Wednesday, June 10, 2009

$8000 First Time Home Buyer Tax Credit for FHA Down Payment? NO (and maybe)

Much has been written and Tweeted about the US Department of Housing and Urban Development allowing the use of the $8000 First Time Home Buyer Tax Credit as down payment on a new home. First, HUD said yes. Then, HUD said no. Now, HUD says maybe. Mortgagee Letter 09-15 which was released and then rescinded has now been revised & re-released. Despite fairly clear language in ML 09-15 (below - emphasis mine) there are still many that mis-understand and mis-report.
  • Pursuant to 12 U.S.C. 1709(b)(9), the homebuyer’s downpayment required for eligibility for FHA insurance may not consist of any funds (including funds derived from a sale of the homebuyer tax credit) provided by the mortgagee, the seller, or any other person or entity that financially benefits from the transaction (or by any third party or entity that is reimbursed, directly or indirectly, by the financially benefiting person or entity). Accordingly, the proceeds of the sale of the tax credit to FHA approved mortgagees, the seller, or any other person or entity that financially benefits from the transaction (or any third party or entity that is reimbursed, directly or indirectly, by the financing benefiting person or entity), may not be used to meet the 3.5% minimum downpayment, but may be used as additional downpayment, buying down of interest rate, or other closing costs.

IF a buyer is eligible for the credit, and IF there is a lender (or agency) available to do so, buyers can use their tax credit as collateral on an additional loan over and above their FHA mortgage to pay some of their closing costs, pre-paids, points for lowering rate, or down payment IF they are putting down the minimum required 3.5% down payment without those funds. Bottom Line - you MUST still have the 3.5% down payment from funds outside of the tax credit.

Your 3.5% down payment can come from savings, gift from relative or employer, your 401k/IRA, etc. Any use of the tax credit at the time of closing can go toward down payment over the 3.5% minimum ONLY.

The use of the tax credit at closing is as collateral on a loan to help you with costs. However, just because HUD has allowed this on FHA loans does not mean that you will be able to find a lender or agency in your area that will assist with this. As of now, there are precious few opportunities to accomplish this. No one in Oklahoma has announced their participation to date. Also, the major national lenders have yet to release their guidelines for underwriting FHA loans with these secondary liens included.

How then can a First Time Homebuyer use this credit to their advantage? There are many ways - savings, emergency fund, home repairs/renovations, etc. For most buyers, the last resort should be using it in getting an additional loan to help with closing.

Speak to a Mortgage Professional about your specific conditions, needs and goals. Have a conversation - do not be sold. Get the RIGHT loan for YOU.

Tim Epps
918-528-4010
Tim@MyFairway.Net

4 comments:

Micha said...

I'm really all confused now. Some sites say, yes the first time homebuyer tax credit can be used for down payments, while some others (including yours) say it can't.

Tim Epps said...

Micha,

Thank you for your comment. You are correct. This can be confusing becuase there are some that are still trying to sell the fantasy that the credit can get you 100% financing. The simple truth is that HUD will not allow this on FHA loans. The buyer/borrower must still have 3.5% of his own (or gift) money for a down payment. Period. The tax credit can only be used as extra down or toward costs and then only as collateral against an additional loan. At present, there are still no lenders offering to allow these silent second mortgages to be used.

Bottom Line - contact a mortgage professional that will tell you the truth instead of one only trying to sell you a loan.

Tim

Ryan said...

Tim,

The credit CAN be used towards the 3.5% down payment IF the bridge loan comes from a party that does not financially benefit from the transaction (i.e. - A state or local government agency). There are a handful of states participating (Florida, Virginia), but I haven't heard of anything in Oklahoma yet.

Tim Epps said...

Ryan,
Thank you for your comment. I have heard that there are some agencies in some states that have speicfic programs to deal with this (maybe as many as 10). However, Oklahoma is not one of them.
I do keep an eye on the national market, but aim to report on what impact there will be on Oklahoma borrowers.
Tim