Home Buyer Tax Credit Blog

It looks like a deal might be in the works to extend the closing deadline for the Home Buyer Tax Credit.  Multiple sources reported that Senate Majority Leader Harry Reid expressed his support for an extension, and had some bipartisan support.  Although it’s not a sure thing, especially since any extension is going to be tacked on as an amendment to a fairly controversial jobs bill, it’s certainly good news to know that a number of Senators have publicly backed the extension.

As we argued earlier this week, an extension would be a good thing:

1. It’s simply not possible to close the number of deals that went into contract in the past few months by the June 30th deadline. The real estate settlement  industry — lenders, settlement agents, attorneys — are simply not equipped to close the number of deals that are in the pipeline by the June 30th deadline.  They don’t have the personnel, and no one is going to hire and train a bunch of new employees to handle what will be a short-term staffing problem.  Moreover, transactions generally have taken longer to close in the past year or so anyway, simply because of tighter lending guidelines and requirements and the prevalence of foreclosure and short-sale purchases that require longer approval times. (Diana Olick’s excellent Reality Check housing blog on CNBC reports that Reid actually cited the short sale issue as the driving factor for the decision).
2. This means that a lot of buyers who legitimately played by the rules will be unable to claim the credit unless the deadline is expected. This won’t be through any fault of their own, just the reality that going from contract to closing takes longer than it used to.  These people did everything they need to do to claim the credit, but they’ll be victims of the overload on the industry if they don’t get an extension.
3. Finally, the extension won’t dramatically change the expected cost of the Home Buyer Tax Credit. When Congress scored (i.e., estimated the cost) the bill, they assumed that people who got into contract would be able to close within the two months between the contract deadline of April 30 and the closing deadline of June 30th.  But the credit did not really generate the business we all expected until April, with buyers basically waiting to the last minute.  Now, all those under-the-wire buyers have created a huge pipeline of transactions in such a short time that they cannot possibly all close by the deadline.  But it doesn’t seem to be more transactions overall than anyone expected when they priced out the bill, so extending the closing deadline will not dramatically increase the cost to the Treasury.

Note that no one is discussing re-opening the eligibility for the tax credit — that is, the April 30 deadline for going into contract is almost certainly to stay in place as a cutoff for eligibility.  All that’s being discussed is giving buyers more time to close their transactions.

We’ll keep you posted.

I was interviewed last week by Amy Hoak of the Wall Street Journal Marketwatch about the looming deadlines for the Home Buyer Tax Credit.  As you know, eligible buyers must be closed by June 30^th in order to claim the credit.  Her article is a terrific overview, so I recommend you take a look at it.

We’ve written about this issue before in this space, but we wanted to review some of the finer points of making sure you can get closed by June 30^th.

The biggest problem home buyers are going to face is simply the difficult in creating a sense of urgency in the industry professionals involved.  Why?  Because in the vast majority of real estate closings, the parties do not have a “hard” deadline for closing.  In fact, most industry pros are used to last-minute delays in closings, which are generally not a big deal.  If we can’t close on Tuesday, we’ll close on Thursday; if not this week, we can close next week.  Most real estate contracts have a closing date stated in the contract, but that date is an “on or about” date and is generally subject to extension for any reason.

So most real estate professionals – lenders, real estate agents, title closers, settlement agents, attorneys, etc. – are not used to dealing with a hard deadline. They have a mindset that “close to” the date is good enough.  In this case, though, it’s not good enough.  If you’re not closed by June 30^th, you don’t get the credit.

In talking with Amy, I came up with a list of the types of things that could delay your closing:

• Communication of Urgency.  Can’t stress this enough.  Make sure EVERYONE involved in the transaction knows you have to close by June 30^th.  Ensure they make your closing a priority.

• Lender Documentation. Since the biggest source of last-minute closing delays come from lender requests, contact your mortgage lender and brainstorm about any potential documents or information they might need to get you clear to close.  Ask what kinds of things come up at the last minute, to get you a head start on tracking them down.

• Late Review of Title Reports. Make sure your attorney or settlement agent reviews your title report as soon as possible.  Usually, a title report is ordered around the time of contract signing, and is produced within a few weeks afterwards, but in a lot of cases the attorney or settlement agent won’t review that report until the week of the closing.  Make sure your attorney or settlement reviews the title as soon as it comes in, in case a problem crops up.  Those problems can usually be resolved, but they take time.

