Black People In Business – World Wide

(See Corrections & Amplifications item below.)

Federal tax credits for home buyers are some of the best deals around—but you will have to jump through some hoops to get one before the deadline.

Mark Matcho

Under the program, first-time buyers can take up to $8,000 off their taxes, and existing-home owners can take up to $6,500. To qualify, a contract to buy must be signed by April 30 and the purchase must close by June 30.

When the program was expanded late last year, the income limits were raised. Now, individuals with adjusted gross incomes up to $125,000 and married couples with adjusted gross incomes up to $225,000 qualify on home purchases up to $800,000. If you owe less in taxes than the credit, the Internal Revenue Service will send you a refund check.

But these days, getting a mortgage involves something of a financial inquisition. Here is what you need to know before you jump in:

To qualify for a mortgage, you will need a job and at least two recent pay stubs. You also will be asked for two years of W-2 forms, proof of other assets and either your tax return or a form allowing the lender to get your return from the Internal Revenue Service. That means that items that reduce your adjusted gross income, like business expenses or IRA contributions, can reduce the loan for which you qualify.

Then there is the appraisal challenge. With home prices still falling in many markets, an appraisal below the purchase price puts the deal in jeopardy. That is because a low appraisal means the buyer must come up with more cash or the seller must lower the price to keep the deal alive.

David Romero, who has 17 Century 21 offices in Southern California, says that has been a problem in San Diego, where lower-priced properties are in demand and buyers sometimes get into bidding wars.

Mortgage rates remain low—around 5% for a 30-year mortgage and closer to 4% for a shorter one. But to get the best advertised rates, you will need a FICO credit score of at least 720 out of a possible 850. Under guidelines set by Fannie Mae, the big mortgage buyer, every 20-point drop in your credit score below 720 results in a steeper origination fee.

While you can put down as little as 5%, you also generally will pay more fees with a lower down payment.

Fannie Mae has increased its minimum credit score to 620 from 580, but in reality, buyers on the low end may still have trouble getting a loan. If you put down less than 20% of the purchase price, as many first-time buyers do, you will need to buy private mortgage insurance, which helps protects the lender from a default. Today, most mortgage insurers aren’t insuring mortgages if the borrower’s credit score is below 680. Some charge higher rates for scores below 700.

Mortgage insurance costs vary widely based on the insurer, credit scores and down payments, ranging from $300 to more than $1,000 a year for every $100,000 you borrow.

Federal Housing Administration loans allow for down payments as low as 3.5%, but also require an upfront mortgage insurance payment of 1.75% of the loan amount, which climbs to 2.25% next month. Borrowers also pay about $500 a year for each $100,000 borrowed.

If you put down between 20% and 25% of the purchase price, you will find yourself in a strange middle ground: You will avoid mortgage insurance, but you will pay extra origination fees because Fannie Mae considers this group to be its highest risk at a time when home prices may decline.

For example, a buyer in this category with a credit score of 680 to 700 would pay an origination fee of 1.5% of the loan, while a buyer who put down 10% would pay a fee of half that.

Last, consider how long you plan to stay in the home. If you move within three years, you will have to pay back the tax credit. Realistically, given the cost, hassle and potential for home-price gyrations, you should plan to own the home five years or more.

Write to Karen Blumenthal at karen.blumenthal@wsj.com

Corrections & Amplifications

IRA contributions don’t affect your ability to get a mortgage. This column incorrectly said IRA contributions can reduce the size of the loan for which you qualify.