Deadline for $8,000 tax credit is fast-approaching. Take the necessary steps to buy a home now.
The $8,000 federal tax credit for certain qualified home buyers is scheduled to expire December 1, 2009. Don’t be fooled by this deadline. This does not mean you have three months left to find your new home and make an offer. Instead, you have three months to close completely on the home sale.
To receive the tax credit, you must complete all transactions and take possession of your new home on or before December 1.
Since the closing process can sometimes take up to two months to complete as you wait for bank approval, or review of a home appraisal, etc., you really have only about 30 – 45 days left to put in an offer on a home.
Here are 5 tips courtesy of Coldwell Banker to help you get to closing by October 1:
1. Find A Qualified Real Estate Agent. A real estate agent will arrange showings; keep track of the properties visited, and can help identify suitable lawyers, mortgage lenders and home inspectors.Remember, an agent is an expert that can help you negotiate the best price and incentives on a home.They can also keep the process on track to ensure that closing on the new home occurs within the deadline for the $8,000 tax credit.
2. Get your credit report in order.Lenders today are looking at prospective borrower’s credit reports more closely than ever, so it’s important to examine your credit report for mistakes and eradicate any “toxic” debt (such as overdue credit-card payments) before the home shopping begins.Rectifying mistakes is easy but can be time consuming, so be sure to address any errors as soon as possible.
3. Compile your paperwork.Lenders require a number of items from potential home buyers so it’s best to be prepared.Pull together the following documents for yourself and any co-applicants on the loan:
Verification of employment form
Two most recent pay check stubs and bank statements
Copies of the last two W2 forms received from employer
Copies of any asset statements including those for retirement accounts, stocks, bonds or mutual funds
Copy of social security card
4.Get Your Pre-Approval. “Pre-approval” means that a lender has verified the borrower’s credit, funds for down payment and closing costs and other credentials and is committed to making a loan. Getting this early green light will put you in a stronger position with sellers by demonstrating that you are serious and well-qualified.
5. Shop for the most favorable mortgage option.It’s imperative for home buyers to educate themselves on the risks of the different types of mortgages and select the right one for his / her family. A difference of even half a percentage point can mean a considerable savings over the life of a loan
It's a bad idea to take an early withdrawal, loan or a disbursement from your 401(k). Consider it untouchable until retirement age, as it is not a good financial move to use it to pay off credit cards or remodel your kitchen.
As the U.S. unemployment rate spikes to 9.5% as of June 2009, more and more people are considering taking a distribution from their 401(k) or withdrawing from other retirement accounts to help meet their expenses. This is a move of last resort, and even then it still remains a bad idea.
Any money you withdraw from a 401(k) or take as a distribution after losing your job, is like stuffing 40% of it down your garbage disposal, flipping the on switch and saying goodbye to that money forever.
When you take money from your retirement account before age 59 1/2 you:
Pay a 10% penalty on the withdrawal
Have to report the money as income on your taxes, potentially taking another 28% hit
Lose compounded growth of your retirement account
Have less to live on when you actually do retire
I spoke with the Associated Press about 401(k) withdrawals and loans back in March 2009. Watch this video to learn more.
Add one more incentive to the up to $8,000 in tax credits the government is offering first-time home buyers (including those who haven’t owned a home in the last three years): Apply the funds toward your down payment, closing costs or to buy down your interest rate. But note, with this option comes some downsides.
Last week the FHA announced that it will permit lenders to give qualified buyers a short-term bridge loan, up to the amount of their tax credit, to use as down payment assistance.
A bridge loan with a home sale is a temporary loan that “bridges” the gap between the sales price of a new home and a home buyer’s new mortgage until other funds are obtained.
For the home buyer, essentially this means that you are selling, or promising, your tax credit to the lender in exchange for them loaning you the money up front to help cover your closing costs.
Upsides
This is all good news, as applying your tax credit toward your home purchase can help you:
lower how much loan you need to take out, thus lowering your monthly payments
cover your closing costs, which means this may provide you with just enough funds to help you qualify to buy a home.
Downsides
Still need 3.5% down. You cannot use the tax credit loan to cover any part of the 3.5% minimum downpayment that FHA requires, so you will still need to come up with some funds on your own. (You can apply the tax credit loan toward an additional downpayment to, say, help you meet a 5% downpayment, or you can use it to cover other closing costs).
Processing fees deducted. Remember, this option is a loan, and thus is subject to the lender’s fees, which could equal up to 2.5% of your anticipated tax credit. What this means is in the end you will be getting less money back on your tax credit. For example, if you qualify for the full $8,000, but used it toward closing costs, you’d only receive funds toward your purchase equal to $7,800 because $200 (2.5% of $8,000) is paid to cover your lender’s processing fees.So, if you don’t need to take out a bridge loan, don’t and save yourself the extra fees for extra cash in your pocket.
