Housing & economic recovery act, how it will help the market
Monday, September 22nd, 2008The recently enacted Housing and Economic Recovery Act will do a number of positive things for the housing market (and a couple that are not so positive). One of the most significant is the $7,500 (maximum) homebuyer tax credit, which we discuss in detail separately below. In addition, the new law makes changes in a number of areas, including:
Fannie Mae & Freddie Mac Conforming Loans: The conforming loan limit under the economic stimulus law passed earlier this year is generally $417,000. However, in high cost areas it can rise to 125% of the median home price in a metropolitan area, to a maximum of $729,750. The new law will reduce the maximum to $625,500, and lower the percentage for high cost areas to 115% of the median home price. These levels will take effect after expiration of the stimulus levels at the end of this year.
FHA Loans
The law increases the base FHA loan limit permanently to $271,050, the present temporary level. In higher cost areas the loan limit will be 115% of the local area median home price, up to a maximum of $625,500. Under economic stimulus legislation passed earlier this year, the current limit, as with conforming loans, is 125% of the area median, with a maximum of $729,750. Because these maximums last only through the end of this year, if you need a conforming or FHA loan at the higher current level, better act fast. A modest negative is that FHA loans will now require at least a 3.5% downpayment, up from 3%. That should not be a deal-breaker for most homebuyers. This change takes place immediately, so there is no avoiding it. A more significant change is that buyers with little or no downpayment funds available can no longer get outside assistance for downpayment help from sellers. The law prohibits buyers from getting assistance from parties with an economic interest in the sale, though help from nonprofit groups funded by churches, employers or family members is still okay. Previously, sellers, especially homebuilders, were able to channel funds through a nonprofit entity back to purchasers for a downpayment.
No more, at least after October 1, so it is probably too late unless you have a deal already in the works. Finally, an FHA initiative to introduce a tiered “risk-based pricing” system is put on hold through September 2009. Thus, FHA homebuyers will continue to pay a mortgage insurance premium based on the downpayment amount only, and not on credit scores.
VA Loans:
It was a considerable oversight that economic stimulus legislation earlier this year failed to increase the loan limit for VA at the same time that it raised the conforming and FHA limits. The VA provides a guaranty amount of $104,250, which effectively serves as a 25% downpayment for a loan at the $417,000 standard conforming limit. The new law increases the VA maximum guaranty to 125% of the area median price up to $729, 750 through the end of 2008.
Property Tax Deduction for Non-Itemizers:
Homeowners who don’t have enough deductions to make it worthwhile to file an itemized return will get an additional standard deduction equal to $500 (for single filers), $1,000 (for joint return filers) or the amount of taxes paid if it is less than those amounts. This tax change is in effect for 2008 returns only at this point. This change will especially benefit older homeowners and others who have paid off or paid down their mortgage and no longer have the big interest deductions that usually are the major reason for itemizing.
Changes in Homeowner Exclusion for Property With Periods of “Non-Nonqualified Use:”
Previously, you could take a full homeowners exclusion for gains on property that had been used as a vacation or second home by fulfilling the requirement that you live in it as your main home for at least two years (out of five). Now, homeowners who sell a property that has had a period of non-qualified use (as other than a principal residence) will only be able to exclude a percentage of the gain, the portion of the period for which the property was the main home. The new rule will apply to property sold after this year. Only periods of non-qualified use that begin after 2008 will be counted for the new rule.
FHA Mortgages for Distressed Borrowers:
The new law provides the latest, most far-reaching (but not all-inclusive) and perhaps last effort to reduce the number of foreclosures. The “Hope for Homeowners Act” provides a chance for homeowners to refinance into more affordable mortgages. Only owner-occupants are eligible and must have a ratio of mortgage debt to income of 31% or more. Homeowners must certify that they have not intentionally defaulted on their loan or obtained the original loan through fraud and their income will have be verified with the IRS. If the homeowner meets the above criteria, they will be eligible for the program, which would refinance them into a fixed-rate FHA loan on a loan amount they can “reasonably repay.” This would require their current lender to write down their mortgage to the new loan amount, at a minimum 90% of the current value. But the program is voluntary, so the lender is not required to go along. However, since the alternative would usually be foreclosure, depending on the particular circumstances, the lender might find it worth while. The program will be in effect from October 1 through September 30, 2011.
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