Per Bankrate.com >>

First-time homeowner tax credit

The law will extend a tax credit of up to $7,500 to first-time homebuyers. A first-time homebuyer is defined as someone who hasn’t owned a home in three years.

The tax credit is for 10% of the purchase price, up to $7,500, but phases out for higher-income homeowners. Homeowners are eligible for the tax credit if they bought after April 8 of this year or buy before next July 1.

This is a tax credit, not a deduction. It reduces the homeowners’ tax bill by up to $7,500 for the tax year in which the purchase was made. If you buy a house this year, you get the tax credit for the 2008 tax year — the one with a filing deadline of April 15, 2009. If you buy a house next year by the end of June, you get the tax credit for the 2009 tax year. It’s a one-time credit; you don’t get to keep taking it year after year.

There is a catch, and that is that the money has to be repaid over 15 years, starting two years after you buy the house. That makes the tax credit an interest-free loan. If you take the full $7,500 tax credit, your income tax bill will increase by $500 a year for 15 years. If you sell the house before then, you’ll have to pay Uncle Sam the remaining balance.

Complex issues, such as divorce, death, sale of the house at a loss and conversion of the house into a vacation home are accounted for in the law.

Forgiveness to allow refinancing

A lot of people have fallen behind on their mortgage payments after the rates went up on their adjustable-rate mortgages, or ARMs. And they can’t refinance into fixed-rate loans because their homes have lost value and they owe more than their houses are worth.

Soon to be a law, the housing rescue bill seeks to help these people get out of trouble. It encourages lenders to forgive some of their debt so they can refinance at lower amounts into mortgages insured by the Federal Housing Administration, or FHA.

It works like this: The lender has to forgive all the debt above 90% of the home’s current appraised value. If that leaves you scratching your head, here is a hypothetical example, using round numbers:

Sometime before Jan. 1 this year, you bought a house for $125,000 and got an ARM for $110,000 after making a $15,000 down payment. But the house lost value. Now it’s worth $100,000, based on an appraisal. Meanwhile, the ARM’s rate went up, and you can’t afford the full payment every month.

Under this law, the lender would forgive everything you owe above $90,000. Let’s say that you owe $105,000 of that original $110,000 loan. The lender would forgive $15,000, and let you pay off the loan for $90,000. The lender would not be allowed to seek any of that $15,000 later.

That allows you to find another lender who would underwrite a $90,000 mortgage to be insured by the FHA. That loan amount would include the upfront FHA insurance premium of roughly $2,700.

Again, there is a catch. If you take refuge in this program, you’ll have to share your home-price appreciation with the FHA. If you sell the house (or refinance the loan) less than a year after refinancing into the FHA loan, the FHA gets all of the house price appreciation. The FHA’s cut decreases over the next five years — but never goes below 50%.

What does this mean to the borrower? Take the example above. You refinanced when the house was appraised at $100,000. A little over two years later, you sell the house for $120,000. You split that $20,000 difference with the FHA. In this case, because it’s between two and three years later, the FHA gets 80%. The FHA would get $16,000 and you would get $4,000.

The equity-sharing arrangement goes like this: If you refinance or sell less than a year after getting the FHA loan, the government gets 100% of the home price appreciation. If it’s more than a year but less than two years, the FHA gets 90%. The FHA’s cut then decreases by 10% until the five-year mark. Anytime after that, the FHA gets half of the appreciation, no matter how long you have the loan or own the house.

This arrangement will encourage homeowners to keep their FHA-insured mortgages for at least five years but to refinance before home prices zoom upward again.

Working with home-equity debt

The government has been trying all year to encourage lenders to forgive debt so homeowners can refinance their loans for lesser amounts and remain in their houses. Lenders have been reluctant to forgive the debt. The FHA-refinance plan is another way of encouraging debt forgiveness.

Among the sticking points: Many homeowners have home-equity lines of credit or home-equity loans. In most cases, these lenders will lose that entire loan balance under the FHA-refinance plan. The new law is low on specifics, but it gives the FHA permission to give second lien holders a cut of the home price appreciation proceeds that the FHA collects.

Down payment assistance: Soon a thing of the past

The housing rescue bill, soon to be a law, bans down-payment assistance programs such as the ones offered by Nehemiah and AmeriDream. The ban goes into effect Oct. 1.

Down payment assistance programs took advantage of a loophole in the way the FHA treats down payments. To get an FHA-insured mortgage, the homeowner has to make a down payment of at least 3%. Homeowners don’t have to save even that much; the 3% can come as a gift from family members or nonprofit organizations.

