Month: August 2009

With all the information coming out about the $8,000 tax credit for first-time home buyers, it might help to recap some of it and clear up some of the more common misconceptions.

A first-timer is deemed to be someone who has had no home ownership in the last three years.

How Much You Get

The tax credit is good toward the purchase of a home that the borrower intends to live in as his or her primary residence.

This means that investment properties are excluded.

The amount of the tax credit can be up to $8,000 or 10% of the purchase price, whichever is less. The buyer of an $80,000 home will get the same benefit as someone buying a $200,000 home.

Buyers must own the property for a minimum of 36 months or will forfeit some or all of the tax credit.

Tax Credit at Closing

Buyers may be under the impression that they will get all or part of this credit at the closing table, thereby helping to pay for closing costs, or even toward a down payment.  There is a very small number of instances where this is happening, but this typically occurs when a borrower is working with a non-profit or charitable organization.

Lenders, most of which have been reluctant to adopt these credit-at-closing programs, would in effect be floating the money to buyers, and most if not all are reluctant to do this.

In the current lending environment, buyers can expect to put down at least 3.5% (with FHA) of their own money or gift funds and take the credit when they file their taxes next year.

Where to Get Help

Buyers should check with their tax professional to get specifics on the home buyer tax credit.

They can also visit the IRS website at www.irs.gov.

Credit is a very important part of the mortgage qualification process because borrowers with the best credit profiles will be able to borrow against their homes at the lowest rates.

With sweeping credit card reforms coming next year, credit users will enjoy many benefits and protections never before seen, but at the same time, they may find themselves paying more for that credit and find it more challenging to come by. Understanding credit, from the perspective of obtaining a mortgage or the anticipation of obtaining one in the future is important.  Here are a few of the many things that lenders look at with regard to credit, and how it may impact your ability to get a mortgage.

Balance to Limit Ratios: Lenders like to see that borrowers are able to keep balances on credit cards low, ideally under 40% of the limit. Higher balances will impact credit scores, and balances that are over the limit, versus near the limit, will have even more of an impact.

Payment History: A demonstrated ability to make payments is important, especially in the period immediately prior to applying for the mortgage.  Borrowers with recent late payments will have challenges in convincing a lender that they are worthy of a mortgage if they are unable to make smaller payments on time.

Debt Ratios: The total amount of debt you are carrying in relation to your income will give the lender a picture of how well you are living within your means. Lower ratios are better.

With so many different terms that relate to mortgage rates and how they are set, it might be helpful to compare and contrast some of them in order to get a clearer understanding of the differences.

HELOCs and Other Short-Term Lending

The prime rate is the rate that banks use to lend money to each other.

Many credit instruments, such as home equity loans and lines of credit, automobile loans, and credit card rates, are based on this.

From the perspective of the creditors, this is considered short-term lending, and the rate can change regularly.

Adjustable Rate Mortgages

Rates for adjustable rate mortgages, or ARMs, are based on indices that often reflect the prime rate but are, at the same time, different.

These economic indices include rates of shorter-term Treasury bills, such as the one-year Treasury bill, the LIBOR, which is the London InterBank Offered Rate, and COFI, which is the Cost of Funds Index.

To arrive at a rate that they will offer potential borrowers on a mortgage, lenders take these indices and add what is called a margin to them.

For example, if the rate on an index were to be 3.00% and the lender were to add a margin of 2.5%, the rate the borrower would pay, at least initially, would be 5.5%.

The rate may change over time as the index changes, and as the loan is eligible for rate adjustments, per the terms of the loan.

Fixed-Rate Mortgages

Fixed-rate mortgages, more specifically those that are for 15 or more years in length, are considered long-tem lending.

For the most part, except for very recently, long-term mortgage rates have followed the yield on the ten-year Treasury bill, which tends to change with economic conditions.

Now more than ever, having good credit is important if you want to qualify for a mortgage. Borrowers with all types of credit profiles can and do obtain mortgages, but those with the best credit profiles get the best rates and terms.

Many borrowers, especially those with dings on their credit reports -such as late payments and medical collections – might benefit from a credit restoration service.

Many credit restoration services work under the guidelines of FACTA – the Fair and Accurate Credit Transactions Act. FACTA states that creditors are obligated to follow certain procedures before reporting information, specifically derogatory information, to the credit bureaus.

Credit restoration services, in cases where proper disclosure was absent, confront the creditors, sometimes with threats of legal action on behalf of a borrower, and can often have information such as late payments, collections and judgments removed from the credit report, under FACTA laws. With most items that carry some type of balance, such as collections, borrowers are still obligated to repay them but can do so without having it appear on their credit reports. A credit restoration can take anywhere from 30 to 60 or more days.

Borrowers need to research credit restoration services. Many are legitimate, but as with many other industries that have appeared after  the housing crisis, there are some that will try to charge high fees or skimp on the service they provide.