There has never seen a better time to buy a home, with low interest rates and affordability being one key component.
When people decide to buy a home, the monthly payment is a crucial factor. Affordability is a function of home price, interest rate and down payment.
Conservative underwriting for mortgage payments state that borrowers should allocate no more than approximately 30% of their income for a house payment. Looked at from another perspective, this means if your monthly income is $4,000, you should keep your mortgage payment under $1,200 a month.
You also want to keep in mind that your total monthly debt payments should not exceed 41% of your income. While exceptions will sometimes allow you to exceed that number, you don’t want to be stressed out, feel like you’re married to your home or miss out on opportunities for investments in a 401K or retirement account.
That said, many experts have said that when median home prices exceed median incomes by three times in a market, then that market could be viewed as a high cost market. As an example, median household income in the U.S. is approximately $51,233 and the median home price in the U.S., according to the most recent statistics released from the National Association of Realtors, is $173,100.
Based on this one statistic, it could be reasoned that housing overall may be somewhat unaffordable. However, you also have to take into consideration what the monthly payment would be based on existing interest rates.
Assuming a homebuyer puts 10% down on a median home price, the monthly payment, assuming the cost of property taxes and insurance at 1% and .5% respectively, would be 28.9% of income, well within reason.
Another consideration should be the cost of renting a home when compared to a house payment for the same type of home. When the cost to rent is similar to the monthly cost to own or more, housing may well be affordable for that particular market.
I went online to look at what types of homes were on Craigslist for $1,000 a month to rent. I found one home that offered 1,300 square feet, no garage and no pool where a home with a similar mortgage payment offered nearly 2,000 square feet of living area, a pool and two car garage in a nicer area.” This is certainly one example where the cost to own is less than the cost to rent.
One other factor is that when the tax deductible portion of the payment is taken into consideration, the after tax mortgage payment was approximately 15% less, making the cost to own even more affordable when compared to renting.
Credit Reports: When One May Not Be Enough
Effective June 1, Fannie Mae has instructed lenders that they should adopt a new policy that could involve a second review of an applicant’s credit report just prior to closing. When reviewing defaulted loan files, they have determined that the credit profile of a borrower may have changed from the time of the initial review of the credit report and at the time of closing.
The potential impact to a borrower who has utilized credit to make significant purchases after the initial credit report could include a delay in closing, increase of closing costs and/or interest rate or a decreased loan amount. In the worst case scenario, it could even result in a loan being denied, even after an original approval had been granted.
In order to eliminate any possibility of potential problems before closing, anyone in the application process should use credit sparingly and make sure they adhere to the tips provided below by credit expert, Linda Ferrari of Credit Resource Corp. For more tips on what you should not do regarding credit during the mortgage application process, contact the professionals, Tim and Sandy Williams, who supplied you with this month’s issue of YOU Magazine.
Top 5 Tips for Preserving Your Credit and Mortgage Application
- Don’t do anything that causes a red flag to be raised by the scoring system.
- Don’t apply for new credit of any kind.
- Don’t pay off collections or charge offs.
- Don’t max out or over charge on your credit accounts.
- Don’t consolidate your debt onto one or two credit cards.
This list is not comprehensive but does give you a peek into situations that could create issues and could also be contrary to some ideas you have read previously.
Great Opportunities When Offered Should Be Acted Upon
The one key component in home affordability that is at greatest risk today is interest rates. Many experts have stated that interest rates should be higher than their current levels, in some cases a lot higher.
One point to remember is that every 1% increase in interest rates decreases the buying power of an individual by 10% in home price. This means that if you qualify for a home priced at $200,000 today and interest rates increase 1%, the amount you could qualify for would be reduced to approximately $180,000 to maintain the same payment.
If you could benefit from moving to a new home, don’t let this opportunity pass you by. Home prices are increasing in most markets and combined with the risk of increasing interest rates, your time to get the home you want could pass you by.
For those people who haven’t refinanced in the last 18 months, calling your mortgage professional could provide you with the opportunity to either cut your mortgage payment or save a lot of money by reducing the term of your mortgage to a 15 or 20 year fixed rate.
