First Time Home Buyer Tax Credit As A Down Payment?

By rerockstar • May 31st, 2009

Grr! - Frustration over First Time Home Buyer Tax Credit.

What’s the answer? I’m so confused.

Update: The amendment allowing for the extension and expansion did eventually pass and was signed into law by the President. You can read up on the new rules and changes in “First Time Home Buyer Tax Credit – The New Extension And Expansion.” The tax credit can still not be used as a down payment, unless you are using it as an additional down payment on top of your 3.5% (for FHA loans).

In my continuing series of answers about the First Time Home Buyer Tax Credit, there’s yet another update. Last week, the Department Of Housing And Urban Development (HUD), re-released Mortgagee Letter 9-15 in an effort to allow consumers to “monetize” their First Time Home Buyer Tax Credit and use it at the closing table.

You may have heard rumors circulating that the idea of this new change was to allow consumers to borrow against their tax credit and use the money as a down payment. Well, the rumors aren’t true… sort of. A little history may show us what’s going on. On May 12th, HUD Secretary Donovan made a speech at NAR Midyear and more or less announced the new program that HUD was opening up. In this announcement, he spoke of Mortgagee Letter 9-15 (Mortgagee Letters are the directives issued by HUD to lenders telling them what they can and can’t do), and upon first inspection of this directive, the idea of it was to allow buyers to temporarily borrow the money they would be receiving from the IRS and use it as a down payment for their new home. By May 13th, this letter was gone from the HUD site and damage control began. It appears that the final version of the letter was not yet ready and it created quite a stir in the Realtor® community. In an effort to combat the “early” announcement, many of us Realtors® were a firestorm of blogging and phone calls to help our clients and readers understand what was going on (government at work). On May 29th, the new version of the letter was released.

On first inspection of Mortgagee Letter 9-15 (.doc) everything looked alright and I waited to make any announcement about the letter, as I didn’t want another confusing fiasco on my hands. While reading the letter a little closer however, I discovered the true key to its contents:

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.

That last sentence (in bold) is the kicker to the entire Mortgagee Letter 9-15. It states that although you can use the loan against your First Time Home Buyer Tax Credit as a down payment, it can not be used for the FHA required minimum 3.5% down payment. In effect, you still have to put up a down payment, but you can use the First Time Home Buyer Tax Credit loan to increase your down payment or to pay your closing costs. While this can prove helpful to some, I don’t think it’s exactly what everyone was hoping for in terms of helping get buyers motivated to clear out the inventory of homes on the market that have helped bring the economy down.

I do think this can be useful to some. Have a seller who’s not willing to contribute closing costs? The bridge loan could help. Want to put more down than you have? This could help (on a $100,000 home, this could equate to an additional 8% down, increasing your total down payment to 11.5%). You can not walk away from closing with any of this money however, so you won’t be able to use it to get the money faster (I had seen some questions on this). It is a loan, so there will be interest and fees (not to exceed 2.5% according to HUD) attached to it. Your best bet is to sit down with your lender and talk about the advantages and disadvantages of using the First Time Home Buyer Tax Credit like this. You may still be better filing an amended return and receiving the check from the IRS for you to use as you please (including building savings, pay off other debt, make repairs or updates to your new home, or reducing the principal on your new home).

As with any Mortgagee Letter from HUD, this is only a directive of what lenders can and can not do. Until your local lender has a system in place to put this into practice, it’s only as good as the paper it’s printed on. It’ll be interesting to see how many lenders do actually make the jump and put a system in place to use this new monetization of the tax credit as it is truly up to them whether they find value in it or not. There have been several Mortgagee Letters in the past that never really went anywhere, because the lenders never implemented them, because they found no real value in them.

I hope this has helped clear up some of the confusion. If you’re looking for a great lender is San Antonio to sit with and talk about the potential of this bridge loan and ask some general mortgage questions, contact me and I will gladly provide you the name and number of several lenders in town. By sitting down with a lender today, you can prevent a lot of headaches tomorrow.

