Whenever we get questions about the Federal Housing Tax Credit I always reference the National Association of Home Builder’s Frequently Asked Questions page.  Recently we have been asked some questions that are not answered on that site.  Here are the questions we have received and hope to clear up within this post:

The Deadlines

There are 3 deadlines for the Federal Housing Tax Credit to be aware of:

• you must enter into a “binding contract” on or before April 30, 2010
• you must close on or before June 30, 2010
• members of the military and certain federal employees are provided a one year extension of the dates above

The “Binding Contract”

According to the IRS, “you must enter into a binding contract to buy the home before May 1, 2010, and close before July 1, 2010, in order to obtain the credit.”  The term “binding contract” has created confusion in the real world due to situations such as short sales, HUD Homes or bank owned properties.  In all of those situations the date the buyer and seller agree to the contract may be different from the actual date the contract is considered “binding”.  I visited a lot of different websites, blogs and forums to get an idea of what others thought.  Here is what they said:

According to the IRS, a buyer must have Bank Acceptance on a Short Sale by the deadline (April 30th) in order to qualify for the credit. I was told that acceptance by the seller on a Short Sale does not constitute a “binding agreement” and the terms of the tax credit call for just that, a binding agreement.”
RealTown.com: http://www.realtown.com/community/RealTalk/view/YZEIPEA?page=1

Buyers who want to claim the credit should be wary of short sales.
BankRate.com: http://www.bankrate.com/finance/mortgages/last-minute-homebuyer-tax-credit-tips-1.aspx

It is only my personal opinion that IRS will consider it a “binding contract” if all parties to the contract have signed the “Offer to Purchase” by April 30, 2010 and there is no contingencies other than inspections, appraisals, title etc.
John Willoughby on Ezine Articles: http://ezinearticles.com/?First-Time-Homebuyer-Tax-Credit—What-is-a-Binding-Contract?&id=4085198

The last site I wanted to quote was the IRS themselves on a previous issue surrounding a “binding contract”.  Here is what they stated was considered a “binding contract”:

Binding contract—(A) In general. A binding contract is an instrument enforceable under applicable law against the parties to the instrument. The presence of a condition outside the control of the parties (including, for example, regulatory agency approval) shall not prevent an instrument from being a binding contract. Further, the fact that insubstantial terms remain to be negotiated by the parties to the contract, or that customary conditions remain to be satisfied, shall not prevent an instrument from being a binding contract. If a term of a binding contract that relates to the amount or type of the consideration the target shareholders will receive in a potential reorganization is modified before the closing date of the potential reorganization, and the contract as modified is a binding contract, the date of the modification shall be treated as the first date there is a binding contract.
IRS: http://www.irs.gov/irb/2004-37_IRB/ar15.html

My Opinion

You might not care what my opinion is on this but I am going to give it to you anyway.

Short Sales

Based on everything I read and the IRS’s definition of a “binding contract” I believe that short sales not approved by the bank are NOT considered binding since the “amount or type of the consideration” is still in question and until the bank has approved the short sale, the date of the “binding contract” is not set.

HUD Homes

Once a bid is accepted by HUD there are no changes relevant to the “amount or type of the consideration” and therefore is considered binding even without the actual signature from HUD is considered a “regulatory agency approval” which the IRS has stated “shall not prevent an instrument from being a binding contract.”

Bank Owned Properties

Banks are the seller and will therefore the IRS will require full sign off by the bank on an offer to be considered “an instrument enforceable under applicable law against the parties to the instrument.”.  I believe that this means that without a bank signature you do not have a “binding contract”.

Tax Credit Extension?
My opinion…I have no idea!  Here is what others have to say though…

• Tax Credit Extension? Don’t Bet the House On It from the Wall Street Journal
• “does not look as if the tax credit will be extended” by Subprime Blogger
• Demand will dictate extension by HSH Associates

Lending A Hand,

Scott Wynn

The Wynn Team

Members of the military and certain other federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and qualify for the credit. Thus, an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2011. If a binding contract is entered into by that date, the taxpayer has until June 30, 2011, to close on the purchase.