Tags: News · Home Affordability: The Key to Your Market You Magazine · www.youmagazine.com
A Second Chance at Tax Savings
You’ve got about three years to amend your return, so go back and make sure you got everything you deserve.
By Mary Beth Franklin, Kiplinger.com
Did you claim every tax break that you were entitled to when you filed your 2009 federal tax return this year? Now that the pressure is off and the April 15 deadline for filing your return has passed, it may be worth your time to give your return a thorough review. There were so many new tax breaks for 2009 that it would have been easy to miss a few. If you did, you may have received a smaller refund – or paid a bigger tax bill – than you should have. But you can set things right by filing an amended tax return now, which could put more money in your pocket in a matter of months.
Don’t worry if you discover a simple math error, though. You don’t need to file an amended return. The IRS can correct computation errors and will send you a notice if you owe more money or are entitled to a bigger refund.
Sometimes, the IRS will accept returns that are missing certain forms or schedules. For example, many taxpayers were confused by the new Schedule M used to claim the Making Work Pay credit – a 6.2% payroll tax credit worth up to $400 for individuals or $800 for married couples. (The Making Work Pay tax credit is phased out for high earners starting at $75,000 for single taxpayers and $150,000 for couples filing a joint return.)
Although most employees received the credit throughout the year in the form of lower tax withholding, you had to file Schedule M to claim the credit and adjust your tax bill accordingly. Retirees who received a $250 economic-recovery check or direct deposit in the summer of 2009 and who had earned income from a job in 2009 are also required to file a Schedule M. To avoid prohibited double dipping, retirees must deduct the $250 payment they received from the $400 Making Work Pay credit for a net tax credit of $150.
But the new Schedule M caused lots of confusion, and millions of people who should have filed one didn’t. So the IRS took matters into its own hands. “Most of the time, we’re going to pick up that omission,” says Eric Smith, a spokesman for the IRS. “Normally, we’ll send you a math-error notice showing the adjustment.” If your refund is larger than you expected, it means the IRS computed the proper tax for you and included the credit amount in your refund. (Retirees with earned income who failed to subtract their $250 economic-recovery check may get a smaller refund than expected.) If you didn’t claim the Making Work Pay credit and the IRS didn’t adjust your refund, file an amended return to claim your extra cash.
Another new form – Schedule L – also caused some confusion. On this form, taxpayers who didn’t itemize their deductions could claim an enhanced standard deduction for net disaster losses, sales or excise tax paid on the purchase of a new car after February 16, 2009, and a property-tax deduction of up to $500 ($1,000 for married couples filing jointly). If you missed one of those tax breaks, file an amended return.
Don’t wait to claim the home buyer’s credit
Another case in which you may want to file an amended return: You bought a new house in 2010 and qualify for either the $8,000 first-time home buyer’s credit or the $6,500 credit for longtime residents who bought another principal residence. You don’t have to wait until you file your 2010 tax return to claim it. Special rules allow you to claim it on your 2009 return as long as you signed a binding contract before May 1, 2010, and close on the home before July 1. Amend your 2009 return by filing Form 1040X. (You’ll also have to file Form 5405, “First-Time Homebuyer Credit and Repayment of the Credit,” and include a copy of your settlement sheet.)
Review education credits
There were so many new tax breaks to offset the cost of college tuition that it’s possible you didn’t claim the best one for your situation. Say you have a child who attended college as a freshman or sophomore last year in one of the seven midwestern states that were declared federal disaster areas following the devastating spring floods of 2008. (The affected states are Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska and Wisconsin, but not all counties in every state qualify.)
Depending on your income, you could claim the supercharged Hope credit for the midwestern disaster area, with a top credit of $3,600 for qualified students, rather than the $2,500 American Opportunity credit available to students elsewhere in the country. Caution: If you choose the Hope credit, you cannot claim the American Opportunity credit for any student in the same year. And while a portion of the American Opportunity credit is refundable if you owe no tax, the Hope credit is not. Tax-preparation software can help you figure out which tax break is best for your situation.
Check your filing status
Perhaps you are single and normally use the tax-rate tables for single individuals to compute your tax. But your daughter and grandchild moved in with you last year, and now you realize that you should have filed as head of household to take advantage of more-generous tax rates and claim the $1,000 child tax credit for your dependent grandchild. File an amended return.
