Biden’s New Homebuyer Tax Explained and possible Hack.
By Kim Block 04/22/2023
Ok so it’s here. Total insanity….. Biden’s goal of creating more affordable housing is important but his methodology is crazy!
This change has been in the works since it was announced in February 2023 and honestly it is already incorporated in today’s rates to finance the purchase of a home. It is one of the reasons the spread between the 10 year Treasury and the 30 year Fixed Mortgage rate has grown to more than 3%. (The 10 yr is 3.5% and mortgage rates are running 6.6%. The spread use to be around 1.65%). Ouch!
Let’s break it down so you can have a clear understanding of what this new rule is and how it impacts homebuyers and homeowners and what can be done to lessen this insult.
The Federal Housing Finance Agency Director Sandra Thompson stated the new rules are designed to “increase pricing support for purchase borrowers limited by income or by wealth” and come with a “minimal” fee changes to those who can afford them. Congratulations you get to fund this.
My feeling is this confusing approach won’t work and more importantly couldn’t come at a worse time for the Real Estate industry working to get back on its feet after these past several months.
Former Mortgage Bankers Association head David Stevens said “To do this at the onset of the Spring market is almost ‘offensive’ to the market, consumers, and lenders. The gap in homeownership opportunity is real. American is facing a severe shortage of affordable homes for sale combined with excessive demand causing an imbalance. But convoluting pricing and credit is not the way to solve this problem.”
This new rule will be applied as Loan Level Price Adjustments (LLPA). This is what makes one person’s interest rate different than the next person. It’s an adjustment based on the amount the buyer contributes as a down payment, credit score, what you are buying (whether it is an attached home (single family home or detached home (townhome, multifamily condos etc) and now debt to income ratio.
Now it’s not the rate itself but the adjustments to the market rate. Because of that, l the LLPA grid is now punishing those who put the most skin in the game by down payment amount and those with the best credit scores.
The biggest pricing hit hurting affects those putting a down payment of 15-20% down with credit scores above 680. . The biggest gain is for those putting a downpayment of 3% with a credit score of 639. This punishes those that have worked hard to pay their bills on time and build their credit up. They have saved money to be able to put more of their money into the purchase of their home.
FHFA, Fannie Mae and Freddie Mac (conventional loans) are requiring these additional adjustments on ALL loans they purchase as of May 1. Keep in mind lenders can’t disclose, close and insure a loan in a day so these adjustments have been in place on rates for over 30 days. So while this is new and absurd, it’s not happening this week, it happened already!. When the FHFA change was first announced VA announced it was cutting its funding fee by .15% saving Denver Veterans an average of $600-$900 at closing. FHA also announced it was dropping its monthly mortgage insurance by .30% saving Denver homeowners an average of $1800 a year according to Nicole Rueth at The Rueth Team powered by Movement Mortgage.
I’ve heard people say, fine I’ll just stop paying my bills on time or default on a few and get rewarded next time I want to buy a home or refinance my home. NO THAT IS NOT THE ANSWER EITHER!
Here is a Hack idea for you. For example: If you have a credit score of 720 and originally wanted to put 15% down on the purchase of your home. It might benefit you to put 5% down instead. Keep the remaining 10% of those funds to purchase another investment. Talk to your lender about doing a recast of your mortgage after 45 days of your purchase. Make an additional principal payment after you have made your first mortgage payment, lowering the monthly payment permanently and getting rid of the mortgage insurance immediately or as soon as possible depending on your loan.
Change happens sometimes in a crazy manner but education is key to staying calm and making informed decisions. Continue to work with Block Team as your Real Estate Advisors. Even after you have purchased your home, as a CFP, I am here to help you. During your home ownership/buying, selling or investing in tangible real estate in Colorado, lean on The Block Team. White Glove Service is our mission!
With kind regards,
Kim Block, CFP®
Supervising Broker/Block Team
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