Home Buyers Use $8000 Tax Credit for Down Payment?

Last February when the Obama administration increased the $7500 tax credit for first-time home buyers to $8000 and said the credit no longer had to be repaid to the government, real estate agents and home buyers alike celebrated the promise of  a stronger real estate market. Real estate agents looked forward to dwindling inventory while home buyers saw a real incentive to get off the fence and start writing contracts.

Unfortunately, as the new tax credit was put into practice, real estate agents and home buyers were still hitting a snag in getting to the closing table. Tightened lending practices combined with a nation of non-savers proved to be an obstacle that couldn’t be overcome for a lot of would-be first-time home buyers. The law still required that home buyers have a minimum of 3.5% of a home’s purchase price for a down payment, and the seller was not allowed to contribute or provide that down payment. If only home buyers could have access to the $8000 tax credit prior to closing, they could use that money for their down payment and/or closing costs. This would help many, many more families achieve home ownership.

Was it asking too much?

Maybe not. Last week HUD announced to lenders it would start allowing certain approved agencies to provide borrowers with a second mortgage or a “bridge loan” to be used for the purchase of their homes. Details on this program are still being worked out, but so far it does sound promising.

Here is an excerpt from the Mortgagee Letter sent from HUD dated May 11, 2009:

The Tax Credit: Secondary Financing:

Entities that can offer tax credit advances with second liens:

• Federal, state, and local governmental agencies and nonprofit instrumentalities of government.
• FHA-approved nonprofits.

Additional information about these entities:

• Government agencies and instrumentalities of government are described in handbook HUD-4155.1 REV-5, paragraphs 1-13 A and B.
• FHA-approved nonprofits can be found, per each Homeownership Center jurisdiction, at: http://www.hud.gov/offices/hsg/sfh/np/np_hoc.cfm 

 

How the secondary financing works:

• The tax credit advance, when combined with the FHA-insured first mortgage may not result in cash back to the borrower. The second lien may not exceed the total needed for the downpayment, closing costs and prepaid expenses.
• The tax credit advance must provide that if the borrower does not repay the amount borrowed by the designated deadline, that principal and interest payments begin automatically.
• If payments on the tax credit advance are required, they must be included in qualifying the borrower and, when combined with the first mortgage, cannot exceed the borrower’s reasonable ability to pay.
• If payments on the tax credit are deferred, the deferment must be for a minimum of 36 months in order for the payment to not be included in the qualifying ratios.
• The tax credit advance second mortgage must not provide for a balloon payment before 10 years.

The Tax Credit: Short-Term Loan:

Entities that can offer the tax credit advance with short-term loans:

• Federal, state, and local governmental agencies and nonprofit instrumentalities of government, FHA-approved nonprofits, and FHA-approved mortgagees may provide short-term or “bridge loans” secured only by the anticipated tax credit due the homebuyer as collateral.

How the short-term tax credit advance loan works:

• The amount that may be borrowed in this manner may not exceed the anticipated tax credit due the homebuyer based on the computations of form IRS 5405.
• Fees and charges for the tax credit advance loan are not to exceed a nominal amount necessary for preparing and administering the loan.

If you have any questions regarding this mortgagee letter, please call FHA’s Resource Center at 1-800-CALL-FHA (1-800-225-5342). Persons with hearing or speech impairments may access this number via TDD/TTY by calling 1-877-TDD-2HUD (1-877-833-2483).