Prospective Homeowners Mull $8,000 Tax Credit

To buy, or not to buy? That's the question that many potential first time home buyers are asking themselves. Financial planner Louis Barajas and mortgage specialist Julian Joseph offer tips on buying a home.

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JENNIFER LUDDEN, host:

To buy or not to buy, that's the question for our weekly Money Coach segment. We want to talk about the $8,000 federal tax credit, which is being offered to first-time homebuyers.

Joining us now to talk about this are Louis Barajas, he's a financial planner and author of the forthcoming book, "My Street Money"; and Julian Joseph, a mortgage specialist with Fulton Mortgage Company in Chesapeake, Virginia. Welcome to you both.

Mr. LOUIS BARAJAS (Financial Planner; Author, "My Street Money"): Hi, Jennifer.

Ms. JULIAN JOSEPH (Mortgage Specialist, Fulton Mortgage Company): So glad to be here.

LUDDEN: Louis, in a nutshell, what are the rules of this program?

Mr. BARAJAS: Well, the homebuyer's tax credit is a credit or refund equal to 10 percent of the purchase price of a home, up to a maximum of $8,000. Now, it's available only for first-time homebuyers or people who have no purchased a home or do not have a principal residence over the last three years. Also, if you're single, and you're earning more than $75,000 a year, you may not be eligible for the credit; and if you're married and earn more than $150,000 a year, you also may not be eligible for the credit.

LUDDEN: Okay. Julian, we know that home sales in some sectors have gone up, thanks in part to this tax credit, but there is this issue of where to buy. I mean, should buyers be safe and maybe go for a foreclosed property for that really good deal, or is now the time to maybe aim high?

Ms. JOSEPH: Well, I think the one thing, Jen, that comes into play is cash flow. Everyone is looking at the foreclosure and the short-sell market, assuming to get a good deal, but the one thing that you want to keep in mind is that you will need some cash on hand when purchasing a foreclosure or a short sale.

With these properties, the one thing to keep in mind is you're probably going to be purchasing it as-is, which means that if - once the seller was leaving the property, if there was some upkeep that needs to be done, any type of repairs that will be done - nine times out of 10, the bank that now holds the trust or the deed to that property is going to sell the property as-is.

So before a lender will actually put a mortgage on a property that is a foreclosure that is not move-in ready or has certain repairs that need to be done, nobody's going to be able to basically supply those repairs but the buyer.

LUDDEN: Right.

Ms. JOSEPH: So it's almost a buyer-beware type of situation.

LUDDEN: You'll be at Home Depot, shelling out the credit card.

Ms. JOSEPH: Exactly.

LUDDEN: Now, a lot of minority families, you know, face this dilemma. You know, do I buy in a Hispanic or African-American neighborhood, where values may be low but may then really go up a lot, or do I go for a gentrified neighborhood? I mean, do you have advice for your clients on that?

Ms. JOSEPH: Well, the one thing that I always tell people is not to necessarily move because of an ethnic dynamic, but more so to look at where is the next Wal-Mart being built? Where is, you know, the next Marriott being built? Look at the development of the area, more so than looking at the ethnic dynamic of it. Look at it economically, to say which areas are shaking and moving right now. Where is there a lot of construction, shopping centers that are being built? Those are the things that are going to help bring the value, the property value, up. So that's something to keep in mind than just the sales price. Look at the potential, and instead of just focusing on does my neighbor look like me, you want to just keep in mind, is this a smart investment.

LUDDEN: Right.

Ms. JOSEPH: Because ultimately, you will have to sell, or you will want to rent. You just want to make sure that it's a neighborhood that will be worth your while to purchase it.

LUDDEN: Right, Louis, very briefly, there's talk of extending the tax credit, but right now, it expires December 1st. There must be a lot of paperwork. When do you tell people they need to start applying?

Mr. BARAJAS: They need to start applying now. I mean, they need to identify the house. I mean, technically, we've got 35 days left before the mortgage credit expires, and so they've got to close and transfer title to the homeowner. So they've got to do it as immediately as possible because most escrows close within 30 to 45 days. So they've got to do it very soon.

