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Bill dangles tax credits, cheaper loans for home buyers

WASHINGTON — Congress left town for the July 4 recess with a half-baked cake in its legislative oven, one that has huge potential significance for the housing and mortgage markets. The unfinished work is a major relief bill designed to rescue hundreds of thousands of homeowners heading for foreclosure, pull new buyers back into the real estate arena, and permanently raise conventional and FHA loan limits in high-cost markets.

The Senate is on the verge of final passage of its bill and could do so as early as next week. The House has already passed its version. Final legislation could go to the White House later this month. Though President Bush has threatened a veto, Capitol Hill analysts say that strong bipartisan support — plus elections this fall — makes it highly unlikely he'd actually do so.

What's in the bill and what could it mean to you? If you dig into this 631-page behemoth, you might find something that directly benefits you. That's especially the case if you are:

• Thinking about buying a first home. The legislation offers federal tax credits up to $8,000 per couple ($4,000 per single) for qualified purchasers of newly constructed or resale houses. There's no cap on the total number of buyers to be assisted, plus the definition of "first-time buyer" is more generous than a literal reading would suggest. This provision alone could provide a significant stimulus and bring thousands of consumers back into the real estate marketplace.

• Saddled with a debt-laden home heading for foreclosure. The pending legislation may offer a way out for you if your lender agrees to participate. Even if you're behind on payments and your mortgage balance exceeds your property's value, you could end up with a new, affordable FHA fixed-rate loan.

• Searching for a home in a high-cost market. The new housing bill is certain to provide higher limits than the $417,000 cutoff for Fannie Mae and Freddie Mac that prevailed before the economic stimulus package's temporary increase of up to $729,500, set to expire at the end of this year.

The odds are the new maximum will be below $700,000. The Senate bill calls for $625,000 for Fannie, Freddie and the FHA. House negotiators reportedly have been pushing for $688,000. But the final compromise number should be high enough to help out buyers in California, New England and the mid-Atlantic states who otherwise could be forced to pay higher interest rates for jumbo loans.

The new credit program would dangle tax savings in front of almost anyone considering buying a first house, or buying a house after not owning one for at least three years. Tax credits are more valuable than deductions because they are dollar-for-dollar reductions off whatever you'd otherwise owe on your federal taxes.

"This should be a very potent stimulus," said Howard Glaser, president of Glaser Group, a Washington legislative consulting firm representing mortgage lenders. "Unlike the earlier (economic) stimulus package" — the one that has been pumping out tax rebate checks to consumers — "this one is directly targeted at selling houses" at a time when unsold inventories are glutting local markets.

The credit's expansive definition of who qualifies as a "first-time" buyer is a plus in economically hard-hit areas of the country where many former owners have become renters in the past several years.

But the credit comes with some noteworthy limitations. Number one: You've got to pay the credit back to the IRS over an extended period, up to 15 years after the tax year of the home purchase. If you sell the house or convert it to another use other than principal residence, such as a second home or investment property, you've got to repay the credit.

There's also an income restriction of $75,000 for singles, $150,000 for married joint filers. Beyond those limits, the maximum allowable credit would phase down in increments. The credit program covers qualifying home purchases between last April 9 and April 1, 2009.

The portion of the legislation that deals with financially distressed homeowners would help an estimated 400,000 borrowers. It is restricted, however, to owners who cannot afford their current loans and have a mortgage debt-to-income ratio above 31 percent. The owner of the mortgage — either a lender or bond investor — must agree to reduce the balance of the principal amount to 85 percent of the current market value, i.e., to write off a significant chunk of what's owed.

If these and other conditions are met — including borrowers agreeing to split any future appreciation with the government — they may qualify for a new fixed-rate 30-year FHA loan they can more easily afford.

E-mail Kenneth R. Harney at

Bill dangles tax credits, cheaper loans for home buyers 07/04/08 [Last modified: Friday, July 4, 2008 4:30am]
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