Just when the party is beginning to show signs of life, do you take away the only punch bowl?

Even though first-time homebuyers are driving the housing market, there has been little energy in the nation’s capital to extend the $8,000 tax credit beyond the Nov. 30 deadline.

That doesn’t mean that some of the more influential trade organizations in this country have stopped trying to convince legislators that the first-time incentive is key to sustaining any semblance of housing momentum. Representatives from the National Association of Home Builders, along with the National Association of Realtors, believe the tax credit is critical to their members.

October is already here. If a first-time homebuyer did find a home in time to beat the deadline, how much time would be needed to close the deal?

Most lenders say they need a minimum of 30 days to close a loan and many will not guarantee that everything will be wrapped up by Nov. 30. Just to be safe, it’s best to get started as soon as possible with as much documentation as possible. The number of applicants will increase as the deadline for the first-time buyer tax credit approaches.

FHA-insured loans can take longer, even with an in-house underwriter. If the lender must send the file to the investor to have it underwritten, the lender is at the mercy of the investor’s workload. Underwriting time frames should be shorter now because overall volume is lower, but everyone in the lending industry expects a late tax-credit rush.

A crucial element in getting loans processed and closed in a timely matter is a complete file. If you have spent time only shopping for a home and not compiling your financial package, here is a list of the top five documents to immediately prepare for your lender:

  • Copy of driver’s license and Social Security card
  • Pay stubs (covering most recent 30 days)
  • W-2 and 1099 statements for 2008 and 2007
  • Copy of 2008 and 2007 federal tax returns with all schedules
  • Bank statements for checking, savings, money market, CDs and IRAs (covering past two months) including account number and bank. …CONTINUED

Often the initial underwriting loan review will trigger additional requirements needed from the borrower. With new rules now in play regarding appraisals and disclosures coupled with the overall tightening of underwriting guidelines, it will be key to start the loan process as soon as possible in case additional documentation or verification need to be met for final loan approval.

There are income limits attached to the $8,000 first-time credit. A phase-out of the credit begins when the taxpayer’s modified adjusted gross income exceeds $75,000 if single or $150,000 if married filing jointly. The credit is eliminated completely when the taxpayer’s income reaches $95,000 (single) or $170,000 (married filing jointly). Taxes owed or refunds due to the taxpayer are factored into the calculation.

Modified adjusted gross income, or MAGI, is a calculation created by the Internal Revenue Service. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is the total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"). AGI includes all forms of income, including wages, salaries, interest income, dividends and capital gains.

While first-time buyers are often viewed as young people seeking their first home, a first-timer does not necessarily have to be "young." The IRS defines a first-time buyer as anyone who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the homebuyer and his/her spouse.

For example, if you have not owned a home in the past three years, but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time homebuyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time homebuyer.

In addition, first-time homebuyers must purchase the property from a source unrelated to them. For example, they cannot purchase the house from a spouse, parent, grandparent, child, or acquire the property by gift or inheritance and obtain the tax credit.

Now, let’s hope for an extension.

Tom Kelly’s book "Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border" was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com.


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