Regulations don’t allow the home seller to provide the down payment money. That’s where down payment assistance programs come in. They are nonprofits. That allows the seller to give the 3% down payment money to Nehemiah or AmeriDream, and then Nehemiah or AmeriDream can turn around and “give” the down payment to the homebuyer as a “donation.”

Fannie Mae and Freddie Mac don’t allow sellers to indirectly give down payments to buyers. But the FHA has allowed this type of transaction for years. The FHA has long complained that down payment assistance programs artificially inflate house prices and that loans using down payment assistance are more likely to default. But prominent congressional Democrats have protected the down payment assistance programs on the grounds that they allow many minority families to become first-time homebuyers.

House Democrats wanted to keep the loophole open, and Senate leaders wanted to close it. With this law, the Senate won.

Property tax deductions for all homeowners

Under current law, you can deduct your property taxes from federal income tax — but only if you itemize deductions on Schedule A. That leaves out people who don’t have enough deductions to warrant filling out Schedule A. They have to take the standard deduction — and that means they can’t deduct their property taxes.

The housing rescue bill changes that. For homeowners who pay property taxes, it increases the standard deduction by $500 for single filers and $1,000 for couples filing jointly. This will be a boon to people, such as retirees, who own their houses outright, and therefore don’t pay any mortgage interest, so they can’t itemize.

You can’t increase the standard deduction by more than the property-tax bill.

So if you’re married filing jointly and you pay $800 in property taxes, you get an $800 deduction, not a $1,000 deduction.

Loan limits extended permanently

There are maximum amounts for loans that the FHA will insure and that Fannie Mae and Freddie Mac will guarantee. Those limits were raised temporarily this year. The new law raises limits permanently.

For FHA-insured mortgages, the new limit will be 115% of the median home price in that area, up to $625,500. That provision will affect loan limits in higher-cost areas. In lower-cost areas, the current FHA limits won’t decrease.

For conforming mortgages — those eligible to be bought by Fannie Mae and Freddie Mac — the conforming limit will remain at least $417,000 for a single-family home. It can be higher than that. Starting next year, the new limit is either $417,000 or 115% of the area’s median home price, whichever is higher — up to $625,500. After that, the limits go up or down according to a price index.

More regulations on reverse mortgages

A reverse mortgage is an advance against home equity. It’s for homeowners age 62 or older, and the reverse mortgage doesn’t have to be repaid until the borrowers die or move out.

Because reverse mortgages are for elderly borrowers, there is concern that dishonest lenders and brokers take advantage of borrowers. Borrowers are required to get counseling first, to learn the pros and cons of reverse mortgages. The law will result in strengthened qualifications for counselors.

The law bars insurance salesmen from originating reverse mortgages and prohibits originators from requiring homeowners to buy annuities or insurance products. (There’s one big exception: The FHA insures reverse mortgages, and borrowers will buy that coverage.)

Finally, the law limits origination fees on reverse mortgages. They can’t exceed 2% of a reverse mortgage of up to $200,000. For a reverse mortgage amount above that, the limit is $4,000, plus 1% of the loan amount above $200,000. Origination fees can’t exceed $6,000 in any case. In future years, this upper limit is indexed to inflation.

Manufactured housing

FHA-insured loans for manufactured houses are limited to a maximum of $48,000, a limit that has been in effect since 1992. That limit finally will be increased to about $70,000 and will be indexed to inflation. These are the limits for loans in which the borrower is buying only the manufactured home and not the land under it.

According to the Manufactured Housing Institute, the raised limit will make a big difference to thousands of families. Under the $48,000 limit, a lot of families can afford only single-section homes. The increased limit will allow more people to buy double-section homes — what are colloquially known as double-wides.

The law directs Fannie Mae and Freddie Mac to come up with new products and flexible underwriting standards for manufactured houses.

Veterans

Service members returning from active duty abroad will be given breaks, effective as soon as the president signs the bill into law.

Some protections apply to service members whose military obligations affect their ability to repay debts — primarily, reservists and members of the National Guard who are called to active duty. They have to leave their jobs and, in many cases, take pay cuts.

For these service members, there are protections having to do with foreclosures and interest rates. If a service member had a mortgage before entering active duty, a lender can’t start foreclosure proceedings until nine months after the service member returns from active duty. Formerly, the protection period was 90 days.

