Last week, HUD announced that the new $8,000 first-time home buyer tax credit could be used towards the down payment of the purchase of a primary residence. The way that it would have worked is that a third party would front the tax credit money to the buyer. The buyer would sign some sort of promissory note with the third party promising to pay back the fronted credit amount when they file their taxes next year (or this year if they have not filed 2008 yet). The seller would pay a fee on the buyer’s behalf, as a seller concession, to the third party.
I had heard about this potential arrangement months ago, but did not want to advertise the idea until all of the details were known. Unfortunately, the cat was let of the bag so I began to discuss this idea with my business referral partners. And then…
HUD has rescinded this decision and has in fact pulled the Mortgagee Letter (how they announce things) from the HUD website. The following is an excerpt from a blog post on ActiveRain by Jeff Belonger explaining “why” in more detail:
“In regards to FHA loans, a borrower can only obtain monies for their down payment of 3.5% by the following :
- Their own funds
- up to 100% of a gift from a relative/family member
- From the Federal, state, and local governmental agencies and nonprofit instrumentalities of government
- FHA approved non-profits
- monies from their employer in a form of employee contribution
- monies from secured borrowed funds… IE. borrowing equity from your home to buy another home or borrowing against your car that is free and clear or borrowing from your 401-k, etc, etc
Here is the major confusion that was put out yesterday, in the body of the mortgagee letter, ML 09-15, at the bottom, it stated :
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.
The confusion: It states “as collateral” and not as a secured lien against the home, but as a secured loan against the collateral. Which in this case would be the $8,000 tax credit.
Because of this, HUD does not allow for monies to be borrowed or given to in any form that I did not mention above, to be used for the down payment. The reality of it all, basically everything that was stated in the mortgagee letter, that has been revoked for now, is old school FHA. When it comes to FHA loans/FHA mortgages, you could get monies for your down payment from the items that mentioned above, which is mentioned in the mortgagee letter. Well, was mentioned… One caveat to all of this is that HUD was going to allow for lenders to secure a short term loan or bridge loan against the $8,000 to be used to purchase a home. But again, that can’t be used for the actual down payment, because it goes against the basic FHA guidelines of down payment monies of 3.5%. Now, unless HUD changed this, it does not clearly state this in the mortgagee letter, even though that letter is no longer valid.”
So for now, buyers must find their down payment the same way they have always had to. Regardless of whether the tax credit can be used as the down payment, it is still a fantastic benefit for first time home buyers especially when combined with the added tax deductions of mortgage interest and property taxes (thereby lowering taxable income).
Rates are low. Prices are reasonable. $8,000 tax credit. Now is a great time to buy real estate.
Questions? Please feel free to email me: [email protected]