Monday, November 23, 2009

Tax Credit Confusion!

Tax credit confusion! We are hearing many agents tell their clients that the $6,500 federal income tax credit for people who have owned their primary residence for 5 of the past 8 years is only for move-up buyers (people buying a more expensive house). That is not true.

The tax credit can be claimed regardless of whether the buyers are moving up, moving down, or buying a house for exactly the same price as their current house.

Here's something to keep in mind, though. If someone buys a cheaper house than the one they currently occupy as their primary residence and they intend to keep their current primary as a rental, they may not be able to get a loan. The reason has nothing to do with the IRS tax credit. It has to do with the fact that so many people were cheating on their loan applications - saying they were buying a new primary residence when they were really buying a rental property - Fannie Mae, Freddie Mac, and FHA now enforce the rules. If someone is going to be moving from a big, expensive house into a smaller, cheaper house, they are going to have to document why they are doing what almost no one in America does. They will need to show an underwriter that they have a legitimate reason for moving into a smaller house. Cutting down on expenses is not a good reason because they will actually be increasing their expenses if they retain their current primary as a rental.

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