Your First Home: The Smart Way to Get It and Keep It
Mortgage interest rates are at historic lows. If you have great credit with a FICO score above the mid-700’s, these days you’ll probably qualify for a rate below 5%. Despite the low rates, if you make a home purchase, should you pay points to lower your rate even more? Generally, my answer is “No.”
What is a Point?
A “point,” also known as a “discount point,” is a fee that costs you one percent of your loan amount, and will typically knock about 1/4 to 1/8 of a percent off your interest rate. It might take 4 points or more to bring your interest rate down one full percentage point.
While it might sound like a good idea to pay a one-time fee up front in order to “buy down” your interest rate, in reality, paying points is often a money-losing game.
Consider This Scenario
Say you apply for a $250,000, 30-year mortgage loan at a 5% fixed interest rate with no points, your monthly payments would be $1,342.
If you then wanted to pay one point to buy down your loan rate to 4.75%, it would cost you $2,500 (almost two months worth of mortgage payments, in this case). Your new payments would be $1,304, a savings of $38 a month or $456 a year.
If you divide the cost of that point by your yearly savings, you will find that it would take you about 5.5 years to reach the break-even month on the cost of that point.
So if you knew for certain that you were going to stay in your home for more than 5 and a half years, then buying the point might be worth it. You also, however, would have to be certain that you will not refinance your mortgage within those 5 years. Although you might think you wouldn’t want to refinance given how low your rate would be, you also can’t say for certain if what I call the “Dreaded Ds” (divorce, disease, disability, or death in the family) might occur, making it necessary for you to refinance.
Another Savings Option
However, a safer bet on yearly savings without having to worry about when you might move, is to use that $2,500 to lower your mortgage loan amount and instead take out a loan for $247,500 with monthly payments of $1,328, which would be $14 a month less than on a $250,000 loan, and a savings of more than $10,000 in interest paid over the life of the loan.
Advantage to Paying Points
I must admit, the one advantage to paying points on a home purchase is that they are tax deductible in the year you pay them. If you can get a seller to pay the points for you at closing, then it’s not money out of your pocket, you lower your rate, save interest over the life of your loan, and you can still take the tax deduction. Ideally, however, you personally shouldn’t pay for any discount points on a mortgage.
For more information on selecting the right mortgage, see my book, “Your First Home: The Smart Way to Get It and Keep It.” It has a lot of helpful tips even for those people purchasing their second or third home.
Under Obama’s “Making Home Affordable” loan modification program, owners who are in risk of losing their home or are on the verge of not being able to make their monthly mortgage payments may be eligible to have their monthly mortgage payments reduced down to as much as a 2% interest rate to help them meet their obligations.
To determine if you qualify for the program you must answer yes to ALL of the following questions:
Loan Date: Was your loan taken out (originated) prior to January 1, 2009?
Primary Residence: Is the property where you want the mortgage modified your primary residence? (If it is a vacation home or rental property where you don’t live, you will not qualify).
Number of Units: Do you own a single-unit property or one with four-units or less? (If you live in one unit of the building and rent out one or more units in the same building, up to three units, then you will still qualify).
Mortgage Balance: Do you have an unpaid principal balance that is equal to or less than $729,750? (This limit can be higher for four-unit properties.)
Monthly Payments: Do you have a mortgage payment (including property taxes, insurance, and home owners association dues) that is more than 31% of your gross (pre-tax) monthly income? If you’re not sure, use this tool to determine the percentage.
Cash-Strapped: Are you having trouble paying your mortgage or are on the verge of doing so? (Answer yes if you are 31 days or more late on your mortgage payments, have had a major reduction in your income since taking out your loan, or have suffered some major financial hardship such as mounting medical bills, financial issues related to divorce, or just had or are expecting a balloon payment coming due or mortgage rate increase from an ARM.)
If you answered yes to all of the questions above, you may qualify for the loan modification program and can move on to the next step, as outlined by the government at Making Home Affordable site.
If you are not in financial hardship and are current on your mortgage, but would like to take advantage of current low interest rates and can’t because there is not enough equity in your home, you might qualify for the Refinance plan under Making Home Affordable program. Check here for my article about the Refinance plan.
It’s a great time to buy a home. Mortgage rates are pushing down below 5%, homes are more affordable than they have been in nearly a decade, and there’s a tax credit of up to $8,000 waiting for many buyers. To determine if you qualify for the tax credit under The American Recovery and Reinvestment Act of 2009, follow the checklist below.
