Plenty to Coax Home Buyers Back To the Market

If you've been watching for the fleeting, best time to buy a home, this fall may be it, especially if you're a first-timer.

That's not because all is suddenly well with the housing market. It's not. But there are signs that things are starting to stabilize. Pair that with limited-time-only offers from the government, and this fall's market looks awfully tempting for buyers.

For example, even though the Federal Housing Administration recently boosted its loan limits to $729,750 in expensive areas such as Washington, it's going to take some of that back come Jan. 1, when the loan limit will shrink to $625,500.

Because it's one of the few remaining alternatives for buyers with low down payments, the FHA is a mainstay of the mortgage market now. It accounted for 29 percent of all applications accepted by lenders in July, according to the Mortgage Bankers Association. The FHA allows down payments of as little as 3 percent, but that will rise to 3.5 percent as of Oct. 1. If you're scraping dollars together for a down payment, try to set your closing for the end of this month.

If you're going to need an FHA mortgage from $625,500 to $729,750, start touring homes now, and make sure to close by the end of the year.

Also keep an eye on the expiration date for the new tax credit of up to $7,500 for first-time home buyers. It requires that you close on the home no later than June 30, 2009. That may seem like a long way off, but it will loom larger come spring, traditionally the busiest time for real estate sales.

It's reasonable to expect title companies, loan officers, home inspectors and others involved in real estate closings to be swamped as the deadline nears. Get your purchase contract signed -- and your loan application submitted -- no later than the end of May; earlier would be better.

This so-called tax credit will shave $7,500 off your federal tax bill due April 15. If you don't owe tax, you'll get the money as a refund.

But it's not exactly a tax credit; it's more accurately a no-interest loan because it has to be paid back to the IRS. After two years, you start to repay the money by adding $500 to each year's income tax bill. If you sell the home during the 15-year payback period, you have to pay the outstanding balance out of your sales proceeds. If you sell for a loss, the IRS will forgive the debt.

The payback requirement has drawn criticism and even some recommendations that buyers turn down the $7,500. But I see no need to abstain.

Here's why: Your tax situation is going to be changing so dramatically after becoming a homeowner that the payments on that tax credit/loan will simply add one more ingredient to a complicated soup. For most people, becoming a homeowner triggers their first need to move from simple, one-page EZ tax forms into the granddaddy Form 1040 that allows individual deductions, such as mortgage interest and property taxes.

New homeowners can get an immediate benefit from the credit -- and other tax breaks -- by filing a new W-4 form to have a smaller amount of tax withheld from their pay. When payback starts in two years, another slight adjustment to your W-4 would make payback relatively painless.