Real Estate: Life After the Stimulus

As most of you who have been following these articles know, we have just come off of an extended period in which home buyers were given a tax credit if they entered into an agreement to purchase real estate prior to April 30. That date has passed and now we are back to business as usual.

The arrangement was a pretty sweet deal, in that if you were a buyer purchasing a property with the maximum FHA loan, your down payment was covered and you still had enough left to cover a generous portion of your settlement cost. The sole complication was that you received the funds as a tax credit, so in most cases, you would need to file your tax return before seeing any of that money.

I suppose the pertinent question is NOW WHAT? How much more difficult is it for a first-time home buyer to make the purchase of their dreams? The brief answer is—not very! Although the loss of the $8,000 incentive is a drag, it was actually more money than was required by a first-time transaction if it were properly structured.

Most first-time buyers utilize the programs of the Federal Housing Administration to finance their purchases and those programs remain extremely viable. Let’s consider an average first-time transaction with a purchase price of $100,000. Under the FHA guidelines, a buyer (any buyer, not just first-timers) needs a down payment of 3.5 percent. In our example, that equals $3,500. In addition, the FHA allows the home seller to contribute up to 6 percent of the purchase price toward the buyer’s settlement charges. In this instance, your seller would be paying $6,000 on your behalf. As a sidebar here, it should be understood that the FHA is considering a reduction in seller’s assistance to 3 percent. This would most definitely reduce the number of FHA transactions completed, however, to date, it is still 6 percent. The foregoing arrangement is only slightly less advantageous than the stimulus program with 3.5 percent down and an $8,000 tax credit. At least with seller assistance, there is no waiting to file a tax return; you receive the assistance at the time of settlement. The combination of a low down payment with maximum seller assistance makes the FHA the way to finance your first purchase.

Now, what if you are a low-income family? Are there any mortgage programs for you? The short answer—absolutely! The Pennsylvania Housing Finance Agency (PHFA) has a program to assist folks that meet their low-income criteria. In this instance, household income is considered. That means the PHFA considers all income coming into a household, by everyone earning anything, even those household occupants who will not be on the loan. Some examples: Gram lives with you, and though she doesn’t own the house, she receives Social Security and that income is considered. Your 19-year-old college student has a part-time job in the bookstore, and that income is considered. The assumption made by the state, correct or not, is that folks with earnings living in the household will contribute to the cost of operating that household.
So what is the ultimate outcome? Really, very little difference. Meeting the low household income criteria qualifies you for certain forms of assistance pertaining to down payment and closing costs. If your household income exceeds the assistance levels, you may still qualify for the loan, sans the assistance.

Keep in mind that if your first-time buyer is a veteran, nothing beats the Veterans Administration (VA) mortgage program. The most outstanding characteristic is that you need nothing down; VA loans are 100 percent financing. You can also ask the seller for assistance of up to 4 percent of the purchase price of the home, AND costs are somewhat restricted by the VA. Remember that although the Home Buyer Incentive Program is over for most of us, it has been extended for those who are out of the country on active military duty.

On the horizon: Legislation is currently being considered that would reduce the allowable seller assistance on FHA loans to 3 percent from 6 percent, which would significantly alter the cost picture for prospective purchasers. Also under consideration is increasing the minimum credit score and an increase in the FHA down payment for folks with lower credit scores. Taken together, these three changes will have a major impact on the ability of the traditional FHA buyer to be qualified, which will translate into fewer FHA sales. So now is the time to buy if you are considering making that move before your options are severely limited.

Gary Straub has been a real estate professional since 1970 and is a member of the Northwood Realty management team.