As January comes to a close it is time to mark your calendars for some important dates as we quickly approach the second quarter of 2010. These dates are important because they stress the urgency of buying or selling a home within the next few months.
March 31 – Fed’s mortgage-backed security purchase program ends
§ Interest rates could rise to 6%
April 5 – FHA begins changing the way they do business
§ Up-front mortgage insurance premium increased to 2.25%
§ Maximum seller concession reduced to 3%
§ Minimum credit score to qualify for 3.5% down payment
April 30 – Homebuyer Tax Credit is scheduled to expire
§ Tax incentive could really go away this time around
These events take place before the end of spring 2010. Buyers will have less than 3 months to take advantage of the current real estate environment. This means that you have a great opportunity to move while getting the best of all worlds.
MARCH 31 – Mortgage-Backed Securities
First up on the calendar is a biggie. The Federal Open Market Committee (FOMC), a component of the Federal Reserve System, concluded their two-day meeting last Wednesday. The outcome of the meeting was that the Fed will keep their target rate near 0% and that they would end the purchase of mortgage-backed securities on March 31, 2010.
First, let’s get one misconception out of the way. The federal funds rate does not mean that mortgage interest rates will be near 0% or that the two rates are not directly related. The federal funds rate is meant to control economic growth. Mortgage rates are driven by the price of mortgage-backed securities. If the two were proportionate than the spread between the two rates would be linear over the years. However, the spread between these two rates has varied significantly over the years. So, keep in mind that these two rates move independently and that the federal funds rate does influence mortgage rates in the sense that that supply and demand of mortgage-backed securities is affected by economic growth.
More significant is that interest rates could rise after the Fed pulls out of the purchase of their $1.25 trillion of mortgage-backed securities. That’s right, $1.25 trillion!! There are really two schools of thought with regard to the impact on the housing market. Optimists will tell you that investors searching for higher-yielding securities will find government-backed mortgage-backed securities a bargain given alternative investments. Pessimists say that the end of this program will cause interest rates to rise a full percentage point, which could take 30-year conforming rates up to 6% (from 5%, right where rates were before the Fed began this program). In the coming weeks we should have some indication on how the end of Fed purchases will affect interest rates since they have already slowed its average weekly net purchases of mortgage-backed securities from $21 billion to about $12 billion.
APRIL 5 – FHA Policy Changes
Effective for all FHA loans with a case number assigned on or after April 5, 2010, FHA has increased the up-front mortgage insurance premium (MIP) to 2.25% (increase of .5% from 1.75%). The up-front mortgage insurance premium can be rolled into the loan itself, so the impact on borrowers will be minimal considering the increase will be paid over the life of the loan. The second step will be to shift some of the premium increase from the upfront MIP to the annual MIP. The annual MIP is also paid over the life of the loan in monthly installments and is currently set at .55% of the base loan amount. The FHA will need to seek Congressional authority to increase the annual MIP, which is already as high as the law will allow. An increase in this amount will be more significant to the borrower’s monthly payment.
Additionally, the FHA plans to introduce two more changes late spring or early summer. The first is to reduce the allowable seller concession from 6% to 3%, increasing the funds a borrower would need to close. The FHA stated that the current level exposes the agency to excess risk by creating incentives to inflate appraised value. The second change is to implement a policy in which borrowers with a FICO score of less than 580 will be required to put down at least 10%, and borrowers with a FICO of 580 or greater will stay at the 3.5% down payment.
APRIL 30 – Homebuyer Tax Credit Expiration
A tax credit of up to $8,000 is available for first-time home buyers purchasing on or after January 1, 2009 and on or before April 30, 2010. In cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will qualify.
A tax credit of up to $6,500 is available for repeat home buyers who have owned a home for five consecutive years out of the prior eight years. The repeat home buyer tax credit applies to houses sold after November 6, 2009 and on or before April 30, 2010. In cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will qualify.
The income limits for sales occurring on or after January 1, 2009 and on or before November 6, 2009 are $75,000 for individual taxpayers and $150,000 for married couples filing jointly. The income limits of $125,000 for individuals and $225,000 for married couples filing jointly apply to all sales occurring after Nov. 6, 2009. Homes priced above $800,000 are not eligible for either the first-time home buyer tax credit or the repeat home buyer tax credit. Taxpayers must submit a copy of the HUD-1 settlement statement and IRS Form 5405 to claim either the first-time home buyer tax credit or the repeat home buyer tax credit.
The National Association of Realtors (NAR) reported that November sales of existing homes were up 44 percent from a year earlier. Although new home sales dropped in November, figures from the Commerce Department show that they're up 8 percent from the low in January 2009. The NAR estimates that in all, 4.4 million households are expected to claim the tax credit before it expires.
This tax incentive will not stay in place forever. Inside the government, talks have shifted to the jobless rate and possible inflationary precautions, so there is no guarantee the home buyer tax credit will be extended again.
Sooo if you are looking for just the right reason to buy a home now, then maybe these reasons above are just what you have been looking for.
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