Home & Garden

Relief may be on the way

Congress left town for the July Fourth recess with a half-baked cake in its legislative oven – one that has huge potential significance for the housing and mortgage markets.

The unfinished work is a major bill designed to rescue hundreds of thousands of homeowners heading for foreclosure, pull new buyers back into the real estate arena, and permanently raise conventional and FHA loan limits in high-cost markets.

The Senate is on the verge of passing its bill, as early as next week. The House has passed a version. Final legislation could go to the White House this month. Though President Bush has threatened to veto it, analysts say strong bipartisan support plus elections this fall make it unlikely he'd actually do so.

What's in the bill and what could it mean to you?

Thinking about buying a first home?

The legislation offers federal tax credits up to $8,000 per couple – $4,000 per single – for qualified purchasers. There's no cap on the total number of buyers to be assisted, plus the definition of “first-time buyer” is more generous than a literal reading would suggest. This provision alone could provide a significant stimulus and bring thousands back into the real estate market.

Saddled with a debt-laden home heading for foreclosure?

The legislation may offer a way out if your lender agrees to participate. Even if you're behind on payments and your mortgage balance exceeds your property's value, you could end up with a new, affordable FHA fixed-rate loan.

Searching for a home in a high-cost market? The bill is certain to provide higher limits than the $417,000 cutoff for Fannie Mae and Freddie Mac that prevailed before the economic stimulus package's temporary increase of up to $729,500, set to expire at the end of this year.

The odds are the new maximum will be below $700,000 – the Senate bill calls for $625,000 for Fannie, Freddie and the FHA. The final compromise should be high enough to help buyers in California, New England and the mid-Atlantic states who could be forced to pay higher interest rates for jumbo loans.

The new credit program would dangle tax savings in front of almost anyone considering a first house, or buying a house after not owning one for at least three years. Tax credits are more valuable than deductions because they are dollar-for-dollar reductions off whatever you'd otherwise owe.

The credit comes with some noteworthy limitations. You've got to pay the credit back to the IRS over an extended period – up to 15 years following the tax year of the purchase. If you sell the house or convert it to another use, such as a second home or investment property, you've got to repay the credit.

There's also an income restriction of $75,000 for singles, $150,000 for married joint filers. Beyond those limits, the maximum allowable credit would phase down in increments. The credit program covers purchases between April 9 and April 1, 2009.

The portion of the legislation that deals with financially distressed homeowners would help an estimated 400,000 borrowers. It is restricted to owners who cannot afford their loans and have a mortgage debt-to-income ratio above 31 percent. The owner of the mortgage – either a lender or bond investor – must agree to reduce the balance of the principal to 85 percent of the market value – to write off a significant chunk of what's owed.

If these and other conditions are met – including borrowers agreeing to split any appreciation with the government – they may qualify for a new fixed-rate 30-year FHA loan they can more easily afford.