What to Do Now That the Home Buyer’s Tax Credit Has Expired?

So now that the first and repeat buyer’s tax credit has come and gone some people who missed out due to timing reasons might be asking themselves what they can do to buy a home. The tax credit, particularly the first time buyer’s tax credit, was a tremendous tool to stimulate housing demand and to make home ownership more affordable for many. However, just because the credit has expired does not mean that there aren’t still tools and strategies which aspiring home owners can take advantage of and which encourage action now.

Here are some ways:

1. Take advantage of the current FHA lending rules for low down payment loans. With qualifying credit and income stability, it is still possible to get an FHA loan and buy a home with as little as 3.5% down. The 3.5% requirement can be satisfied with the borrower using their own cash or receiving a gift from a family member, their employer, labor union, non-profit or government entity. There have been discussions of raising the minimum down payment for FHA to 10% (the current level for lower credit qualifiers which may also increase in the future).

2. Focus on short sales. Much of the under $200,000 housing stock was snapped up by first time home buyers in the run-up to the expiration of the tax credit. Many of these homes were foreclosures and short sales (mortgage owed is greater than the home value). In fact, foreclosures became objects of bidding wars. Short sales require bank approval, but because they are not yet bank-owned the period of time for bank approval is much longer (2 – 3 months or more). It is possible that some first-time buyers established multiple short sale contracts before April 30 2010 in order to satisfy that deadline and once one of the contracts is accepted by the bank, they will drop the others causing these homes to come back on the market (this is my theory right now and I am trying to develop the data which supports this view). In any event, there are still plenty of short sales available and the removal of the tax credit deadlines might make these a more attractive package than a foreclosure.

3. Take advantage of lower Mortgage Insurance premiums. Mortgage insurance premiums currently stand at 2.25% upfront and 0.55% monthly. Until just recently the upfront premium was 1.75% and there is talk of the monthly 0.55% premium rising in the future.


4. Take advantage of low interest rates. There is some debate as to whether home prices have bottomed. Who knows? There is also a lot of discussion about possible rate hikes. This is much clearer to predict. The amount of stimulus money which has been put to work coupled with a gradually improving economy point to rate hikes as a matter of when not if. If a $200,000 house were to drop another $10,000 the savings at a current interest rate of 5.25% would be just under $20,000 over the life of the loan ($10,000 upfront and $9,879 in interest over the loan life. However, if the interest rate for the same $190,000 house increases by just ½% the savings are erased. Which way do you want to bet?

5. Take advantage of 6% closing cost credit for FHA loans before it is reduced to 3%. Currently buyers can receive up to 6% closing cost credit from the seller which can be used to pay for transaction costs, upfront mortgage insurance premiums and interest rate buy-downs.

Capping all of this discussion is the fact that it is currently substantially less expensive to own a home today than it is to rent (see Rent vs. Buy) and there are compelling reasons to act now and buy a home.