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2008-08-21  BUSINESS | New housing law closes loopholes
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| | by Brian Patton |
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August 26, 2008
www.northfulton.com
The recent housing downturn has spawned some definitive action by the U.S. Congress in the form of a wide sweeping new housing law. It appears that the law effectively addresses some short term and long term problems of the housing market.
One aspect of the new law, which was signed by President Bush in late July, removes some down payment assistance programs. One of these programs is the "Kiddie Condo Loan" which I wrote about in a recent article. This Federal Housing Administration (FHA) loan program was one of the best programs out there to help jump start a student's credit and provide a low down payment option for cash strapped parents to purchase a home for their son or daughter.
Under the old law, a charitable organization could fund up to 6 percent for the purchase; 3 percent of which could be used for the down payment and 3 percent which could be used for closing costs. The organization in turn, at closing, would give all of it back to the seller, less a $500 contribution from the buyer. So, the net out of pocket from the buyer was the $500.
This creative "loophole" was also being utilized by some new home builders to sell houses to buyers with good credit but little money for down payment. It seems it was good business at the time, but the practice brought some buyers in the market who probably needed to save money for a little while longer before taking on the financial strain of home ownership.
While removing this creative financing technique may not be good for the housing market temporarily, it appears that the long-term health of the housing market is dependent upon buyers being qualified with a proper amount of down payment.
In an effort to provide some short term relief, the new law allows for some relief to homeowners in financial difficulty. Under a voluntary program, the lender is allowed to change the terms of an existing loan which will be backed by the FHA.
Existing lenders would have to agree to take a loss on an existing loan, but would bypass the costly foreclosure process. The new loan program will be available to homeowners who are spending more than 31 percent of their income on their existing house payment.
Another short term provision of the new law is beneficial to first time home buyers. Under this provision, a one-time tax credit will be available to first time buyers. The amount will be 10 percent of the loan up to $7,500. However, the tax credit will have to be paid back as a 15-year no-interest loan and is retroactive for buyers of houses from April 9 of this year until July 1, 2009. Some non-first time home buyers may be eligible if they haven't owned a home in the last three years.
One provision of the new law that affects investors directly is the vacation home provision. Under old tax law, an owner of a vacation home could avoid capital gains tax by living in the property at least two years before the sale of the property. As primary residences don't require payment of capital gains tax (up to some maximum capital gain exclusions), this was a way to convert a vacation home to a primary residence prior to a sale. However, under the new tax law, capital gains will be owed for any portion of time that the home was a rental property.
While this is not an exhaustive outline of all provisions in the housing code, the new changes should give a much needed boost to the housing market. And, hopefully, an improved housing market will boost the nation's overall struggling economy.
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Brian Patton, CCIM is an author, lecturer, and founding broker of Capital Realty Advisors, LLC in Alpharetta. View the company Web site at: www.CapitalListings.com
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