LUDDEN: All right, you guys hang on. We're going to come back for more on this in a minute, after a short break. I'm speaking with financial planning Louis Barajas and mortgage specialist Julian Joseph. Stay with us on TELL ME MORE from NPR News. I'm Jennifer Ludden.

(Soundbite of music)

LUDDEN: I'm Jennifer Ludden, and this is TELL ME MORE from NPR News. Michel Martin is away. Coming up, Halloween, an eco-nightmare, a minefield for the politically incorrect? Those scary questions and more in a few moments, but first, we are continuing our conversation about the federal government's first-time homebuyer credit of $8,000.

We're speaking with Louis Barajas and Julian Joseph. Julian, we've heard so many good things about the tax credit. Is there anything that you would like to warn about it?

Ms. JOSEPH: Well, the only thing that I would not necessarily warn anyone, but caution them, is that when you do get this tax credit to use it responsibly. A lot of the programs that are basically being offered for the first-time homebuyer are centered around the VHDA first-time homebuyer product; and it's a very low-money-down, sometimes no-money-down program. And with that, we'd want to also encourage all the buyers to use that tax credit responsibly. And with them having such high loan to values in financing, and sometimes a little bit over the sales price of the property, I would suggest that when they receive that tax credit money to actually apply it to their principal - so they won't end up in the same boat that we're in right now, you know, to avoid that whole upside-down, short-sell market that we're in.

LUDDEN: Start paying down that debt early.

Ms. JOSEPH: Exactly. So once you do receive that money, I suggest to people, that they apply it to their principal so they can actually give themselves a little bit of equity in the event that they do need to sell or refinance for any reason, that they won't be where a lot of people are right now, that they actually owe a little bit more than what they actually - what that property would be worth.

LUDDEN: Yeah, I bet that advice is easier to give than take, maybe. Louis, any words of caution for your clients?

Mr. BARAJAS: Yeah, well, you know, I never suggest for anyone to buy a home just because of the credit. They really want to focus on what Julian mentioned a little earlier, on the affordability of the home - meaning that, you know, taking account not only of just the mortgage but the property taxes, the maintenance, and also take a look at the financing.

We don't want to end up in the same kind of sub-prime mortgage debacle that we've just gone through. And in the lower-income areas throughout the country, there's a lot of predatory lending practices that still continue. So just be very careful about the type of home you're going to purchase, what you're buying, and the type of financing.

LUDDEN: Can I just ask you: Today's Washington Post has an op-ed article titled "The Homebuyer Tax Credit: Throwing Good Money After Bad." The author is Simon Johnson and James Kwak, essentially say this tax credit is artificially propping up housing prices, which he says - they say are not a good idea, and it's doing it in a very expensive, inefficient way. Would you agree with that, Louis?

Mr. BARAJAS: I don't agree with that, necessarily. I think that, you know, it's helping the economic recovery. I mean, if we can get the Congress to extend it for 2010, we're going to see an extra 383,000 new home sales, but not just the home sales. We're going to create another 350,000 new jobs, and that's good for the economy.

I think that again, people aren't just, you know, over-inflating or charging more for a property because, you know, they know that the person buying it is going to get an $8,000 credit. People have to be really smart about what they're buying, and I think in the long term, I think it's a really good thing.

LUDDEN: Julian, is the tax credit messing with the housing market in a bad way?

Ms. JOSEPH: I feel that it is actually a benefit to the market, currently, because with the climate of foreclosures and short sales that are going on, it's almost a crab-in-a-barrel type situation, and we have to stop the bleeding. And I think that in order to help the market rebound, people have to buy these houses. Regardless, I would prefer that it would be a first-time homebuyer that is basically benefitting from a lot of these foreclosures and in short-sale properties than to be investments. Because a lot of times what we've seen is that the investment market is almost what the subprime market was feeding on at that time that sort of brought us into this situation. And the truth of it is people are more conscious about making their payments on time and doing those things for the roof that covers you than the roof that covers someone else.

LUDDEN: All right. Julian Joseph is a mortgage specialist with the Fulton Mortgage Company. She joined us by phone from her office in Chesapeake, Virginia. Louis Barajas is a financial planner and author of the forthcoming book "My Street Money," and joined us from his home in Irvine, California. Thanks so much to both of you.

Mr. BARAJAS: Thanks.

Ms. JOSEPH: Thank you.

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