by referring to tables that the IRS prepares each year.
5. How does withholding affect my tax credit and my refund?
A few examples are provided at the end of this document. There are several steps in this calculation, but most income tax software programs are equipped to make that determination.
6. Is there an income restriction?
Yes. The income restriction is based on the tax filing status the purchaser claims when filing his/her income tax return. Individuals filing Form 1040 as Single (or Head of Household) are eligible for the credit if their income is no more than $75,000. Married couples who file a Joint return may have income of no more than $150,000.
7. How is my "income" determined?
For most individuals, income is defined and calculated in the same manner as their Adjusted Gross Income (AGI) on their 1040 income tax return. AGI includes items like wages, salaries, interest and dividends, pension and retirement earnings, rental income and a host of other elements. AGI is the final number that appears on the bottom line of the front page of an IRS Form 1040.
8. What if I worked abroad for part of the year?
Some individuals have earned income and/or receive housing allowances while working outside the US. Their income will be adjusted to reflect those items to measure Modified Adjusted Gross Income (MAGI). Their eligibility for the credit will be based on their MAGI.
9. Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the benefit of the credit?
Not always. The credit phases-out between $75,000 - $95,000 for singles and $150,000 - $170,000 for married filing joint. The closer a buyer comes to the maximum phase-out amount, the smaller the credit will be. The law provides a formula to gradually withdraw the credit. Thus, the credit will disappear after an individual’s income reaches $95,000 (single return) or $170,000 (joint return). For example, if a married couple had income of $165,000, their credit would be reduced by 75% as shown: Couple’s income $165,000 Income limit 150,000 Excess income $15,000 The excess income amount ($15,000 in this example) is used to form a fraction. The numerator of the fraction is the excess income amount ($15,000). The denominator is $20,000 (specified by the statute).
In this example, the disallowed portion of the credit is 75% of $8000, or $6000 ($15,000/$20,000 = 75% x $8000 = $6000) Stated another way, only 25% of the credit amount would be allowed. In this example, the allowable credit would be $2000 (25% x $8000 = $2000)
10. What’s the definition of "principal residence?"
Generally, a principal residence is the home where an individual spends most of his/her time (generally defined as more than 50%). It is also defined as "owner-occupied" housing. The term includes single-family detached housing, condos or co-ops, townhouses or any similar type of new or existing dwelling. Even some houseboats or manufactured homes count as principal residences.
11. Are there restrictions on the location of the property?
Yes. The home must be located in the United States. Property located outside the US is not eligible for the credit.
12. Are there restrictions related to the financing for the mortgage on the property?
In 2009, most financing arrangements are acceptable and will not affect eligibility for the credit. Congress eliminated the financing restriction that applied in 2008. (In 2008, purchasers were ineligible for the $7500 credit if the financing was obtained by means of mortgage revenue bonds.) Now, mortgage-revenue bond financing will not disqualify an otherwise-eligible purchaser. (Mortgage revenue bonds are tax-exempt bonds issued by a state housing agency. Proceeds from the bonds must be used for below market loans to qualified buyers.)
13. Do I have to repay the 2009 tax credit?
NO. There is no repayment for 2009 tax credits.
14. Do 2008 purchasers still have to repay their tax credit?
YES. The $7500 credit in 2008 was more like an interest-free loan. All eligible purchasers who claimed the 2008 credit will still be required to repay it over 15 years, starting with their 2010 tax return. Some Practical Questions
15. How do I apply for the credit?
There is no pre-purchase authorization, application or similar approval process. All eligible purchasers simply claim the credit on their IRS Form 1040 tax return. The credit will be reflected on a new Form 5405 that will be attached to the 1040. Form 5405 can be found at www.irs.gov.
16. So I can’t use the credit amount as part of my down payment?
No. Congress tried hard to devise a mechanism that would make the funds available for closing costs, but found that pre-funding would require cumbersome processes that would, in effect, bring the IRS into the purchase and settlement phase of the transaction.
17. So there’s no way to get any cash flow benefits before I file my tax return?
Yes, there is. Any first-time home buyers who believe they are eligible for all or part of the credit can modify their income tax withholding (through their employers) or adjust their quarterly estimated tax payments. Individuals subject to income tax withholding would get an IRS Form W-4 from their employer, follow the instructions on the schedules provided and give the completed Form W-4 back to the employer. In many cases their withholding would decrease and their take-home pay would increase. Those who make estimated tax payments would make similar adjustments. Some "Real World" Examples
18. What if I purchase later this year but can’t get to settlement before December 1?
The credit is available for purchases before December 1, 2009. A home is considered as "purchased" when all events have occurred that transfer the title from the seller to the new purchaser. Thus, closings must occur before December 1, 2009 for purchases to be eligible for the credit.
19. I haven’t even filed my 2008 tax return yet. If I buy in 2009, do I have to wait until next year to get the benefit of the credit?
You’ll have a helpful choice that might speed up the process. Eligible home buyers who make their purchase between January 1, 2009 and December 1, 2009 can treat the purchase as if it had occurred on December 31, 2008. Thus, they can claim the credit on their 2008 tax return that is due on April 15, 2009. They actually have three filing options.
