Money Matters: Don't let details deprive you of tax credit

By Robert Nusgart

The Daily Record Newswire

With just days to go for first-time buyers and move-up buyers to take advantage of the federal tax credit programs, it’s apparent the initiative is doing exactly what it was meant to do — ignite home sales.

Here’s a prediction: In May, the National Association of Realtors will announce that sales of existing homes in April were the highest in the last three years.

Here’s another prediction: In June, the National Association of Realtors will announce that sales of existing homes in May dropped drastically from the previous month.

Just as the “Cash for Clunkers” program gave a quick high to the auto industry, the April 30 deadline to have a ratified contract to take advantage of tax credits is creating a bit of a buying frenzy that has not been seen since the go-go days of the late 1990s and early 2000s. Contracts are being put in, countered within hours and agreed upon with a sense of urgency.

To review what the government has put in place: A first-time homebuyer (someone who has not owned a principal residence in Maryland for the last three years) can get up to $8,000 back on their taxes. A move-up buyer, who has lived in their home for three of the last five years, is eligible to get $6,500 back. It’s not a deduction on one’s taxes; it is cash back and a tremendous incentive.

As one Realtor said in my office: “After April 30, the house you are looking at just cost you $8,000 more.”

Is it possible that the there will be an 11th-hour extension of this program? So far there has been no serious chatter about extending the program through the spring selling season. And if the NAR is not banging the drum, then my guess is that there is “bailout” fatigue in Washington. The only exception is for members of the military who are serving outside of the country. For them, there is a one-year extension.

Title companies are already prepping for a hectic closing week at the end of June when settlements for all of those contracts signed by April 30 must be concluded or the buyer will be ineligible to get the tax credit.

Therefore, here are tips for buyers who are going to go through the process:

• Do not schedule your closing date on June 30, unless you enjoy stress. Be smart and schedule the closing at least a week before, because if there are issues at the last minute, there will be sufficient time to resolve them.

• If you are floating your interest rate, lock in sooner than later. New disclosure rules put in place by the Department of Housing and Urban Development now require three to six days for a buyer to review documents when there is a status change to the loan. If you lock 48 hours before settlement, I can almost guarantee you will not settle.

• Get all documents, disclosures and financials asked for by your lender to them as soon as possible. That means within 48 hours. More times than not, the reason why loans get bogged down in the system is because the borrower drips in the required documents. The sooner a file goes through underwriting for a loan commitment and final conditions are known, the better for everyone in the process.

There is no question that lenders are seeing their pipelines fill up, and that will put more pressure on the operation side of the industry to move files through in a timely manner. Therefore, it also would not surprise me if there are some interest rate hikes coming for no other reason than to slow the mounting volume.

So as the final days wind down, remember that the easy part may have been finding the home by April 30 — the tough part will be getting to the table with no stress by June 30.

Check condos’ budget

I recently had a purchase loan that was unable to go to closing, not because the borrower was inadequate, but because there were issues with the financials within the condominium associations.

Here was the situation:

The borrower was putting down 10 percent, meaning that private mortgage insurance would be required. With less than 20 percent down, many lenders, to protect and document on behalf of the mortgage insurance companies, will do a full review of the condominium and its budget as well. This is called a “condo questionnaire” within the industry, and typically the management company that works with the association fills out the details.

In this instance, the yearly operating budget for the association was $65,000. The yearly reserves being set aside for unexpected repairs were only around $2,800.

Fannie Mae guidelines, which most if not all lenders underwrite to, require that a minimum of 10 percent of the yearly operating budge be set aside. Furthermore, mortgage insurance companies carry the same requirement and will not budge off of that mark. And even though there were substantial reserves already in the bank, the yearly contribution was inadequate.

Bottom line: The collateral did not meet guidelines, therefore it was not a saleable loan and the deal fell apart. It was unfortunate for my buyer, but it put the seller in a worse position because now he has a home where getting buyer financing is certainly more difficult.

So the advice to sellers, as well as agents listing condos, is to get the association’s budget beforehand to see if there are any issues that might make it impossible for a potential buyer to get financing.

Robert Nusgart is a loan officer with Prospect Mortgage LLC., a division of The Strata Group in Baltimore, Md. He can be reached at 443-632-0858 or by e-mail at Robert.Nusgart@ prospectmtg.com.