Archive for September, 2008
First Time Homebuyers Tax Credit
| IRS Tax Credit to Aid First-Time Homebuyers |
| WASHINGTON — First-time homebuyers should begin planning now to take advantage of a new tax credit included in the recently enacted Housing and Economic Recovery Act of 2008. Available for a limited time only, the credit:
However, the credit operates much like an interest-free loan, because it must be repaid over a 15-year period. So, for example, an eligible taxpayer who buys a home today and properly claims the maximum available credit of $7,500 on his or her 2008 federal income tax return must begin repaying the credit by including one-fifteenth of this amount, or $500, as an additional tax on his or her 2010 return. Eligible taxpayers will claim the credit on new IRS Form 5405. This form, along with further instructions on claiming the first-time homebuyer credit, will be included in 2008 tax forms and instructions and be available later this year on IRS.gov, the IRS Web site. If you bought a home recently, or are considering buying one, the following questions and answers may help you determine whether you qualify for the credit. Q. Which home purchases qualify for the first-time homebuyer credit? A. Only the purchase of a main home located in the United States qualifies and only for a limited time. Vacation homes and rental property are not eligible. You must buy the home after April 8, 2008, and before July 1, 2009. For a home that you construct, the purchase date is the first date you occupy the home. Taxpayers who owned a main home at any time during the three years prior to the date of purchase are not eligible for the credit. This means that first-time homebuyers and those who have not owned a home in the three years prior to a purchase can qualify for the credit. If you make an eligible purchase in 2008, you claim the first-time homebuyer credit on your 2008 tax return. For an eligible purchase in 2009, you can choose to claim the credit on either your 2008 (or amended 2008 return) or 2009 return. Q. How much is the credit? A. The credit is 10 percent of the purchase price of the home, with a maximum available credit of $7,500 for either a single taxpayer or a married couple filing jointly. The limit is $3,750 for a married person filing a separate return. In most cases, the full credit will be available for homes costing $75,000 or more. Whatever the size of the credit a taxpayer receives, the credit must be repaid over a 15-year period. Q. Are there income limits? A. Yes. The credit is reduced or eliminated for higher-income taxpayers. The credit is phased out based on your modified adjusted gross income (MAGI). MAGI is your adjusted gross income plus various amounts excluded from income—for example, certain foreign income. For a married couple filing a joint return, the phase-out range is $150,000 to $170,000. For other taxpayers, the phase-out range is $75,000 to $95,000. This means the full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less. Q. Who cannot take the credit? A. If any of the following describe you, you cannot take the credit, even if you buy a main home:
Q. How and when is the credit repaid? A. The first-time homebuyer credit is similar to a 15-year interest-free loan. Normally, it is repaid in 15 equal annual installments beginning with the second tax year after the year the credit is claimed. The repayment amount is included as an additional tax on the taxpayer’s income tax return for that year. For example, if you properly claim a $7,500 first-time homebuyer credit on your 2008 return, you will begin paying it back on your 2010 tax return. Normally, $500 will be due each year from 2010 to 2024. You may need to adjust your withholding or make quarterly estimated tax payments to ensure you are not under-withheld. However, some exceptions apply to the repayment rule. They include:
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Doom and Gloom: “The worst is yet to come” says one analyst
The worst is yet to come. ‘No market for old men,’ TCW investment strategist warns in gloomy forecast
SAN FRANCISCO (MarketWatch) — An influential investment strategist has a dire forecast for U.S. stocks, credit markets and the continued independence of some of the nation’s top financial institutions. Jeffrey Gundlach, chief investment officer at Los Angeles-based mutual-fund company TCW Group Inc., told clients on a conference call late Wednesday that the crisis in credit and housing may not abate for several years and is actually getting worse.
In the deteriorating climate he sees unfolding, Gundlach said, the Standard & Poor’s 500 Index could fall another 30%, giant Citigroup could become an “AIG-sized debacle,” Morgan Stanley would merge with a banking company, Wachovia won’t be able to stand alone, default rates on even prime mortgages could soar, and European banks’ woes are just beginning. “This is no market for old men,” said Gundlach, who also manages TCW’s flagship Total Return Bond Fund. “This is no market for old-school thinking.”
Gundlach based his assessment on a belief that housing prices still face several more years of decline, a protracted slump, he said, not seen since the Great Depression. Moreover, Gundlach said it’s possible that home prices could be sluggish until 2022. “If it’s like the Depression experience — and it sure is shaping up that way — it could take several years. Maybe we won’t see a bottom in home prices until 2014,” he said.
Write-offs could top $1 trillion
As a forecaster, Gundlach didn’t just climb aboard the gloom-and-doom wagon. He was early to spot the cracks that subprime loans were making in the financial system, and among the first to warn that an era of easy money would come to a bad end. “The subprime market is a total unmitigated disaster and it’s going to get worse,” Gundlach told money managers and financial advisers at an investment conference in June 2007. See full story.
And Gundlach has put his shareholders’ money where his mouth is, shunning derivatives and counterparty risk in his bond fund portfolio. That defensive posture should offer protection in the continuing credit storm that Gundlach foresees. In this bleak scenario, an unprecedented — and growing — number of home foreclosures, along with mortgage loans that are under water as soon as they’re originated and a glaring lack of buyers for even modestly risky assets keeps the financial system under enormous stress.
Expect loan default rates to rise, Gundlach said, not just in the subprime market, but among the top-drawer prime borrowers as well. The prime default rate could approach 10% from a current 2% before the carnage is over, he said. “The current environment is maybe a little worse that what was experienced in the Depression in terms of the housing market,” Gundlach said.
