First-time home buyers and their $8000 credit

Many of my peers are excited about the $8000 tax credit for home which that is part of the stimulus package. Prospective buyers that I�m meeting are not. They just do not see this as the stimulus of their decision to buy. Makes sense to me. If you understand this credit, you know that this $8000 credit will go for improvements, furniture, or towards replenishing your reserves. Economic stimulation for contractors or retailers, maybe. It doesn't make or break the ability to buy a home.

Would-be buyers, here is an outline of the new program (thanks again to Eric Heinrich from Mortgage Master, Inc., who sent the first copy. Posted is the NAR page on it.)

Before leaping in, consider these things:
1. It is a grant, not a loan; that�s great. But, it�s a tax rebate, so it is tied to your annual tax refund. The funds are not available as part of your down payment or closing costs.
2. There are income limits. If you fall within the income limits for the rebate, you also fall within these limits for your loan.

Realistic ratios for borrowing should be 28 percent of gross monthly income for housing expense and 36 percent for housing plus credit debts.
(I used gross income here, $75,000 and $150,000. Your actual earnings can be higher, since the program is based on MAGI. I chose an interest rate of 5.25 percent. I used an average tax for properties in the towns west and north of Boston.)

A single person with a $75,000 income has a monthly gross income of $6250. 28 percent of that is $1750. (36 percent is $2250, so there is $500 set aside for other long-term debt such as car or student loans.) That $1750 must cover principal, interest, tax and insurance. So, this borrower can take a loan for about $240,000, depending on taxes and condo fees for the property he/she chooses. With a 10 percent down payment of $24,000, the purchase is $264,000. That $8000 is roughly 3 percent of the purchase price.

A couple with a $150,000 income has a monthly gross income of 12,500. 28 percent of that is $3500. (This leave $1000 more set aside for other long-term debt within the 36 percent total debt limit.) That $3500 covers principal, interest, tax and insurance for a loan of about $500,000, depending on the taxes and condo fees on the property they choose. With a $50,000 down payment, that $8000 is roughly 1.5 percent of the purchase price of $550,000.

In markets where $100,000-$150,000 will purchase a home, this government program can make the difference between buying and renting. There, first-time home buyers can reach for a down payment of $10-15,000, wait for the rebate, and then stabilize their home ownership with the rebate funds. Here in eastern Massachusetts, I just don�t see it. Down payments are still too high. Prices are still too high.

If you are buying this year in eastern Massachusetts, your decision should be based on more than this rebate. Sorry if I rained on your parade. Some of you were waiting for this stimulus to get you into your first home.

First-time buyers, you are not being bailed out. You are getting cash back to paint your boat...next year.

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