The IRS has been rejecting first-time home buyer claims from anyone who shows a Form 1098 Mortgage Interest Expense in their prior year files.

In many cases, the applicants are entitled to the credit because their previous mortgage interest deduction is for a timeshare, mobile home, boat, or other recreational property.

If you have a client who is in this unfortunate position, here is some advice from Enrolled Agent Eva Rosenberg, who authors the Web site TaxMama.com.

• Respond to the IRS immediately and tell them why their rejection is wrong. Be prepared to prove that the mortgage the IRS is seeing isn’t on a personal residence. First-time home buyers are entitled to own other types of real estate and still get the home buyers credit, so provide proof that the previous mortgage was on something else.

• Send a letter explaining the situation and providing proof of a previous rental or other non-ownership living situation, including copies of rental contracts for the last three years, an old driver’s license showing that address, utility bills, etc.

• Home buyers who believe the IRS may view their situation in this way should be proactive, providing proof that they are a first-time buyer when they initially file for the credit.

• Anyone who is rejected after two attempts to explain the problem to the IRS should call the Taxpayers Advocate Service toll-free, (877) 777-4778, their Congressman, and their Senator, Rosenberg advises.

Will people who currently face foreclosure or short sales or who walk away from their underwater properties ever be able to get financing to buy another home down the road?

Banks haven’t been very forthcoming on this issue. However, knowledgeable observers of the situation say that while it may take some time, the situation will right itself for most people.

Because bankrupt borrowers have eliminated their debts, they should “constitute attractive fodder for mortgage lenders,” says University of Michigan law professor John Pottow, whose specialty is bankruptcy.

As home prices and the mortgage market stabilize, lenders will be motivated to lend to people who previously had financial troubles if they look like they can pay the next time around, says Alan Riegler, a consultant with CCG Catalyst, which advises banks.

“The lender who figures out how to do more of this case-by-case stuff cost-effectively is going to end up ahead of the pack,” Riegler says.

The Federal Housing Administration will raise the minimum down payment for its least credit-worthy borrowers, the agency announced Tuesday. The change is among a number of major changes the FHA is making to ensure its long-term financial soundness.

Borrowers with credit-rating scores below 580 will be required to put down at least 10 percent. Those with a credit score above 580 will be able to continue to put down only 3.5 percent. The changes are intended to shore up the agency’s finances.

The FHA also will increase its upfront mortgage insurance premium from 1.75 percent to 2.25 percent. The agency is expected to seek congressional approval to raise annual mortgage insurance premiums, paid by borrowers over the life of the loan, above the current 0.55 percent maximum. The amount it will seek has yet to be announced.

There is not one specific definition for this type of mortgage as banks offer many different variations of this loan.  Also, construction to perm loans can be done for new construction or remodeling.  The basics are:

A one step or two step loan process.  With the one step process, the initial construction loan is then converted into the longer-term mortgage.  With the two step process, one loan is provided for the construction and then another loan is provided upon the completion.

Depending on the loan type selected, interest rates can vary greatly.  Some people choose a floating rate, others choose to pay for a lengthy lock and guarantee a fixed rate.

The two step process usually incurs added expenses for the homeowner as they have two closings and thus, two sets of closing costs.  That being said, a benefit of the two step process can be that the homeowner can shop for the best possible terms just a few weeks before closing on the second loan.

The Federal Housing Administration served subpoenas Tuesday on 15 mortgage companies with high default rates for FHA-backed loans.

The agency has previously taken action against several lenders with questionable records, including Lend America and Taylor, Bean & Whitaker Mortgage Co.

Department of Housing and Urban Development’s Inspector General, Kenneth Donohue said he plans to determine why these 15 lenders had so many loans that defaulted shortly after they closed.

Troubled lenders include: First Tennessee Bank N.A, of Memphis, Tenn.; Alethese LLC, of Lakeway, Texas; Security Atlantic Mortgage Co., of Edison, N.J.; Pine State Mortgage Corp., of Atlanta; Birmingham Bancorp Mortgage Corp., of West Bloomfield, Mich.; Alacrity Financial Services LLC, of Southlake, Texas; Assurity Financial Services LLC, of Englewood, Colo.; D and R Mortgage Corp., of Farmington, Mich.; Webster Bank, of Cheshire, Conn.; Mac-Clair Mortgage Corp., of Flint, Mich.; Americare Investment Group Inc., of Arlington, Texas; 1st Advantage Mortgage, of Lombard, Ill.; American Sterling Bank, of Independence, Mo.; Sterling National Mortgage Co., Inc., of Great Neck, N.Y.; and Dell Franklin Financial LLC, of Columbia, Md.

John Courson, CEO of the Mortgage Bankers Association, applauded the crackdown. “We’re concerned about the viability of the program and we want to make sure that the bad apples and the bad players, frankly, are eliminated,” he said.

• Last week, the U.S. Senate and House passed legislation that included an extension and expansion of the tax credit for homebuyers. President Obama signed the bill into law at the end of the week.
• The $8,000 first-time homebuyer tax credit will continue until April 30, 2010, and the income limits have been increased to $125,000 for single filers and $225,000 for join filers.
• Additionally, current homeowners who have lived in their home for five of the previous eight years are eligible for a $6,500 tax credit.
• There is a purchase price limit of $800,000 for the home, and it must be maintained as the purchaser’s primary residence for three years or the tax credit will be due back to the IRS.
• Unlike the current tax credit program, the extended program allows any purchaser who has a binding contract in place by April 30, 2010 to close by June 30, 2010 and still qualify.

The IRS is cracking down on people who don’t qualify for the first-time homebuyer tax credit but try to claim it anyway.

The IRS says it is investigating 24 cases of people who falsely claimed the first-time homebuyer credit on their federal income tax returns. Getting caught making a false claim carries a penalty of up to three years in jail and a fine of as much as $250,000.

The First-Time Homebuyer Credit, enacted in 2008 and modified in 2009, provides up to $8,000 for first-time homebuyers. The purchaser must be someone who has not owned a primary residence in the previous three years. If the taxpayer is married, this requirement also applies to the taxpayer’s spouse. 

The home purchase must close before Dec. 1, and the credit may not be claimed on the purchaser’s tax return until after the taxpayer closes and has purchased the home.

Key lawmakers in the Senate have tentatively agreed to extend the existing $8,000 tax credit for first-time home buyers and also offer a new $6,500 credit for existing homeowners who have lived in their current residence for a consecutive five-year period in the past eight years. 

Home buyers must be under contract by April 30, 2010, and close before July 1. House Democrats have expressed concern about the cost of the tax credit for the government, and allegations of abuse have resulted in an IRS probe of the program.