After much ado, on May 29, 2009, the Department of Housing and Urban Development issued Mortgagee Letter 2009-15, which opens the door for homebuyers who are eligible for the $8,000 First-Time Homebuyer Tax Credit to use the tax credit as a down payment, to buy down the interest rate, or pay closing costs.
Before you start the celebration, let me explain how this will work. There are two methods for converting the $8,000 First-Time Homebuyer Tax Credit into "cash."
The first method is via secondary financing (second mortgage) equal to the tax credit. The following conditions apply:
a) The tax credit advance, when combined with the FHA-insured first mortgage may not result in cash back to the homebuyer;
b) The second mortgage may not exceed the total amount needed for the down payment, closing costs, and prepaid expenses;
c) Secondary financing may be "soft" (silent) or require a monthly payment. Soft or silent means that no repayment is necessary if certain conditions are met;
d) If a payment is required, it must be included in the homebuyers qualifying debt ratios and ,when combined with the first mortgage, cannot exceed the homebuyers' reasonable ability to pay;
e) Payments must be deferred for at least 36 months to not be included in the qualifying debt ratios;
f) The secondary financing may not require a balloon payment before ten years.
For the tax credit to be eligible to be used as any portion or all of the down payment it must be via secondary financing provided by state or local housing finance agencies, government agencies, or certain FHA-approved non-profit groups. Unfortunately, as of the typing of this blog post there is no agency or non-profit organization providing the secondary financing for California. I will notify you via another blog post if I hear of any agency or non-profit providing secondary financing but I wouldn't get my hopes up. For one, the First-Time Homebuyer Tax Credit is set to expire on December 1, 2009. And two, I predict that it will work like other programs of this nature, which is on a first come, first served basis, be underfunded, and require the homebuyer to be in escrow prior to applying for the tax credit advance.
The second method method allows FHA-approved lenders and FHA-approved non-profit organizations as well as Federal, state, and local government agencies to purchase the tax credit from the homebuyer and works a lot like a payday advance. A fee will likely be charged to access the tax credit advance. The following conditions apply:
a) The amount of money provided on behalf of the homebuyer may not exceed the anticipated tax credit due the homebuyer based on the computations of IRS Form 5405;
b) The homebuyer must submit a signed certification that the tax credit is not subject to or obligated to some other unpaid indebtedness (i.e., another debt owed to the government);
c) Any fees charged by an organization or agency for the purchase of the tax credit are to be no more than 2.5% of the anticipated tax credit (i.e., $8,000 to be refunded, with all fee considered, the homebuyer should receive not less than $7,800 for the sale of the tax credit);
d) The tax credit funds may not be used to meet the 3.5% minimum down payment, but may be used as additional down payment, buying down the interest rate, or other closing costs.
Under this option, the homebuyer must still come up with the required minimum 3.5% down payment using their own funds, a gift from a family member, or a combination of the two. Unfortunately, as stated above, as of the typing of this blog post there is no agency or non-profit organization purchasing the tax credit for California. I will notify you via another blog post if I hear of any agency or non-profit purchasing the tax credit.
By the way, non-profits that receive fees from sellers cannot provide down payment assistance under this program.
I hope this blog post brings a little clarity to the circumstances in which the First-Time Homebuyer Tax Credit can be utilized to aid in the purchase of a home versus waiting to receive the tax credit months after purchasing a home.
Friday, June 12, 2009
Wednesday, June 10, 2009
The Credit Cardholders' Bill of Rights and YOU
The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 is now law and it puts forth some very valuable protection for credit card holders. While no person or business forces another person or business to apply for and open a credit card account, credit card companies have been taking advantage of the fine print in their contracts and charging cardholders outrageous fees and making "anytime, any reason" interest rate increases for far too long.
While I am a staunch free market capitalist and I believe that both people and businesses should accept the consequences of their decisions, whether good or bad, the introduction of the Universal Default Clause, among other tactics, has opened the door to a $15 Billion goldmine of fee income that most cardholders aren't even aware of. I think you'll agree that the following list of guidelines in the new Credit Card Act is both JUST and long overdue.
1) Credit card issuers must notify cardholders in writing at least 45 days prior to any change in the annual percentage rate (APR). If the cardholder elects to cancel the account before the effective date of the increase, the cancellation cannot be considered a default on the account and cannot trigger an obligation to immediately repay the account in full.
2) Credit card issuers are prohibited from increasing APRs that apply to existing balances unless specific conditions apply. An APR may be increased only if a) the index on which the rate is based changes, b) it is a promotional rate that has expired, c) a cardholder fails to comply with a hardship workout plan, or d) the account falls 60 days past due.