Members of the uniformed services, members of the Foreign Service and employees of the intelligence community are eligible for this special rule. It applies to any individual (and, if married, the individual’s spouse) who serves on qualified official extended duty service outside of the United States for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010.

In many cases, the credit repayment (recapture) requirement is waived for members of the uniformed services, members of the Foreign Service and employees of the intelligence community. This relief applies where a home is sold or stops being the taxpayer’s principal residence after Dec. 31, 2008, in connection with government orders received by the individual (or the individual’s spouse) for qualified official extended duty service. The credit is still allowable even if this happens during the year of purchase.

Qualified official extended duty is any period of extended duty while serving at a place of duty at least 50 miles away from the taxpayer’s principal residence (whether inside or outside the U.S.) or while residing under government orders in government quarters. Extended duty is defined as any period of duty pursuant to a call or order to such duty for a period in excess of 90 days or for an indefinite period.

If the tax credit is extended for any reason, we’ll post about it immediately and as long as you are a subscriber, you’ll be notified the morning after we post.

Many of you have heard us tout the awesomeness of the Colorado Housing and Finance Authority (CHFA) Mortgage Credit Certificate (MCC).  The CHFA MCC program allows qualified homebuyers to claim a dollar-for-dollar reduction of income tax liability equal to 20% of their paid mortgage interest on their first mortgage….for as long as they own (and live in) their home!  In addition, the remaining 80% of the paid mortgage interest continues to qualify as an itemized tax deduction.

This is great news for first time home buyers.  Don’t forget, you are not required to have a CHFA mortgage to qualify for the MCC!

However, and most pertinent, Section 1006 (e) of ARRA also eliminated the prohibition of the Borrower’s access to the federal First-Time Home Buyer Tax Credit if their loan was financed with Mortgage Revenue Bonds (MRBs).

The CHFA FirstStep and CHFA FirstStep Plus programs, made available on February 1, 2010, are funded with MRBs. Many ARRA or federal First-Time Home Buyer Tax Credit-related websites have not been updated to highlight this specific provision of the law; however, the actual IRS Form 5405 has been updated to reflect this change. Click here to read complete ARRA bill as written.

The Wynn Team has found that the National Association of Home Builders website created for the First Time Home Buyer Tax Credit has the most comprehensive information and the best FAQ page of any other site.  By the way, they have updated the MRB inclusion.

This is important because qualified first time home buyers who need down payment assistance and want to take advantage of the First Time Home Buyer Tax Credit before it goes away can finance a home with competitive market rates.

Lending A Hand

Marla Wynn

The Wynn Team

• Long term mortgage rates are at 20-30 year lows
  • According to Freddie Mac, in a press release yesterday, the average rate on a 30-year fixed mortgage was 5.01% this week, up from 4.98% last week.  Last year at this time, the average rate for a 30 year fixed mortgage was 5.25%.  Rates fell to a record low of 4.71% average in early December
• FHA allows 6% seller concessions (may decrease to 3% this summer)
• FHA up front mortgage insurance is currently only 1.75% (set to increase to 2.25% on April 5)
• FHA 90 day flipping rule waiver is in effect until February 1, 2011
• CHFA (Colorado Housing and Finance Authority) has financing for buyers with credit scores as low as 580
• CHFA has down payment assistance programs available
• CHFA can offer loans with market interest rates and down payment assistance with the FirstStep Program
• CHFA MCC (Mortgage Credit Certificates) are available
• Fannie Mae is offering 3.5% incentive to buyers purchasing Fannie Mae owned properties
• HomePath financing is available for Fannie Mae owned properties
• The First Time Home Buyer Tax Credit is available
• Move Up Buyers receive a $6,500 tax credit
• Home values expected to increase from November 2009-2010

If you were on the fence before reading this, we hope this spurs you into action and clears up any confusion or questions about the benefits of purchasing now.  If you have any questions, please contact us.

Lending A Hand

Marla Wynn

The Wynn Team