The first-time homebuyer tax credit is changing yet again, this time to allow some buyers to get their hands on the tax money as a down payment.
When it was created last year, it was a $7,500 (or 10 percent of the home's purchase price, whichever was less) tax break that basically operated as an interest-free loan that eligible buyers got when they filed their tax returns. It has to be repaid in subsequent tax filings.
Then came the American Recovery and Reinvestment Act. When that stimulus package was signed into law on Feb. 17, it included provisions that increased the credit for eligible 2009 purchases to $8,000 (or
The IRS followed up the new law by allowing flexibility on when the credit could be claimed. Still, the tax break was available only after the qualifying taxpayers closed on their first home.
That's now changing for some buyers.
HUD tweaks: A ruling by the Department of Housing and Urban Development (HUD) will allow some homebuyers to "monetize" their credit as a down payment. Eligible buyers can use their credit amount to secure a piggyback or bridge loan from private lenders, state housing agencies and some nonprofit groups and use that money as a down payment.
HUD Secretary Shaun Donovan, in announcing the plan, said the down payment option "will not only help these families to purchase their first home but will present
an enormous benefit for communities struggling to deal with an oversupply of
housing."
Donovan pointed to a home builders' study that claimed that the tax credit will
stimulate 101,000 sales to first-time buyers. Another 59,000 home
sales will follow, according to the study, by folks who then will be able to buy homes because first-time buyers purchased their properties.
While I appreciate the intent of the FHA rule and understand the desire of Uncle Sam and the housing industry to get this vital sector of the economy moving again, I am bothered by yet another special tax circumstance.
This tax break keeps morphing more than the shapeshifting aliens in the X-Files, and that can only lead to confusion, frustration and the perception of special tax treatment for certain taxpayers. There's already enough of that in connection with our tax laws.
Still some limits: The tax credit down payment program is available only for FHA loans and buyers still must follow some of the federally-insured loan rules.
FHA loans will continue to require a minimum 3.5 percent down payment, which the buyers much come up with on their own. However, they can use loans from certain nonprofits and state and local housing agencies to reach the 3.5 percent amount.
Any additional funds from a tax credit secured loan can be used as an additional down payment amount.
The bridge or piggyback loan would be paid back when the homebuyer receives his or her tax credit.
You can read more about this new program at:
- How to Get the $8,000 First-Time Home Buyer Credit Upfront (Wall Street Journal)
- FHA Adds Down-Payment Options to Housing Credit (Washington Post)
- First-time buyer tax credit can now be used as a down payment (WalletPop)
- Feds will allow tax credit for down payment, closing costs (SeattlePI.com)
- The $8,000 First-Time Home Buyer Tax Credit Program Expands: 5 Things to Know (U.S. News & World Report)
- Change in rules regarding home-buyer tax credit likely to spur housing market (MercuryNews.com)
Jenny
TWTP, that’s a broad brush. My husband and I, after years of saving, were finally able to put down 3% on our home. Purchasing, at what was then a decent fixed rate of 5.75%, allowed us to improving our living condition while at the same time paying less each month to maintain our mortgage and insurance than our rent had been.
A low down payment can be the only way into the housing market for people with low incomes. One of the keys to making it work is purchasing as much house as you can realistically afford. Even as everyone around me told me I could (and should!) afford a much more expensive home, I limited my search to homes whose mortgages I felt I could carry even if our circumstances were to change for the worse.
Kay
Janna,
This new option to use the tax credit amount as a down payment applies only to FHA-insured loans.
You confusion is understandable; lots of things connected with the credit are being discussed simultaneously.
The credit itself, for any eligible first-time buyer, is 10 percent of the home’s purchase price up to a maximum of $8,000.
For the FHA program, you must come up with a down payment of 3.5% of your home’s price totally on your own.
If after coming up with that 3.5% down payment you decide you want to put a larger down payment on your FHA-insured mortgage loan, you can use the tax credit bridge loan option. That’s where this comes into play.
You come up with 3.5%, you get a bridge loan against your tax credit and add that amount (a possible $8,000) as an additional down payment. When you file your tax return, you claim your first-time homebuyer credit as usual and then use that tax money to pay back the bridge loan.
Of course, this supposes that you’re going to get refund. If you owe taxes, then any credit you have will first apply to your tax bill with any excess coming back to you as a refund.
Again, this is only for FHA loans. If you’re a first-time buyer with a conventional mortgage loan, you can’t use the credit to secure a loan to help you come up with down payment money. But you still can claim the credit on your tax return.
I hope this helps clear things up.
If you’re buying your first home, congratulations and be prepared for all the other components of home ownership — insurance, repair and maintenance and, of course, property taxes!
Kay
Micha
I think it’s good that the tax credit can now be used for down payment, aside from bridge loans. It could really help people a lot.
Janna
I’m confused. Your commenters say it’s 3.5% of the price of the home, others say 10%, and someone else completely negates it saying it can only be used for bridge loans.
Imee
Well it’s not a full downpayment, 3.5% of the tax credit is all you can use for that purpose. It’s not much, but I guess it helps.
Jeff Day
My oh My, why do people have to make such simple conclustions from such complex situations?
In the area we live, the Midwest, a comfortable 3 bedroom home can be purchased aproximately 80k-90k. A 3.5% downpayment would represent aproximately $3k. The $8k credit would leave aprox $75,000 plus aproximately $4,000 closing costs. Or a mortgage of aproximately $80k
With interests rate in the 5% rage that would mean monthly payments aproximately $430. 3 bedroom apartments or renting a 3 bedroom house costs over $600 a month.
So KB would think a young family having had no opportunity to save monies yet, should not take advantage of this circumanstances?
Well send the family to me, I will help them get all their ducks in line.
Jeff Day EA
Evansville, IN
Roth & Company, P.C.
Governmental dementia
One of the sad signs of dementia is the way old folks forget the recent past. The government itself seems…
Robert D Flach
KB-
If all you can put down on a house is 3.5% of the purchase price you should not be buying a house!
This kind of nonsense caused the current financial mucking fess in the first place.
TWTP