You qualify for the tax credit if you meet all of the following:
You are a U.S. citizen or a qualified U.S. resident. If you have a valid Green Card or are otherwise a U.S. citizen or resident, you should qualify for the tax credit. Non-resident aliens as defined in IRS Publication 519 will not qualify.
You or your spouse have not owned a home as your primary residence in the last three years. If you have owned a vacation home or rental property you will still qualify for the tax credit so long as you haven’t owned a primary residence since the start of 2006.
You purchase or build a primary residence. Any home you will use as your primary residence will qualify for the tax credit. This includes existing or new construction single-family detached homes, townhouses, condos, mobile homes and even houseboats, if that houseboat will be your primary residence. If you hire a contractor/architect to build a home on land you already own, you will also qualify provided construction is complete and you move in between January 1 and December 1, 2009. You will not qualify on the purchase of rental property or vacation homes.
The home purchase date (i.e. “the closing”) occurs on or after January 1, 2009 and before December 1, 2009. Note, if you close on the home sometime during December this year, even if you entered into the contract in October or November, you will not qualify for the tax credit.
You make less than $95,000 as an individual or $170,000 filing jointly. If you make less than $75,000 filing as single or head of household, you should qualify for the full $8,000 (if the home costs at least $80,000, otherwise you will receive 10% of the purchase price). If you make less than $150,000 as married, filing jointly, you should also qualify for the full $8,000. If you make more than these amounts, but under $95,000 as an individual or $170,000 filing jointly, you will qualify for a lesser amount. If you make more than those upper figures, you will not qualify at all.
You claim the tax credit on your federal income tax return. Complete IRS form 5405, which will help you determine how much of the $8,000 credit you qualify to claim. Put the determined amount on Line 69 of your 1040 tax return.
The average American family owes $8,000 in credit card debt, according to the American Bankers Association. All together American consumers were carrying $2.564 trillion in total debt in January 2009, up 1.2% from December, reports the Federal Reserve.
We are a nation in deep debt, but there are some strategies you can take to help yourself out of your own personal debt. Here are four tips for tackling credit card debt that will help raise your credit score.
Use tax refund to pay debt. If you’re expecting a tax refund, apply it to pay down your credit card debt. It was money you didn’t have the day before so don’t use it on luxuries. If your refund can pay off any one of your credits cards in full, pay it off. It will be one less bill you’ll have to worry about. Paying off a card will also help raise your available credit, which, believe it or not, helps to raise your credit score.
Don’t close any accounts. Even if you pay them off in full, even if they have a high interest rate, you still want to leave your accounts open. When you close out accounts, you hurt your FICO credit scores in two ways. First, you decrease your available credit, which is used as a criteria in calculating your credit score. Also, you decrease the “average age” of your accounts, and cut off that past credit history. Remember, the longer a credit history you have, the more it works in your favor. 15% of your credit score is based on the length of your credit history.
Hide your cards. Just because you leave an account open, that doesn’t mean you have to use the card to help your credit score. An open account is not the same as an active account. To avoid the temptation of using a credit card, put the card in the freezer, store it in a hiding place that’s hard and inconvenient to access, or go ahead and cut it up if you absolutely must. (I typically don‘t recommend cutting up cards as a general strategy, because the problem isn’t the cards, the problem is us, and our ability to control our spending!)
Choose card to pay off first. I know this is going to sound like financial heresy, but there’s a huge problem with the age-old advice of “pay off high-interest rate debt first.” This strategy doesn’t work for most people, especially if your interest rates aren’t that high or if it will take only a small amount of money to pay off a different card and years to pay off the card with the highest interest rate. The best strategy for knowing which card to tackle first is to know what’s really bugging you about your cards. Is it high balances, the sheer number of cards or the compounded interest rates? Tackle the source of your pain first so that psychologically you feel as if you’re making a dent on your debt so that you don’t just stop making payments, which could hurt your credit score even more.
Many people are cutting back their contributions to their retirement plans, such as to their 401(k) or IRA because of the deflating U.S. economy and even their deflating pocketbooks. If you’re one of those people, or are one considering saving money by not contributing to retirement, that’s not the way to go. You’ll only feel the sting even more at tax time.
Adding to your 401(k) or another retirement plans through your employer actually will gain you money now, not just when you retire. Consider these five points about retirement contributions:
1) Save on your income taxes. When you add to your retirement account you reduce your taxable income. The less you add in, the more you’ll pay in taxes. If you’re under 50 years old, you can contribute as much as $15,500, and you will not be taxed on that much income. So imagine, by not contributing that, or even a lesser amount, you will be taxed on it. If you’re at a 25% tax bracket, that would be $3,750 in taxes on $15,500.