Or maybe you’re accustomed to filing a simple return using Form 1040EZ and didn’t know that there are several tax breaks you can claim even if you didn’t itemize your tax deductions. You need to use the right form. For example, non-itemizers can deduct up to $2,500 of interest paid on student loans and contributions to an IRA. Teachers and other educators can deduct up to $250 in out-of-pocket expenses for classroom supplies. You can claim the deductions on either Form 1040 or 1040A. If you moved to take a new job, you may be able to deduct your moving expenses on Form 1040. If you missed any of these tax so-called above-the-line deductions, file an amended return.
Mail your paperwork
Generally, you have three years from the date of your original return or two years from the date you paid the tax, whichever is later, to claim a refund. (You have seven years to amend a bad debt or loss incurred in that tax year.) Fill out Form 1040X, which you can download at www.irs.gov. Enter the corrected numbers and explain why you need to amend your original tax form. You don’t have to redo your entire return; just make the necessary changes and adjust your tax liability accordingly.
Unlike your regular income-tax return, you can’t file Form 1040X electronically. You can prepare it electronically but you’ll have to print it out and mail it to the IRS. Figure it will take about 12 weeks to process your request. And you can’t ask for direct deposit, either. The IRS will mail your refund check to you. If you are filing amended tax returns for several different years, mail each amended return in a separate envelope. You may also need to file an amended return with your state tax agency.
Reprinted with permission. All Contents © 2010 The Kiplinger Washington Editors. www.kiplinger.com
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Obama Loan Modification Plan Explained
The key components of Obama’s foreclosure-avoidance program are loan modification and loan refinancing. The details of this provision has created an extraordinary opportunity for millions of people to either re-finance or modify their existing mortgage.
What is Obama’s loan modification plan?
President Obama recently announced a $75 billion initiative called the Homeowner Affordability and Stability Plan (HASP). One of the principal tenets of the plan is called the Making Home Affordable initiative. This initiative is comprised of two parts:
• The Home Affordable Refinance program which will help homeowner’s who’s falling home values have prevented them from refinancing because their current loan-to-value ratios are higher than the normal 80% figure and who’s mortgage is owned by Fannie Mae or Freddie Mac.
• The Home Affordable Modification program which is designed to reduce monthly mortgage payments for people who are close to foreclosure by modifying their mortgages and lowering the payments on their loans. Their loan does not need to be owned by Fannie Mae or Freddie Mac.
Incentives for Mortgage Lenders and Homeowners
In the current economic environment, mortgage providers have been reluctant to refinance loans. Thus the “Making Home Affordable” initiative actually provides cash incentives to mortgage lenders and loan servicers.
Providers will receive an up-front fee of $1,000 for each eligible modification that meets the guidelines (outlined below and full details here) established under this initiative. They will also receive monthly cash incentives (as long as the borrower stays current on the loan) of up to $1,000 each year for three years.
Further, to help lenders remain focused on borrowers who are trying their best to stay current on their mortgages, an incentive payment of $500 will be paid to servicers, and an incentive payment of $1,500 will be paid to mortgage lenders, if they modify at-risk loans before the borrower falls behind.
Finally, homeowners who make their mortgage payments in a timely manner are eligible for $1,000 reductions in the prinicipal of their loan every year for five years.
Overview of Home Affordability Modification Guidelines
• Loans must have originated on or before January 1, 2009.
• Mortgages must be for a single-family residence with a loan balance no greater than $729,750.
• Loans can only be modified once beginning March 4, 2009 through December 31, 2012.
• Home cannot be vacant or condemned and must be a primary residence—not investor owned.
• Interest rate can be lowered to as low as 2 per cent and the term of the mortgage can be extended to a maximum of 40 years in order to maximize the reduction in loan payment.
• Borrowers will need to provide an “affidavit of financial hardship”, their most recent tax return, and two recent pay stubs.
• Service providers will be required to follow a sequence of steps that modify the loan in order to reduce the monthly loan payment to no more than 31% of gross monthly income.