3) If a rate increase is triggered by a cardholder falling 60 days past due on the account, the cardholders' APR will be restored to what it was before the increase once the cardholder has made timely minimum payments for six consecutive months.
4) If different APRs apply to separate portions of an outstanding balance, the amount of any payment beyond the minimum payment due must be applied to the portion of the balance with the highest APR.
5) Credit card issuers can no longer increase a cardholders' interest rate on an existing balance on credit card "A" due to negative activity on credit card "B", as is currently the case.
6) Credit card issuers are prohibited from imposing interest charges on any portion of a balance that is paid by the due date.
7) Credit card issuers are required to mail credit card statements at least 21 days before the bill is due (current requirement is 14 days).
8) Cardholders must be given the option of having a fixed credit limit that cannot be exceeded and credit card issuers cannot charge over-the-limit fees on cardholders with fixed limits. This makes the ability to exceed an established credit card limit and opt-in election.
9) Credit card issuers are prohibited from charging interest on credit card transaction fees, such as late fees and over-the-limit fees.
10) If the payment due date is a date when a credit card issuer does not receive or accept payments by mail (e.g., weekends and holidays), the creditor cannot treat a payment received on the next business date as a late payment.
11) Credit card issuers are prohibited from charging a fee to allow a cardholder to pay a credit card debt, whether the payment is made by mail, telephone, electronic transfer, or otherwise.
12) Credit card issuers are required, when soliciting persons under the age of 21, to obtain an application that contains either a) the signature of a parent, guardian, or other qualified individual willing to take financial responsibility for the debt, b) information indicating an independent means of repaying any credit extended, or c) proof that the applicant has completed a certified financial literacy or financial education course.
There is more to the bill than listed here but I have chosen to cover the more beneficial elements. To read the full text of the bill click here. The only unfortunate thing about the bill is that it doesn't take effect for 9 months after its passage on May 27, 2009.
While I am a staunch free market capitalist and I believe that both people and businesses should accept the consequences of their decisions, whether good or bad, the introduction of the Universal Default Clause, among other tactics, has opened the door to a $15 Billion goldmine of fee income that most cardholders aren't even aware of. I think you'll agree that the following list of guidelines in the new Credit Card Act is both JUST and long overdue.
1) Credit card issuers must notify cardholders in writing at least 45 days prior to any change in the annual percentage rate (APR). If the cardholder elects to cancel the account before the effective date of the increase, the cancellation cannot be considered a default on the account and cannot trigger an obligation to immediately repay the account in full.
2) Credit card issuers are prohibited from increasing APRs that apply to existing balances unless specific conditions apply. An APR may be increased only if a) the index on which the rate is based changes, b) it is a promotional rate that has expired, c) a cardholder fails to comply with a hardship workout plan, or d) the account falls 60 days past due.
3) If a rate increase is triggered by a cardholder falling 60 days past due on the account, the cardholders' APR will be restored to what it was before the increase once the cardholder has made timely minimum payments for six consecutive months.
4) If different APRs apply to separate portions of an outstanding balance, the amount of any payment beyond the minimum payment due must be applied to the portion of the balance with the highest APR.
5) Credit card issuers can no longer increase a cardholders' interest rate on an existing balance on credit card "A" due to negative activity on credit card "B", as is currently the case.
6) Credit card issuers are prohibited from imposing interest charges on any portion of a balance that is paid by the due date.
7) Credit card issuers are required to mail credit card statements at least 21 days before the bill is due (current requirement is 14 days).
8) Cardholders must be given the option of having a fixed credit limit that cannot be exceeded and credit card issuers cannot charge over-the-limit fees on cardholders with fixed limits. This makes the ability to exceed an established credit card limit and opt-in election.
9) Credit card issuers are prohibited from charging interest on credit card transaction fees, such as late fees and over-the-limit fees.
10) If the payment due date is a date when a credit card issuer does not receive or accept payments by mail (e.g., weekends and holidays), the creditor cannot treat a payment received on the next business date as a late payment.
11) Credit card issuers are prohibited from charging a fee to allow a cardholder to pay a credit card debt, whether the payment is made by mail, telephone, electronic transfer, or otherwise.
12) Credit card issuers are required, when soliciting persons under the age of 21, to obtain an application that contains either a) the signature of a parent, guardian, or other qualified individual willing to take financial responsibility for the debt, b) information indicating an independent means of repaying any credit extended, or c) proof that the applicant has completed a certified financial literacy or financial education course.
There is more to the bill than listed here but I have chosen to cover the more beneficial elements. To read the full text of the bill click here. The only unfortunate thing about the bill is that it doesn't take effect for 9 months after its passage on May 27, 2009.
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