2) Reduce your FICA tax. A 401(k) contribution reduces how much you pay out in FICA tax each pay period, since your taxable income is being reduced. (The same does not apply to the Medicare tax, however.)
3) Increase your chances for tax credits. Tax credits start to phase out for upper-income earners. However, contributing to your retirement plan may let you take full advantage of the dependent-care, dependent-child, and tuition credits since your take home pay would be reduced.
4) Claim more itemized deductions. If you itemize your deductions contributing may keep your income below the level at which itemized deductions are reduced.
5) Get free money from your employer. Although many employers recently have changed how much per dollar they match on your retirement contributions, most companies still offer some form of matching. You’ll only lose that free money if you don’t contribute to your plan.
It’s time to get busy filling out those tax returns. Mercifully, you don’t have to pore over thousands of pages of the IRS tax code, nor do you have to pay an expensive accountant in order to get your taxes done by the April 15 deadline.
If you earned roughly $42,000 or less, or if you can’t prepare you own taxes, you can get help in filling out your tax return and even claiming the EITC from a Volunteer Income Tax Assistance (VITA) site in your area.
The VITA Program operates nationwide, and is staffed by individuals who are trained in completing basic tax returns. You can find a local VITA site by calling 800-829-1040. Most of the country’s 12,000-plus VITA sites are run out of community agencies, neighborhood centers, libraries and schools.
Here is what the IRS recommends you bring to a VITA site to have your tax returns prepared:
ID: Proof of identification
SS cards: Social Security Cards for you, your spouse and dependentsand/or a Social Security Number verification letter issued by the Social Security Administration
DOB: Birth datesfor you, your spouse and dependents on the tax return
Tax forms: Current year’s tax package if you received one
W2: Wage and earning statement(s) Form W-2, W-2G, 1099-R, from all employers
1099: Interest and dividend statements from banks (Forms 1099)
Last return: A copy of last year’s federal and state returns if available
Bank info: Bank routing numbers and account numbers for Direct Deposit
Daycare info: Total paid for daycare provider and the daycare provider’s tax identifyingnumber (the provider’s Social Security Number or the provider’s business Employer Identification Number)
One special feature of the earned income tax credit is that you can get it sooner, rather than later. If you expect to qualify in 2009 for the earned income tax credit and you have at least one dependent child, you can request part of that credit right now under the “Advance EITC Program.”
Here’s how it works. You fill out a Form W-5, which is called the Earned Income Credit Advance Payment Certificate. (Get a Form W-5 from your employer, or download a copy from: http://www.irs.gov/pub/irs-pdf/fw5.pdf.) Soon after you complete the W-5, you will begin receiving advance EITC payments through your employer. The EITC payments are added to your regularly scheduled paychecks. If you are self-employed, you cannot qualify for the advance payment.
In 2009, the maximum advance EITC payment amount you can receive through your employer is $1,826. Once tax season rolls around next year, you can still claim the earned income tax credit and receive the balance of any money that may be due you, above and beyond the $1,826 that was added to your pay over the course of this tax year.
To be eligible for the advance earned income credit payment, all four of the following must be true:
You (and your spouse, if filing a joint return) have a valid Social Security Number
You expect to have at least one qualifying child, and to be able to claim the earned income credit using that child
You expect that your 2009 earned income and adjusted gross income will be less than $35,463 (or $38,583 if married filing jointly), with one qualifying child. Or you expect to have two or more qualifying children, and you expect your 2009 income will be less than $40,295 (or $43,415 if married filing jointly).
You expect to be able to claim the EIC for 2009
The W-5 form is very short, easy to fill out, and will likely take you just one minute to complete.
On the W-5, you simply print or type your full name and social security number. Then you answer “Yes” or “No” to two questions, and check a box indicating your tax filing status (i.e. single, head of household, qualifying widow(er), or married filing jointly). At the bottom of the form, you sign and date the W-5, and that’s it.
1. Find A Qualified Real Estate Agent. A real estate agent will arrange showings; keep track of the properties visited, and can help identify suitable lawyers, mortgage lenders and home inspectors. Remember, an agent is an expert that can help you negotiate the best price and incentives on a home. They can also keep the process on track to ensure that closing on the new home occurs within the deadline for the $8,000 tax credit.
Compile your paperwork. Lenders require a number of items from potential home buyers so it’s best to be prepared. Pull together the following documents for yourself and any co-applicants on the loan:
Tip: To learn more about purchasing a home, read my book, “Your First Home: The Smart Way To Get It and Keep It.” It has plenty of tips to suit even homeowners who are in their second or third home. See the table of contents and an excerpt in this downloadable PDF.