Interesting note: While looking through blogs to find some “related articles” (below), I was still finding a lot of misinformation or incomplete information. This is one of those things that will probably continue to be a swirl of controversy and uncertainty, but I am dedicated to staying on top of the issue in order to bring you the most complete and up to date information available.

photo courtesy of Martin Kingsley

$8000 First Time Home Buyer Tax Credit Now Available for Down Payment (livingtwincities.com)
$8K Tax Credit CAN Be Used As FHA Downpayment (hsh.com)
The $8,000 First-Time Home Buyer Tax Credit Program Expands: 5 Things to Know (usnews.com)

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Comments(10) Buyers, Housing Market, Realtor® Speak 101

Comments

By Twitted by rerockstar

on June 1st, 2009 at 3:29 am

[...] This post was Twitted by rerockstar – Real-url.org [...]
Sorry… forgot to say great post – can’t wait to read your next one!

By stephanie

on June 10th, 2009 at 4:10 pm

Though it cannot be in lieu of a down payment, but only as additional down payment, does this mean that you still have to have 3.5% down payment upfront, or is that decreased? a smaller amount plus what you take from the credit?

By rerockstar

on June 10th, 2009 at 10:14 pm

Stephanie – The 3.5% down payment is still required to be paid (without using the tax credit based bridge loan). This plan only applies to FHA-insured loans as well – so no conventional, VA, or seller financing allowed.

For example, let’s suppose you qualify for the full credit and owe $0 to the IRS when you file your taxes. You’re buying a $100,000 house.

You would need to come up with $3,500 (3.5%) and qualify for a FHA-insured loan. If the lender had a program to monetize the tax credit, you could borrow up to $8,000 (the max tax credit) from the lender and apply that money to either your closing costs or additional down payment.

If you were to use the entire loan of the tax credit for down payment you would essentially be putting 11.5% down (3.5% your cash, 8% ($8,000) of the loaned tax credit money).

In most cases I would have the buyer speak to an outside source – a trusted lender or some with loan experience. You need to look at the balance between the extra down payment/closing cost advantages and the cost to you for the temporary loan (interest, fees, etc.). One may be more advantageous than the other.

Hope that helps! Thanks for stopping by and if you have more questions, just let me know.

By Tyler

on June 22nd, 2009 at 12:53 pm

The deatils are pretty simple. Cannot be used as down payment, can be used towards closing costs.

The real question… Has anyone actaully done this? Where do you get the money? It has to come from someplace. FHA is not doing it, or not taking part in the program. Thoughts????

By rerockstar

on June 22nd, 2009 at 1:13 pm

Tyler – That’s been the problem with it so far that I’ve seen. I don’t know of any lenders that have jumped on this yet. For them, according to one of my friends in the lending industry, is that there is little gain and more work for them to do this, so it winds up being not worth it to them.

FHA doesn’t give the money (or actually loan the money for an FHA loan either). It would be a lender of the buyer’s choosing who would give you the bridge loan. All FHA does is insure the loan for the lender.

The term “FHA loan” is actually a misnomer, the term is actually “FHA-insured loan.”

Thanks for adding your comments and questions.

By Apryl

on July 2nd, 2009 at 9:37 am

Oh wow. Thank you so much for this information. This took some doing to find. No one knows anything, it seems, about this. Our lender is investigating. It is really frustrating. Does the lender have the option to not allow the credit to go towards our closing costs?

By rerockstar

on July 2nd, 2009 at 10:30 am

Apryl,

It is up to the lender to have a program to monetize the tax credit. In other words, if the lender doesn’t have a program in place to provide you with the loan against your tax credit, they can’t count it towards your closing costs. For example, none of the lenders I work closely with have created a program to use the tax credit in this way – therefore the whole idea of it being using towards closing costs is useless to most of my clients.

Check with your lender to see if they have a program in place to make these sorts of bridge loans…if you’re lender is investigating, they probably don’t have one in place.

Thanks for stopping by.

By David Home Inspection

on August 5th, 2009 at 11:50 am

I have worked as a home inspector for 11+ years. We have inspected everything you can think of. I take the time to read and write many blogs and articles on home inspection and real estate. This was a true joy to read, well done!
Mr D Salvato
Founder of
HomeInspectionServices.org

By Cheap Mortgages

on February 12th, 2010 at 4:25 am

First time buyers need to read this article if they are unsure of anything within the mortgage sector. Many people rush into mortgages and make the banks and the government money by not meeting payment deadlines and not having the knowledge to prevent this from happening.
Cheap Mortgages´s last blog ..Adjustable Rate Mortgage