First time buyers that are thinking of buying a home or condo this year are in luck.
Take a look below for the basics on how the tax credit works and how Missouri residents can get most of the tax credit up front so that they can use it on closing day to cover the down payment and closing costs.
Tax Credit Basics:
How much is the federal tax credit?
Buyers can get a tax credit for 10% of the purchase price of a primary residence up to a maximum of $8000.
Who is eligible?
All first time home buyers are eligible for the tax credit if they meet income guidelines. For the purposes of the tax credit, a first time buyer is defined as anyone that has not owned a primary residence in the last 3 years. If a married couple is buying the property, then they are only eligible if neither has owned a primary residence in 3 years. If unmarried people are buying a property jointly and one of the purchasers meets the eligibility criteria, the credit may be prorated. This provision would allow a parent who is already a homeowner to jointly purchase a property with a child and the child could still get a prorated portion of the tax credit.
Single buyers with an income of up to $75,000, and married couple with an income up to $150,000, are eligible for the full $8000 tax credit. Buyers with incomes that between $75,000 and $95,000 for single individuals and $150,000 to $170,000 for married couples are eligible for a reduced credit. Check with an accountant if you have any questions about your eligibility.
What properties can be purchased?
The tax credit will be awarded for the purchase of any primary residence. Properties can be new or resale, single family homes, attached or detached townhouses or condominiums. The credit can also be used for mobile homes and houseboats.
What is the deadline for purchasing?
In order to be eligible for the tax credit, purchases need to be completed by December 1, 2009. Buyers who purchased a property on or after January 1, 2009 are also eligible for the tax credit.
Does the tax credit have to be repaid?
The federal tax credit that was available in 2008 for first time home buyers was actually an interest-free loan that has to be repaid. Eligible buyers that bought a home between April 1, 2008 and December 31, 2008 will have to repay the $7500 tax credit that they will receive on their 2008 tax return.
In contrast, the newly passed tax credit does not have to be repaid as long as the buyer does not sell the home in less than 3 years.
More information on the tax credit…
Finding the Money for Closing Day:
One of the challenges for first time buyers is saving enough money to cover the down payment and closing costs for their new home.
Since the federal tax credit is not forwarded to buyers until they file a tax return after their purchase, buyers still need to come up with money for closing day.
The minimum down payment for purchases financed through a FHA loan is 3.5% of the purchase price. VA and USDA rural loans are the only 100% loans programs at this time, but the vast majority of buyers are not eligible for these programs.
In addition, closing costs typically run more than 3% of the purchase price. The actual amount is dependent on a number of factors including a buyers credit score and the size of the down payment.
When you combine the required closing costs with the down payment, buyers typically need a minimum of 7-8% of the purchase price at closing. Coming up with the money for closing day is a struggle for many first time buyers. Often a lender can work it out so that a relative can provide a gift (which could later by repaid using the tax credit). For buyers without cash in the bank or a generous relative, the tax credit doesn’t solve the problem of needing money for closing day.
Missouri’s MHDC program comes to the rescue:
MHDC Basics:
Buyers take out two MHDC loans. The first loan is the primary mortgage and the second loan covers the majority of the money needed for the down payment and closing costs. The second loan, an advance on the tax credit, gives buyers up to 6% of the sale price up to a maximum amount of $6,750.
The buyer then files a tax return and gets their federal tax credit. This money is then used to pay off the second loan. If it is paid off by June 2010, then there is no interest owed on the second loan other than a modest servicing fee. If it is not paid off by the deadline, then the loan is converted to a 10 year loan.
MHDC loans are available for households with incomes up to $85,500.
Read more about MHDC loans…
Please note that I am not an attorney or an accountant. You should contact a professional to confirm your eligibility before you purchase a home with the expectation that you will receive the tax credit.
I’m happy to help with referrals to an accountant, real estate attorney, and lender, or to talk with you about your plans for buying your first home.
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