Q and A with Denisa - Home Financing :: Certified Financial Planner : Colorado Springs, CO

Dear clients, colleagues....friends

We are moving our COLORADO SPRINGS office location on June 1st

to:

The downtown PLAZA OF THE ROCKIES
121 S. Tejon, Suite 1107, Colorado Springs, CO 80903

Q and A with Denisa - Home Financing

4. Home Financing

"We are looking to buy our first home but we want to do it right and not put ourselves in a financial bind. We have a few credit cards and fairly tight budget. What is the right approach?"

ANSWER:

While buying your first home can be very gratifying, it will also be a significant financial commitment.

Figure out how much house you can afford. Total housing cost, including payment, taxes and utilities should not exceed 40% of your total monthly gross income.
Most likely your first home will be a fixer-upper so make sure your budget includes room for repairs and upgrades.
Have a cash reserve for sudden changes in income so that you don't fall behind on your payments.
If you have a lot of revolving debt, you may want to consider postponing your purchase and pay down your debt first.
Know your credit score.
Get pre-qualified so that you know what you can afford before you begin to search for the perfect home.
Find out how much you will pay in closing cost.
Make sure to take advantage of the first time homebuyer tax credit
Do some shopping around. There is abundance of motivated sellers.

"How does the new homebuyer credit work? Can you cover some key points? Thanks, Mark."

ANSWER: First-Time Homebuyer Tax Credit

Tax credit of up to $8,000 is for qualified first-time homebuyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.

Who is eligible?

First-time homebuyers purchasing a new home or resale. The ‘purchase date' is the date when closing occurs and the title of the property transfers to the homeowner. First-time homebuyer is a person who has not owned a home during the 3-year period prior to the purchase. If you owned a rental property, but not a principal residence, you still qualify as a first-time homebuyer.

Are there any income limits?

It is reduced and ultimately phased out at certain Modified Adjusted Gross Incomes levels:

For Single filers, the range is $75,000-$95,000, and for Joint filers, the range is $150,000-$170,000.

How do I claim it?

You claim it on your tax returns by completing IRS Form 5405 and specifically claiming the amount on Line 69 of your 1040 income tax return.

How is it different from the tax credit enacted by Congress in July, 2008?

The significant difference is that this credit does NOT have to be repaid.

(Source: National Association of Home Builders)

Many of you worry about losing your homes but you know that foreclosure can be a painful process, so you look for alternatives to a foreclosure. While these options can bring you an instant peace of mind, they may seriously impact your credit. Let’s take a closer look.

Foreclosure will stay on your credit report for up to 7 years.

Loan Modification may reduce your monthly mortgage payment, if you are a qualifying homeowner. Be careful though, your credit score may take a hit, depending on how the lender reports your modification.

Another one is ‘Deed in Lieu of Foreclosure’, also known as the ‘friendly foreclosure’. It allows you to just release your home to the lender instead of going through a foreclosure. But get this - it still could get reported on your credit as a foreclosure.

Short Sale is when you owe more on your home than what it is worth, but the bank will accept the sales proceeds, and it may forgive you the remaining debt. The good news is that a short sale does not get reported on your credit! You may only have to wait a few years to qualify for a loan.

Look, these options may provide a temporary relief but they do not treat symptoms. After you unload the burden of mortgage payment, the financial reality of overspending, poor debt management and a lack of planning, will not go away. That is why I urge you to get a solid financial plan in place.

Michelle emailed me asking how a short sale would impact one's credit and if there would be any taxes owed on the forgiven debt.

Short sales are a HOT topic these days, so let's talk about what they are.

In the event that a homeowner cannot afford to make his house payments, a short sale would be an alternative to a foreclosure. The lender allows the homeowner to sell his home for less than the balance of his mortgage, and the bank accepts those proceeds as payment in full.

Let’s say you owe $300,000 on your mortgage and your home is worth $270,000. In a short sale, the bank would accept the sales proceeds of $270,000 and would forgive the remaining $30,000 debt.

Michelle wants to know if she would be taxed on the $30,000 cancelled debt. Thanks to the Mortgage Forgiveness Debt Relief Act, a debt forgiven from selling your principal residence in a short sale is NOT taxable.

Let's talk about the impact on your credit. Short sale is not reported on your credit report like foreclosure, but it will impact your credit score.

Just because you can't sell your home for the price you want, does not automatically qualify you for a short sale. Only if you are experiencing any of these situations, should you consider one:

Your home value has dropped
You are in default or struggling to make your house payments
You are experiencing a hardship, such as unemployment, divorce, sudden illness, or bankruptcy

As you can see this is not a slam-dunk decision and you should consult your accountant to see what is right for your situation.