By Jessica Perdew
Unless you have spent the last few months under a rock, you know that housing prices have fallen dramatically during the past year. Even with today's reduced prices, many experts believe the market has not reached bottom. Drive through nearly any neighborhood in America and you likely will find at least one foreclosed and vacant home.
Any financial planner will tell you that a home traditionally has proven an excellent investment. You need a place to live, after all, so why not build equity for yourself rather than making someone else's mortgage payment? The recent enactment of the Housing and Economic Recovery Act of 2008 (H.R. 3221) provides additional incentives to home buyers.
Although anyone would agree that this is a buyer's market, military families must consider additional factors before deciding to purchase a home.
All investments carry some level of risk. You have no guarantee the home you purchase today will appreciate in value. In fact, many homeowners who purchased during the recent real estate boom now find that their homes are worth less than they paid for them.
When my husband and I arrived in northern Virginia three years ago, houses were selling for more than the asking price. By the time you were able to attend a showing and make an offer, someone else had beaten you to it. This was common in many military communities. Unfortunately, many of these families are now facing a permanent change of station (PCS) move and cannot sell their homes.
Consider these three key factors before committing yourself to a home purchase:
How long do you expect to live in the home? If you will live in the home for three years or less, you may not have time to build significant equity in your investment. Remember that when you sell your home, the price will need to cover not only any remaining mortgage balance but also the costs of selling, such as closing fees and broker fees. Of course, if you are contemplating the purchase of a home in a place where you probably will return, it may make sense to buy now.
How strong is the rental market in your area? If you receive unexpected orders, would you be able to rent the home for enough to cover the mortgage, property management fees and maintenance? Military communities generally boast strong rental markets because another servicemember usually arrives as a replacement for every servicemember that leaves.
Remember, of course, that you must continue your mortgage payments whether or not you have a renter in the home. Your rental home easily could remain vacant for a month or longer, and you should maintain a cushion in your budget to cover these difficult periods. Also, don't forget that you may lose a significant portion of your monthly income when you move if you are in a dual-income family. Even if you are able to secure a position before you leave your current duty station, you may need some time to travel and settle into your new home and community.
Can you afford to purchase a home right now? This is a tricky question. You may easily qualify for a mortgage, but that does not always mean you can afford to buy a home. In addition to covering mortgage expenses, you will need to budget for maintenance and repairs; a suggested starting point is to budget 20 percent of your monthly mortgage for this purpose. If your new home is a "fixer-upper," you should budget a bit more. Many communities maintain homeowner's association dues or recreation fees. You also will need to consider the cost of homeowner's insurance and property taxes.
So, you have considered all these things and decided you are ready to purchase a home. Congratulations! Now you will need to decide how to finance your new home.
Many military families consider the merits of a VA loan. One of the provisions of the Housing and Economic Recovery Act of 2008 temporarily increases the ceiling for Department of Veterans Affairs (VA) secured loans. Until the end of the year, qualifying borrowers may apply for a regular VA loan up to $729,750 in the most expensive housing markets. Homeowners are permitted a deduction for property taxes even if they do not itemize deductions on their returns; normally this would be permitted only for a taxpayer filing a Schedule A for itemized deductions.
An important provision offers qualified first-time home buyers a tax credit of up to $7,500. (This legislation defines a first-time homebuyer as one who has not maintained an ownership interest in a principal residence for the previous three years.) It is a refundable credit; in other words, if your tax liability for 2008 totals less than $7,500, the taxpayer would qualify for a refund of the difference between the total tax liability and the amount of the refundable credit.
The tax credit is an interest-free loan that must be repaid over 15 years beginning in 2010. Details on the repayment process have not yet been released, but military families should consider that using this tax credit now could result in a lower profit on a sale later. Suppose you sold your home and expected to receive $10,000 at closing. If you elected to take the tax credit and have not paid back the full amount, any remaining outstanding tax credit would be deducted from your proceeds and remitted to the Internal Revenue Service. In cases where the proceeds of the sale fell short of the remaining balance on the tax credit, the outstanding credit is supposed to be forgiven. If you were to receive $2,500 at settlement but still owed $5,000 on the tax credit, for example, you would receive nothing at settlement but the remaining $2,500 credit repayment would be forgiven.
There are some significant tax advantages to owning rather than renting a home. Mortgage interest on a principal residence is 100 percent deductible on your tax return if you itemize rather than elect the standard deduction. Property taxes also are deductible for taxpayers who itemize (partially deductible for all taxpayers in 2008, as discussed above). For many taxpayers, the ability to itemize deductions means the ability to deduct non-mortgage related items as well. Without mortgage interest, a taxpayer may not benefit from choosing to itemize medical expenses because the standard deduction would provide a greater tax savings. With mortgage interest, however, many authorized itemized deductions are available to the taxpayer.
The decision to purchase or rent a home is complex and personal. The best way to ensure that you make the right choice is to educate yourself and carefully weigh all the benefits and risks associated with your various options. Most important, don't get caught up in the pressure of short-term incentives. While it may be a buyer's market, you may find that it's still not the right time to be a buyer.
Jessica Perdew is a deputy director of government relations for the National Military Family Association (www.nmfa.org).
New Housing Law Protects Military Families
The Housing and Economic Recovery Act of 2008, H.R. 3221, is designed to help homeowners keep their existing homes and provide first-time buyers access to affordable housing. Several provisions uniquely impact military members and veterans. The law:
- Excludes military housing allowances from counting as income when servicemembers try to qualify for low-income housing.
- Expands the foreclosure protection for servicemembers returning from deployment. Previously, servicemembers enjoyed 90 days' protection from foreclosure; this is now raised to nine months. This temporary protection expires December 31, 2010.
- Provides a temporary increase until the end of the year for the maximum loan guaranteed by the Department of Veteran Affairs (VA). Depending on the median housing prices for the area, the cap can run as high as $720,750 and as low as $417,000.
- Requires the Secretary of Defense to develop a program to provide financial counseling to returning servicemembers, including credit and home mortgage counseling.
- Provides a moving benefit to servicemembers who are forced to move out of rental housing if the owner of the housing is foreclosed on.
- Increases grants for severely disabled veterans from $50,000 to $60,000.
- Makes totally disabled servicemembers held on active duty for medical reasons eligible for VA grants for home alternations before their discharge.
- Extends grants for specially adapted housing and assistance to veterans with severe burns and veterans residing outside the United States.
- Allows veterans' benefits received as a lump sum to be treated as monthly benefits for the purposes of eligibility for Section 8 Housing assistance.
To review the full law, visit http://thomas.loc.gov and type "HR 3221" into the search field.
Source: National Military Family Association