• Homeowners who make their payments on time are eligible for up to $1,000 of principal reduction payments each year for up to five years
Loan Modification is Not for Everyone
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The median sales price for homes in Rochester MN for Dec 05 to Feb 06 was $275,000 based on 2 home sales. Compared to the same period one year ago, the median home sales price increased 0%, or $275,000, and the number of home sales increased 0%. There are currently 1,436 resale and new homes in Rochester on Trulia, including 56 homes in the pre-foreclosure, auction, or bank-owned stages of the foreclosure process.
The average listing price for homes for sale in Rochester MN was $231,126 for the week ending May 19, which represents an increase of 1.1%, or $2,456, compared to the prior week. Popular neighborhoods in Rochester include Northwest and Historic Southwest, with average listing prices of $206,850 and $301,468.
Tags: News · Trends & Stats
WASHINGTON – Senators agreed Wednesday to extend a popular tax credit for first-time homebuyers and to offer a reduced credit to some repeat buyers.
The tax credit provides up to $8,000 to first-time homebuyers but is set to expire at the end of November. The Commerce Department said Wednesday that new home sales fell 3.6 percent in September, and some industry representatives blamed uncertainty about the tax credit.
Senators agreed to extend the existing tax credit for first-time homebuyers while offering a reduced credit of up to $6,500 to repeat buyers who have owned their current homes for at least five years, said Regan Lachapelle, a spokeswoman for Senate Majority Leader Harry Reid, D-Nev.
The tax credits would be available to homebuyers who sign sales agreements by the end of April. They would have until the end of June to close on their new homes, according to a summary of the legislation being circulated among lawmakers.
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First-Time Home Buyers…this is your last chance to secure the $8,000 Federal Tax Rebate, due to expire on November 30, 2009. Call us today to see if you qualify for the rebate, and we can begin your home search today! Click the link for qualifiying details!
Tags: News · 000 · Federal Tax Rebate $8
Downpayment/Closing Cost Loans for Buyers of Foreclosed Properties
Greater Minnesota Housing Funds will provide downpayment and closing cost assistance loans of $10,000 or $15,000 (depending on buyer’s income and availability of GMHF funds) to income qualified buyers purchasing foreclosed home in Greater Minnesota. Loans have 0% interest and no monthly payments are required! If the buyer remains in the home for 5 years, the entire loan amount is forgiven.
This program has two important goals: reducing the negative effects on foreclosures on comminutes and helping buyers become successful homeowners for the long term. To meet these goals, the program has the following requirements:
Maximum Income to Qualify for Assistance:
Family Size Greater Minnesota Chisago, Isanti, Sherburne, & Wright Counties Olmsted & Dodge Counties
1 $40,900 $47,100 $43,700
2 $46,800 $53,800 $49,900
3 $52,600 $60,500 $56,200
4 $58,400 $67,200 $62,300
5 $63,100 $72,600 $67,300
6 $67,800 $78,000 $72,300
7 $72,500 $83,400 $77,300
8 $77,100 $88,800 $82,300
9 $81,800 $94,100 $87,300
10 $86,500 $99,500 $92,300
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How has the new Stimulus bill affected the tax credits for energy efficient home improvements?
On February 17, 2009, President Obama signed a stimulus bill (The American Recovery and Reinvestment Act of 2009) that made some significant changes to the energy efficiency tax credits. The highlights are:
- The tax credits that were previously effective for 2009, have been extended to 2010 as well.
- The tax credit has been raised from 10% to 30%.
- The tax credits that were specific dollar amount (ex $300 for CAC), have been converted to 30% of the cost.
- The maximum credit has been raised from $500 to $1500 for the two years (2009-2010). However, some improvements such as geothermal heat pumps, solar water heaters, and solar panels are not subject to the $1500 maximum.
- The $200 cap on windows have been removed.
For further information on the tax credit on home improvement please check out energy star’s website: http://www.energystar.gov/index.cfm?c=products.pr_tax_credits
*Note the above information was all taken from the www.energystar.gov website.
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We’d like to welcome you to The Williams Home Team Real Estate Blog. The blog will provide the latest news and stastics regarding the local Rochester MN real estate market.
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