If they purchase between January 1, 2009 and April 15, 2009, they can claim the $8000 credit on the 2008 return due on April 15.
They can extend their 2008 income-tax filing until as late as October 15, 2009. (The IRS grants automatic extensions, but the taxpayer must file for the extension. See www.irs.gov for instructions on how to obtain an extension.)
If they have filed their 2008 return before they purchase the home, they may file an amended 2008 tax return on Form 1040X. (Form 1040X is available at www.irs.gov)
Of course, 2009 purchasers will always have the option of claiming the credit for the 2009 purchase on their 2009 return. Their 2009 tax return is due on April 15, 2010.
20. I purchased my home in early 2009 before the stimulus bill was enacted. I claimed a $7500 tax credit on my 2008 return as prior law had permitted. Am I restricted to just a $7500 credit?
No, you would qualify for the $8000 credit. Eligible purchasers who have already claimed the $7500 credit on a 2008 return for a 2009 purchase may file an amended return (IRS Form 1040X) for the 2008 tax year. This amended return will enable them to obtain the additional $500 credit amount.
21. If I claim my 2009 $8000 credit on my 2008 tax return, will I have to repay the credit just as the 2008 credits are repaid?
No. Congress anticipated this confusion and has made specific provision so that there would be no repayment of 2009 credits that are claimed on 2008 returns.
22. I made an eligible purchase of a principal residence in May 2008 and claimed the $7500 credit on my 2008 tax return. My brother, who has never owned a home, wishes to purchase a partial interest in the home this spring and move in. Will he qualify for the $8000 credit, as well?
No. Any purchase of a principal residence (or interest in a principal residence) from a related party such as a sibling, parent, grandparent, aunt or uncle is ineligible for the tax credit. Since you and your brother are related in this way, he cannot qualify for the credit on any portion of the home that he purchases from you, even if he is a first-time home buyer.
23. I live in the District of Columbia. If I qualify as a first-time home buyer, can I use both the $5000 DC credit and the $8000 credit?
No; double dipping is not allowed. You would be eligible for only the $8000 credit. This will be an advantage because of the higher credit amount, plus the eligibility requirements for the $8000 credit are somewhat more easily satisfied than the DC credit.
24. I know there is no repayment requirement for the $8000 credit. Will I ever have to repay any of the credit back to the government?
One situation does require a recapture payment back to the government. If you claim the credit but then sell the property within 3 years of the date of purchase, you are required to pay back the full amount of any credit, including any refund you received from it. A few exceptions apply. (See below, #24). Note that this same 3-year recapture rule applies, as well, to the $7500 credit available for 2008. This provision is designed as an anti-flipping rule.
25. What if I die or get divorced or my property is ruined in a natural disaster within the 3 years?
The repayment rules are eased for many circumstances. If the homeowner who used the credit dies within the first three years of ownership, there is no recapture. Special rules make adjustments for people who sell homes as part of a divorce settlement, as well. Similarly, adjustments are made in the case of a home that is part of an involuntary conversion (property is destroyed in a natural disaster or subject to condemnation by eminent domain by an authorized agency) within the first three years.
26. I have a home under construction. Am I eligible for the credit?
Yes, so long as you actually occupy the home before December 1, 2009. WITHHOLDING EXAMPLES: Note: The impact of estimated tax payments would be the same. Situation 1: Sally plans her withholding so that her withholding is as close as possible to what she anticipates as her income tax liability for the year. When she fills out her 1040, her liability is $6000. She has had $6000 withheld from her paycheck. She also qualifies for the $8000 home buyer credit. Result: Sally’s withholding satisfies her tax liability and reduces it to zero. She will receive a refund of the full $8000. Situation 2: Nick and Nora file a joint return. Nick is self-employed and makes estimated payments; Nora has taxes withheld from her salary. When they compute their taxes, their combined withholding and estimated tax payments are $11,000. Their income tax liability is $9800. They also qualified as first-time home buyers and are eligible for the $8000 refundable tax credit. Result: Ordinarily, their combined estimated tax payments and withholding would make them eligible for a refund of $1200 ($11,000 - $9800 = $1200). Because they are eligible for the refundable tax credit as well, they will receive a refund of $9200 ($1200 income tax refund + $8000 refundable tax credit = $9200) Situation 3: Cesar and LuzMaria both have income taxes withheld from their salaries and file a joint return. When they file their income tax return, their combined withholding is $5000. However, their total tax liability is $7200, generating an additional income tax liability of $2200 ($7200 - $5000). They also qualify for the $8000 first-time home buyer tax credit. Result: Cesar and LuzMaria have been under-withheld by $2200. Ordinarily, they would be required to pay the additional $2200 they owe (plus any applicable interest and penalties). Because they are eligible for the refundable home buyer tax credit, the credit will cover the $2200 additional liability. In addition, they will receive an income tax refund of $5800 ($8000 - $2200 = $5800). If they owed penalties and/or interest, that amount would reduce the refund.