A few weeks ago, I was taking the van service from my hotel in Manhattan to Newark Airport. It was early in the morning and the driver was listening to a talk show. I was half asleep and wasn’t paying much attention to the squawking except at commercial breaks when I kept hearing advertisements from a local mortgage company about first-time homebuyer tax credits.

The reason my thought processes kept waking up at the commercials was that:

1. It was such anomaly. There was a time, in the middle of this decade, when we probably heard nothing but commercials from mortgage companies, but that was at least two years ago. With the collapse of the housing market and, to some extent, many of the country’s largest mortgage firms, we enjoyed mostly silence on the airwaves about residential lending.

2. Why would a mortgage company run ads about the tax credit, since credits really had nothing to do with getting a mortgage?

The $787 billion stimulus bill President Obama signed into law earlier this year included an $8,000 tax credit for first-time homebuyers. There is a time limit on this offer; the sale of the home must close between Jan. 1, 2009 and Dec. 1, 2009.

Now, a tax credit will not help anyone get into a new home. It comes at the very end of the home-buying process; it is put into place after all the paperwork has long been completed. Months later when it’s time to do your taxes for 2008 (or for 2009), you fill out the appropriate forms if you haven’t done so already, and then weeks later, you open your mailbox to find — depending on your tax situation — a refund check from the U.S. government.

(First-time homebuyers may be able to sell their anticipated tax credit or obtain a loan against it that can be used toward their down payment. The Federal Housing Administration issued guidelines in May allowing FHA-approved lenders, nonprofits and government agencies to purchase the tax credits. In most cases, the tax credit can’t be used to meet the FHA’s 3.5 percent minimum down-payment requirement. Down-payment assistance loans offered by some state housing finance agencies are an exception.)

How does this work?

The tax credit is a refundable credit, which means that if you pay less than $8,000 in federal income tax, the government will send you a check for the difference. If you owe $4,000 in federal taxes, your payment to the Internal Revenue Service would be nil, plus you would get a $4,000 payment from the government. What happens if you didn’t owe any money to the federal government and instead were expecting a $2,000 refund? That’s even better because the refund would grow to $10,000 once the tax credit gets added into the mix.

While it’s a great deal for the homebuyer, I was curious, if the tax credit was included in a "stimulus" bill, why wouldn’t the government incite buyers to acquire homes with actual mortgage help at the beginning of the process. …CONTINUED

Dan Green, who developed The Mortgage Reports Blog and remains a loan officer with Mobium Mortgage Group Inc. in Cincinnati, explained it to me this way: If your financial health is in such a tenuous position that you couldn’t get a mortgage without government aid, then there is no lender in the country that would give you that mortgage today.

"Mortgage guidelines have gotten to the point, where it really does require a solid financial profile in order to buy a home," says Green. "In theory, the folks buying today are more qualified than those buying several years ago."

To which he adds, the homebuyer credit is really independent of the deal (to buy a house). It is simply a tax issue. As a true credit, it does not have to be repaid — unless the home is sold within three years after the purchase.

That’s the first thing to understand about the tax credit. It’s not going to help you buy a new home, but if you do purchase one, you will be rewarded by the federal government at tax time. (Single homebuyers can get the $8,000 credit if modified adjusted gross income (MAGI) is less than $75,000; married couple’s MAGI needs to be less than $150,000.)

Secondly, what most people don’t understand about the tax credit is that the government has broadened the definition of a "first-time homebuyer" to include someone who has owned a principal residence but not during the three-year period prior to this year’s purchase. If you owned a home in New York, but five years ago you sold it because you were transferred to Portland, but never bought a home there, you could now qualify as a first-time homebuyer.

The credit can be a dealmaker, notes Mark Perry, professor of economics at the University of Michigan Flint campus. This wasn’t just an insightful comment based on the perusal of data, but something from personal experience. "My sister just bought a house in Washington, D.C.," Perry explains. "She’s not a first-time homebuyer, but she had been out of the market for three years so she qualifies as a first-time homebuyer for the purposes of the tax credit. Being able to get that $8,000 tax credit really made the difference to her in a tight housing market like Washington, D.C. The credit is enough to make a difference."

Tom Kunz, president and CEO of Century 21 Real Estate LLC in Parsippany, N.J., would concur. Like that mortgage company in New York, he wants Century 21 agents to promote the tax credit. His company not only is offering training programs about it, but also Web site links for information. Some Century 21 offices are even holding first-time homebuyer seminars.

Obviously, a company like Century 21 wants to see more activity in the housing market so it would be a good idea to promote the tax credit. However, Kunz really supports the program based on economics, which he says can be a thing of financial beauty, especially as part of an overall incentive package: A number of states and municipalities have issued their own programs to bring homebuyers back to the market. California, as an example, offers tax credits for buyers of newly built homes, and in my home of state of Arizona, the city of Phoenix boasts a down-payment assistance program.

"I don’t feel enough people know about these tax credit programs — that’s why we are pushing our agents to get into the marketplace and start to talk about them," says Kunz. "If you bought a home prior to 2004 and aren’t investigating the marketplace this year, you are missing a huge opportunity."

Steve Bergsman is a freelance writer in Arizona and author of several books, including "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade."


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