The Housing and Economic Recovery Act provides assistance to those facing foreclosure.

Last week President Bush signed into law The Housing and Economic Recovery Act. Most people know that the act is designed to help Fannie Mae and Freddie Mac, as well as help homeowners who are facing foreclosure. But the new law reaches much farther than that. It includes provisions for a first time homebuyer’s tax credit, an update to the FHA loan program, help for our nation’s veterans, and much more.

Does The Housing and Economic Recovery Act affect you? Here are the key changes enacted by the new legislation.

The HOPE for Homeowners Act

The HOPE for Homeowners act will make it possible for certain homeowners to refinance their existing mortgages with a 30 year, fixed-rate FHA loan of up to 90% of their home’s value. The conditions of the HOPE for Homeowners act are:

  • Eligible homeowners are those who originated their loans before January 1, 2008, spend more than 31% of their monthly income on their mortgage, and are currently in danger of foreclosure.
  • The program is completely voluntary. Your bank may elect not to participate.
  • If you sell your home after you refinance, you will have to split the equity earnings with the FHA, on a sliding scale basis.
  • The program begins on October 1, 2008 and ends in September 20011.

Communities Devastated by Foreclosures will Receive Assistance

Congress will make available $3.92 billion in block grants for communities hit hard by foreclosures. The block grants will be used to buy empty, foreclosed homes and rehabilitate them, so other property owners in the area aren’t devastated by a significant loss in property value.

Families in Need will Receive Foreclosure Counseling

$180 million will be made available to provide families in need with pre-foreclosure counseling. Additionally, $30 billion will be made available for legal services to help those facing foreclosure.

Our Nation’s Veterans Will Receive Assistance

In order to prevent foreclosure for veterans returning from overseas, The Housing and Economic Recovery Act of 2008 makes provisions to help our veterans. Highlights of this section of the act include:

  • increasing the amount of time a veteran must be home before foreclosure proceedings begin from 3 months to 9 months.
  • providing a 1 year relief from increasing mortgage interest rates, after a soldier returns home.
  • ensuring access to financial counseling for active duty soldiers and veterans who need it.
  • increasing the VA loan guarantee amount, so more veterans can purchase homes.
  • increasing benefits for disabled veterans to make necessary accessibility modifications to their homes.
  • providing a moving benefit for those military personnel facing a forced move from rental housing, because the landlord is being foreclosed upon.

The FHA Program Will Be Updated

With FHA being the primary loan program people are using to buy new homes right now, the program will receive some necessary updates to make home ownership more accessible to those in areas where housing prices are high.

  • The FHA loan limit is increased from 95% to 110% of the median home price in the area.
  • The cap is set at 150% of the GSE limit, currently $625,000.
  • Home buyers will be required to put at least 3.5% down on a home.
  • Counseling requirements will be enhanced for new home buyers.
  • After October 1, 2008 the FHA will no longer insure loans in which the borrower’s downpayment is paid for by the seller (ie. gifting programs such as Nehemiah and Ameridream).

New Requirements in Place for Mortgage Disclosures

Mortgage lenders will be required to present potential homeowners/those refinancing their loans with disclosures within 3 days of applying for a loan on some types of loans. Disclosures will also be required no later than 7 days before closing, so buyers can shop for a new mortgage, if they don’t like the terms. Lenders are also required to inform potential borrowers of the maximum mortgage payment possible under the loan.

Standard Property Tax Deduction Available for Non-Itemized Tax Returns

Currently, only those homeowners who itemize their tax deductions are able to deduct state and property taxes on their federal return. The Housing and Economic Recovery Act of 2008 will create a standard deduction of $500 for single filers, and $1000 for married taxpayers who own their homes, but do not itemize their tax deductions.

Tax Credit Available for First Time Home Buyers

I use the term “tax credit” lightly, because it’s really a loan. First time homeowners will be able to take a $7500 tax credit (or 10% of the purchase price of the home…whichever is lower) on their 2008 returns, which must be paid back, interest free, over the course of 15 years. Here are the details:

  • First time homebuyers (those who have not owned a primary residence for 3 years prior to their home purchase) who purchase their home between April 9, 2008 and July 1, 2009 will be eligible for the tax credit.
  • Singe taxpayers with modified gross incomes up to $75,000 and married taxpayers with a joint modified gross income of up to $150,000 are eligible for the full $7500. Above those incomes, the tax credit begins to phase out.
  • This is a tax credit, and not a tax deduction, meaning that it is a dollar for dollar reduction on taxes owed, as opposed to a tax deduction, which reduces the amount of your adjusted gross income that can be taxed.
  • The credit is refundable, meaning if you owe $2000 in taxes and take the $7500 credit, you will receive at $5500 refund.
  • The credit must be repaid to the government over 15 years or when the house is sold. For those taking the tax credit in 2008, the first $500 payment would need to be made when the buyer files their 2010 tax return.
  • This tax credit is basically an interest free loan.

There are more aspects to The Housing and Economic Recovery Act of 2008, but these are the main areas where consumers will see the effects of the act.

We will be eligible to take the first time homebuyer’s tax credit, though I’m not sure if we’ll do it. Will you be affected by the new housing act?

Photo by respres.