More troubles ahead
Accordingly, financial institutions may suffer write-offs that could surpass $1 trillion before conditions improve, he said. As of late August, credit losses and writedowns at the world’s 100-largest banks and brokerages topped $506 billion, he noted. Among the casualties, Gundlach said, is Citigroup. The company’s balance sheet problems could be on a scale similar to that of insurer American International Group, which the U.S. bailed out this week. “I would give a very meaningful probability to the biggest, next AIG-size debacle being Citigroup,” the strategist said. “I would definitely not be a buyer of Citigroup stock,” Gundlach said. “If I were going to buy financial market stocks,” he added, “I would be a buyer of Wells Fargo, JPM and BAC. Other financial giants also won’t escape the crisis unscathed, Gundlach said. “I don’t see how Wachovia can make it as a standalone,” he said. He expressed the same sentiment about Morgan Stanley.
Indeed, late Wednesday the New York Times reported that Morgan Stanley was exploring a merger with Wachovia or another bank. Europe’s financial giants are in similar or even worse shape than their U.S. counterparts, Gundlach said, with “substantial exposures to assets which U.S. banks are now getting taken to the woodshed over. I would rate all European banks as not a buy.” The breakdown will take a further toll on U.S. stocks, Gundlach added. The S&P 500 will tumble below 800, he said, about 35% below its 1156 close on Wednesday.
Said Gundlach: “None of us have ever seen this, and it’s no market for old men, but risk aversion is the order of the day.”
Jonathan Burton is an assistant personal finance editor for MarketWatch, based in San Francisco.
Credit Alert: FICO or FAKO?
We’ve all seen them – the never-ending television ads and radio commercials with the catchy jingle for free credit reports and scores.
Nowadays a number of similar companies are offering free credit reports and scores. With all of these ads for freebies, it’s no wonder that so many consumers believe that all credit scores are created equally.
First, a little history on credit scores:
A company called the Fair Isaac Corporation created the first credit score. It was made available to lenders in the very late 80s and soon thereafter began to pick up momentum and popularity in the lending world. The FICO score became the gold standard in the mortgage lending world when Fannie Mae and Freddie Mac endorsed its use for evaluating mortgage loan applications in the mid 90s.
For years the FICO score was a mystery to consumers and was only known by the lending industry. Credit scores have only recently been made available to the public in the last few years. In 2001, California passed a law that required credit scores to be made available to California residents.
This pretty much opened the floodgates for the rest of us.
It also turned into a cash cow for the bureaus. However, for two of the three, instead of selling the actual FICO score, where they had to pay royalties to the Fair Isaac Corporation – they created their own scores to sell to consumers.
That’s where the confusion started.
Now that the bureaus all sell scores targeted at the consumer market, many unknowing consumers assume that these scores are the same scores a lender would see. Unfortunately, this is just not the case and it often causes a lot of confusion for those that are looking to refinance a mortgage or trying to qualify for a new car loan.
Take Steven and Veronica Blanco for example. To get a better understanding of where they stood credit wise, they went online and paid for all six of his and his wife’s credit scores – one for each of them from each of the three major credit bureaus.
Between the two of them, their scores ranged from a high of 732 to a low of 705. Knowing that mortgage lenders typically go with the middle scores, Steven assumed that they would be fine in qualifying for a new home loan at a decent rate.
But when the couple applied for a mortgage loan through their credit union, they were shocked to find out that the credit scores their lender pulled were significantly lower, ranging from 645 to 672. After talking with their lender at length they learned that even though they had purchased their scores from one of the three major credit bureaus, the scores they purchased were not the same scores that lenders use.
So what score is the right score and where can I find it online?
Here’s the deal…the industry standard for credit scores is still the FICO score. The FICO score is the score that most lenders use when determining your eligibility and terms for a loan. While the FICO score is not the only credit score that lenders use, it is the most widely used with more than 90% of lenders using it to make their lending decisions.
The easiest and most convenient site to order your FICO credit scores is through Fair Isaac’s consumer website: www.myFICO.com.
This is the only site where consumers can order all three of their FICO credit scores from all three credit bureaus. You can also order scores from the credit bureau websites directly but you should be aware that you’re not necessarily going to get a score that lenders use.
While these scores are pretty much worthless in the lending environment, they are a constant source of revenue for the bureaus at the consumer level. Let’s take a look at what each of the three major credit bureaus offer to consumers:
Equifax
Equifax is the only bureau website that you can order your FICO score from directly – without having to search for an obscure alternate web address. The score is marketed as Score Power.
When you visit their website you’ll notice that they explain that the score that you’re purchasing is in fact a FICO score. The problem is that you’re only able to get the Equifax FICO score from this site and we all have three FICO scores – one from each of the three major credit reporting agencies.
Experian
Experian markets and sells the PLUS Score on their website. They also have a half dozen other websites marketed under different brands that also sell their Plus Score. Be very careful when watching commercials about free credit reports; that’s one of their marketing tactics.
If you’ve purchased a score from Experian or one of their consumer sites, you didn’t get your FICO score.
TransUnion
TransUnion sells the TransRisk score under their ‘TrueCredit’ brand. Their TransRisk score is also available for sale to lenders but it just isn’t commonly used.
TransUnion does sell the legitimate FICO credit score to consumers, but it’s only marketed at their TransUnion Consumer Services website at www.transunioncs.com.
As you can see, this site is almost impossible to find unless you know the exact website address. Just try Googling the consumer services division and you’ll see what I mean.
While these are only the websites of the major players, there are tons of other sites out there that offer credit reports and scores. The easiest way to be sure that you’re ordering a FICO score is to read the fine print. If it’s a FICO score, it’ll say so.
Buyer beware! (Source: CreditCCRM)