FHA to Allow $8000 Tax Credit to be Used as Downpayment

Update 5/29: HUD reversed course today on its initial plan to allow homebuyers to use the $8000 credit towards a downpayment. Instead, the credit may be “purchased” by FHA approved lenders (and credited at closing), to pay for additional closing costs. While this decision may be helpful, it won’t have the impact originally hoped for, since buyers frequently negotiate to have sellers pay their closing costs anyway.

Original Post:
HUD announced that they are going to permit lenders to allow homebuyers to use their $8000 tax credit as part of their downpayment. This "monetization" of the tax credit is big news for first time buyers struggling to come up withe their 3.5% to 10% downpayments required in today's lending environment. The current challenge to home buyers is that there is no way to 'advance' payment on the $8000 -- buyers must wait until they file their 2009 tax returns in early 2010, creating a catch-22: buyers need the $8000 to buy a home, but can't get to the $8000 until after they do so.

With this announcement, FHA-approved non-profit organizations will supply home buyers short-term or "bridge loans" up to the amount of the $8,000 first-time home buyer tax credit. Click here to learn about some of these programs, which provide funds for little or no interest.

Looking for info on the $8000 credit and eligibility? Read this post.

Remember, you must close on a house by November 30, 2009 to take advantage of the tax credit. Get started with your search:
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Stimulus Bill To Be Law: First Time Buyers Get $8000 Credit, Conforming Loan Limits Increase

The stimulus bill, having had its original House and Senate versions reconciled in Committee, is now on its way to President Obama's desk in time for his President's Day goal. I'm still wading through the Committee report text, but here is what I can see:

• Credit is $8000 (up from the House version of $7500 but down from the Senate's $15,000)
• Does not have to be repaid as long as you own the house for 36 months from the date of purchase and you purchased in 2009. If you sell before 3 years then you have to repay the entire thing.
  
• Applies to purchases from January 1 through December 1, 2009. (Note: I've seen some other reports saying 12/31, and others saying July or August, but from what I read in the Conference report posted online, it says 12/1) If you bought in 2009 you can elect to treat it as purchased on 12/31/2008 so you can claim it on your 2008 return.
  
• Is a refundable credit - so even if you don't owe $8000 in income taxes then you get the difference back (NB: This is an update from previous post)
• DC buyers cannot claim both this credit and the $5000 DC homebuyer credit.
• Unlike the previous $7500 credit, you can claim the credit even if your mortgage was financed by a mortgage revenue bond (like with VHDA loans) - check with your tax advisor!
• Limitations are similar to the previous $7,500 "credit" (interest free loan) in 2008: income restrictions start at $75,000 (single) and phase out completely at $95,000 or $150,000 (married filing joint) and phase out at $170,000, and have not owned a home in previous 3 years.
  

See page 19 of the Conference Report pdf file here for more.

Here's a handy chart of the old law versus the new law.


Move-up (non first time) buyers -- don't worry, there's something in the Bill for you, too...

There is another important change that hasn't been getting nearly as much press: the temporary reinstatement of the increased conforming loan limits for high cost areas. You may recall that our local Washington, DC, area's conforming loan limits rose from $417,000 to $729,750 last year, giving purchasers of higher end homes an important break on interest rates for loan limits up to that amount. At the end of 2008, the temporary limit expired and it dropped to $625,500. That means any loan above that amount fell into the "jumbo" category--making it very difficult and very expensive for borrowers in that bracket. This stimulus bill reinstates that $729,750, which should make it easier for folks to get these loans which now qualify for Fannie, Freddie (and possibly FHA...unclear at this time) guidelines, which translates to lower rates and greater availability.

Read more about conforming loan limits and how they work here.

Ready to start your search and take advantage of the credit?

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