• Open Permits.  A major stumbling block to closing comes when the seller turns out to have done some work on the home without completing a final engineering inspection and closing out building permits.  This might be a deck, a bathroom, or any other remodeling project.  Usually, it’s not illegal work, just work that was done legally, but no one bothered to file the final paperwork.  Not a problem, unless you discover it on June 28th, the day before your closing.

• Short sales.  In some areas of the country, almost half of the transactions involve short sales, which essentially require approval not of the seller but of the bank that has to approve taking a short on the mortgage.  Getting approval for short sales has become easier in the past year or so, and particularly in the last six months, but bank loan mitigation departments are not necessarily responsive to requests to close on particular dates unless the parties in the transaction are very aggressive and competent in responding to bank requests.  This is particularly troublesome because the seller is the one in the relationship with the bank, not the buyer, and a lot of sellers in those situations have a low level of urgency since they are not getting any equity out of the transaction.  It’s even tougher dealing with banks than with sellers if you’re trying to get a deal closed by the deadline.

• Last minute judgments.  Sellers who are in some sort of distress often have stopped paying their mortgage as well as some other debts, and it is not unusual for creditors to put last-minute liens on a property between the time of the initial title search and the “continuation search” that is conducted on the eve of the closing. For example, sellers in short sale situations might get approval for the short from the bank, only to discover the day before the closing that a creditor has put another judgment lien on the property that now requires a re-negotiation of the terms.

• Verification of Employment.  The biggest last minute hold up is verification of current employment, which can’t be done until the loan is cleared to close (i.e., the bank wants to verify employment right at the last minute, before the loan is issued).  So make sure you can get that verification, and that your employer is available to give it, within the few days prior to your closing.

• PMI approval.  If you are getting PMI, you’ll need to be aware that PMI companies don’t give approval until the first mortgage bank clears the file, so PMI approval necessarily comes at the last minute.

• Last minute credit documentation.  A lot of times, the lender needs last-minute credit reports, pay stubs, and other credit documents.  Lenders usually run credit and collect credit documents when they take the loan, but those documents are only good for about 60-90 days.  Given how long it generally takes to close, by the time of the closing, those documents might be considered out of date, and new credit reports (and new bank statements, and new pay stubs) have to be collected. 

• Credit Impact. Another delay can be caused if the buyer has done something in the past few months, since they made the application, that affects their credit rating (such as buy a car, open a new credit line, anything at all).  Most lenders caution buyers to be very careful about doing anything that might affect credit, but that last-minute credit check might show a change in credit status that can delay (or kill) a loan.

We hope this helps.  Good luck!

The Wall Street Journal reported this week that the National Association of Realtors is pushing for an extension of the June 30^th Home Buyer Tax Credit closing deadline in order to ensure that otherwise eligible home buyers are able to claim their credit.

This is absolutely a good idea, and Congress should indeed extend the deadline.  This has nothing to do with enlarging the pool of eligible home buyers, since the contract deadline has already passed. Rather, it’s simply a recognition of the difficulty many qualified home buyers are going to face in getting closed by the end of the month.

Anyone in the real estate business can tell you about the challenges in meeting a closing deadline, and the potential last minute hiccups that can derail a closing.  Most significantly, very few real estate transactions involve a “hard” deadline in which the parties absolutely HAVE to close by a particular date. Although parties can insist on a “time of the essence” clause in a contract to require closing on a particular date, few people actually utilize such clauses. 

Why?  Because the ability to meet a closing deadline is usually out of the hands of most buyers and sellers. Instead, your ability to meet a closing deadline can depend on last minute lender requirements (“oh, we now need your paystubs from 2005…”) or late-discovered problems with the title (last minute liens placed on the property, open building permits).  Usually, these are not problems that buyers and sellers can anticipate.

Moreover, in the market we’ve had over the past few years, a large percentage of home sales involve short sales, in which the seller is not really the determining factor anyway.  Instead, there’s a loan mitigation department at the owner’s mortgage bank that has to decide whether to give final approval to a sale that will leave the bank short.

Finally, I would love to see an extension of the credit simply to take the pressure off the industry. The June 30^th deadline is certainly a lot better than the November 30^th deadline from last year, which would have fallen on the Monday after Thanksgiving and ruined a lot of holidays.  But any summer deadline is going to be complicated by vacations, particularly by the fact that the Independence Day holiday is but a few days after the deadline.  It would be nice if people in the real estate industry who will be consumed with getting deals closed by June 30^th could get a break, and be able to maybe take a vacation.  That might be a little self-serving, but everyone is better off if the industry can close this huge pipeline of transactions in an orderly process over the next few months.