Get the $8000 Tax Credit at Closing?

It sounds so simple. There’s an $8000 tax credit offered to first time home buyers if they purchase a home and close on it before November 30. Why not make it available to home owners prior to closing so they can use the money for their down payment or closing costs? If folks are qualified for a loan but have no cash to put down, and the government has promised to give them $8000 after closing, why not give the buyers access to the money so they can actually buy a house?

If it was me, and there was a loan program that let me borrow the tax credit up front and pay it back when I received the money after closing, I know I would do it. Who wants that debt hanging over their head? Unfortunately, not everyone thinks that way. If the government fronted the money to home buyers as an unsecured note, how many of those notes would go unpaid? Given the state of our economy, probably a whole lot.

That’s one reason it’s been difficult to pass legislation allowing home buyers to use their $8000 tax credit. But there’s another one as well. There used to be lots of ways for the buyer to skirt around having to come up with a down payment for a house. All that came to a screeching halt last fall. Back on September 30, 2008, all down-payment assistance programs were banned by the government. If they banned the practice last fall, how can they bring it back this spring?

Very carefully, it appears. I received an e-mail update on this from George Hart, one of my lenders. This is what he said:

Here is the latest on the recent discussions concerning using the $8,000 tax credit at closing for the downpayment….

1. HUD has released the actual guidelines and if you want to wade through the letter – just ask and I will send it to you.

2. BUT — there are so many catches, turns, and conditions – it will be difficult if not impossible to implement.

3. The FHA approved lender can advance up to the $8,000 as a personal loan IF the buyer makes the normal 3.5% downpayment from their own resources. What?
Does that mean the tax credit can NOT be used for the actual required downpayment?  Yes it does. The rationale is that the lender, broker, seller can not directly assist the buyer/borrower with the downpayment -a rule that, unfortunately, has a direct affect on the tax credit idea.

4. The loan from the lender – if you can find a lender that will make the loan – can not be secured by the property being purchased or by the future tax credit. It is a personal loan only. Total fees can not exceed 2.5% of the money advanced. If it does, the lender is in danger of losing its FHA approval. Plus- the tax credit refunds can not be sent from IRS to the lender to pay the loan – it can only be released to the buyer/borrower and any back taxes owed, or delinquent student loans would be paid from the tax credit first.

So what can be done?

first — the Federal and State tax credits are real – they are cash – and they are an incentive to buy homes.

second — the idea of having that cash at closing is remote and not feasible unless the government changes their thinking.

third —- if taxes for 2008 have been filed – AFTER THE CLOSING – amend the 2008 return and file for the tax credit this year.

fourth —- have your buyer/borrower talk to a qualified tax preparer to review all their options.

and last —- don’t let this stop or delay you from buying or selling a home.

After the crisis we’ve seen in the mortgage industry these past two years, it’s not surprising the government prefers home buyers have some “skin in the game.” There has been an unprecedented number of folks walk away from their homes in the past few years, and speculation says that if those folks had had to put some money down on their properties, they would have at least thought twice about leaving them.

I know it’s hard to save money, and believe me, I would make more money if every Tom, Dick, and Harry could buy a house today. But home ownership is a privilege, in this country, not a right. I think we lost site of that over the last five years or so. If we can get everyone turned back around and understanding that, we’ll all be better off.

Your feedback and questions are welcome.