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First-Time Credit FAQ

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Posted On: 07/08/2009

Q: I’m a first-time buyer. I’ve heard that I can use the $8,000 first-time buyer credit in place of cash for a down payment. I’ve also heard that I can’t. Which is it?

A: Both.

Let’s rewind. In 2008, under the Housing and Economic Recovery Act, first-time buyers could get a tax credit from Uncle Sam equal to as much as 10 percent of the purchase price of a home but not more than $7,500. To qualify you generally could not have owned a home for three years before the date of purchase and your income could be no larger than $75,000 if single and $150,000 if married.

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So far, so good. However, the 2008 credit was actually a loan. Once the property was sold the “credit” had to be repaid.

In 2009 the deal was changed. Under the American Recovery and Reinvestment Act the size of the credit was increased to $8,000, you must buy before Dec. 1, 2009 and -- here’s the biggie -- the credit was a real credit. But if you live in the property for at least three years the money doesn’t have to be repaid.

Given the vast number of homes for sale and the huge inventories of lender-owned properties pushing down prices, the purpose of the credit is obvious. Get those homes off the market so local home prices can be stabilized or perhaps even pressured higher.

Next we come to FHA loans. The FHA program is an insurance plan. To reduce risk and offset claims, premiums were raised and the down payment was increased from 3 percent to 3.5 percent for most borrowers during the past year.

The FHA has historically required a cash down payment from borrowers. The money must be from savings or from a gift. No second loans. To get around the FHA restrictions, a number of seller-funded “down payment assistance programs” were established during the past few years, arrangements where sellers made a contribution to a nonprofit organization and the nonprofit then gave the buyer a gift for the down payment. Such programs were banned in 2008 but the legacy remains: in a May 7 speech HUD Secretary Shaun Donovan claimed that DPAs recently represented 14 percent of all outstanding FHA loans -- and 31 percent of all foreclosures.

On May 11, HUD came out with a “mortgage letter” that said that “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.”

In other words, first-time buyers could get a short-term loan to pay their down payment, a second loan that would be repaid from their federal tax credit. Sounds good, and you get the idea that HUD wanted to encourage more first-time buyers to get into the market. Unfortunately, “FHA-approved mortgagees” -- private-sector lenders -- are not allowed to make secondary loans for use as a down payment.

On May 29 HUD posted a revised letter with a new policy that made two main points:

First, “buyers financing through state Housing Finance Agencies and certain non-profits will be able to use the tax credit for their down payments via secondary financing provided by the HFA or non-profit.”

Second, “current law does not permit approved lenders to monetize the tax credit to meet the required 3.5 percent minimum down payment, but, under the terms of today’s announcement, lenders can now monetize the tax credit for use as additional down payment, or for other closing costs, which can help achieve a lower interest rate.”

So, if you’re a first-time buyer and qualify for the $8,000 credit you can apply the money to the FHA down payment provided that the credit advance comes from an approved non-profit or government agency, such as a state housing program. However, if your financing comes from a private lender -- say a bank -- then the deal is different. You cannot get an advance on the tax credit to pay the FHA down payment. You must still come up with the 3.5 percent down payment from your own funds or from a gift, however you can get an advance to pay off other closing costs or to increase your down payment.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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