Also, when someone with a mortgage is called up to active duty, the interest rates on all previously existing debt are capped at 6%. That goes for mortgages — and for home loans, that 6% cap extends until one year after the service member returns from active duty.

The Defense Department will be required to provide foreclosure-prevention counseling upon request to service members who are returning from active duty abroad.

Miscellaneous

Other provisions of the law:

• It will establish an Office of Housing Counseling, which coordinate all federal housing counseling functions, as well as produce booklets that will be given to people applying for mortgages.

• It will require licensing and registration of all mortgage brokers. Several states have begun to license mortgage brokers and share the information through the Conference of State Bank Supervisors; this law extends that initiative nationally.

• It won’t ask questions about tornadoes. An earlier version of the bill would have commissioned a study into how to “mitigate the risks to manufactured housing residents and communities resulting from tornados.” The inquiry into this head-scratcher will have to wait for another bill; it was deleted in the final version that passed into law.

This article was reported and written by Holden Lewis for Bankrate.com.

Major market participants, just like individual investors, are constantly searching investment opportunities that will provide the greatest return with the least amount of acceptable risk. All investments inherently possess at least some risk. For example, one risk associated with mortgage-backed securities is a fear of prepayment. A homeowner obtains a loan for a certain duration of time at a certain interest rate. As interest rates fall, homeowners tend to refinance their homes, which lead to the early payoff of the first loan and the origination of a new loan at a lower interest rate.

Investors are very aware of this scenario and factor this risk into their demand for MBS’s. If the demand for MBS’s is strong, the prices of MBS’s increase leading to lower mortgage rates. However, if the demand weakens, mortgage interest rates rise. Continued gains in the US stock market add to the competition for investors’ funds. In addition, Treasury securities also provide competition and thus, volatility.

Regularly, stocks and bonds exhibit a general trading pattern or direction. Last year, bonds steadily increased pushing mortgage rates lower. Unfortunately, the recent pattern has been a wild and almost constant up and down motion resulting in a general increase in mortgage interest rates.

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Some of the Documentation Needed for a Mortgage:
Past two (2) years W-2 statements
Pay Stubs covering the last (30) thirty days
Three most recent monthly bank statements
Most recent transaction summary of 401K, IRA, or Mutual Fund Accounts
Photocopies of any stocks or certificates of deposits
Copy of the purchase and sale agreement
If you are currently renting….either 12 months canceled rent checks or the name and address of your current landlord
If divorced…a fully executed divorce decree
For a refinance…a copy of the deed, and most recent tax bill
A letter of explanation for any known credit problems
For self employed borrowers, employed in sales, paid by commission, or owns rental real estate:
Two (2) years signed personal tax returns - including all schedules
If self-employed through a corporation, last two years corporate returns as well as a year-to-date profit and loss statement and balance sheet
Different programs require varying amounts of documentation. The loan program you select may require more or less documentation. Please contact us for a free, no-obligation consultation.

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The federal funds rate is the rate banks charge each other for overnight loans, which the Fed can influence by easing or constricting the supply of money. The discount rate — what the Federal Reserve charges banks for short-term loans — is set directly by the Fed.

Does this mean I can get a better interest rate on a 30 year fixed loan?
Not necessarily. The Fed rate doesn’t directly effect long-term fixed mortgages. Sometimes, a fed rate cut can actually influence long term rates to go UP, which actually happened a week or so ago when they cut the rate 75 basis points in an emergency session.

Then, what does the rate cut mean for me?
If you have an Adjustable Rate Mortgage, a construction loan, credit cards, or a home equity line, then you are going to be helped out by the lower rates.

The average 15-year fixed rate mortgage, popular for refinancing fell
to 5.28%, and the average jumbo 30-year fixed rate sank to 6.98%.
Adjustable mortgage rates were lower also, with the average one-year
ARM slipping to 5.93%, and the average 5/1 ARM diving to 5.67%.

With the national economic worries about a potential recession, these rates are falling at the fastest pace in 20 YEARS!!!

WHAT DOES THIS MEAN FOR YOU??

If you are buying in the Huntsville Alabama Metro Area, it’s a dream come true! The rates will bottom out soon, and within the next couple of weeks will be a great time to buy a home in our area. Just imagine how lucky a person would be to be able to buy a home in an appreciating real estate market with a great interest rate! Within the next two to three years, with the vast amount of jobs coming to our area, we are going to be looking at a BIG reduction in available inventory, thereby pushing home prices up. The coming weeks will be an excellent time for the smart investors and homeowners to really stake a claim.