Monetizing the Tax Credit for a Down Payment: Clear as Mud

Ever since the May 12th announcement from HUD¹ that the $8000 First Time Homebuyer Tax Credit was going to be able to be used as a down payment I believe there has been more misconceptions, ill conceived speculation, and just down-right misinformed banter from those in the real estate industry and future home buyers alike.

A lot of those in the real estate industry posted information on their blogs, or in forums such as Trulia, ActiveRain and Zillow baiting those interested in or searching for this information by only posting “Great News!” and then a link to a news release — not on how this can be used. What is even worse was that they never bothered to inform their readers that the Mortgagee Letter was later retracted from HUD.

As for prospective home buyers I have heard first-hand all kinds of misconceptions such as:

• If not married, and buying jointly with a friend or sibling BOTH First-time home buyers are eligible for the $8000. (This is not true! only one party, but both must be eligible, per household may receive the tax credit)
• That even before  the HUD announcement, people were applying for the First Timer Tax Credit and waiting for the money in order to buy a home. (This is not allowed a credit is an acknowledgment for something you have done. Even with the new DPA² it needs to be done simultaneously)

I by no means want to offend those who may have thought such things, but simply want to make sure everyone is clear, and if they are not clear, or have questions to please contact me or another competent real estate agent or mortgage professional. Trust me, you can call and pick my brain even if you are working with another agent, I am not going to be intentionally seducing you to cheat on your agent with me. As the little count-down box on here to right says (at the time of this writing) there is only 6 months remaining to close on your home to be entitled to this credit, there is no time to spare if there are misunderstandings on how to use the tax credit as a down payment, or even how to get it if you are using your own funds, or a loan program the does not require a down payment.

OK, so back to what I intended to discuss. So as of May 29th, there is a new “approval” from HUD outlining how to monetize the $8000 Tax Credit, but what I want to make crystal clear to everyone reading this.

You can not use tax credit for the initial 3.5% down payment unless you are using a state approved down payment assistance program.

Now with that being said, the TDHCA³ is who is going to be able make this happen for home buyers here in Denton County. BUT, their program is still being ironed out, and must get approved from HUD. I first wrote about this back on March 29th, the program was hopeful to be released by Mid May, but that time has come and gone, now it is projected for Mid June.

This is what is clear as of right now:

• You can apply for a short term lien to be applied to as a down payment onto of the FHA required 3.5%, or toward closing cost, or toward buying down your interest rate.
• Tax credit loans made by state and local housing finance agencies, government agencies and certain nonprofit groups can be used to cover the minimum 3.5%. However, non-profits that receive fees from sellers cannot provide downpayment assistance under this program. (This will eliminate some county programs as they exist now)
• No Cash or Credits can be paid back to the Buyer or Seller after closing.
• Any costs attendant to the purchase of the tax credit are to be nominal and discounting the anticipated credit to cover the costs and expenses of the transaction must be reasonable and disclosed to the homebuyer. In FHA’s view, fees and costs that total more than 2.5% of the anticipated credit are considered excessive. (Example: $6000 to be refunded, with all fees and costs discounted, borrower should receive not less than $5850.00 for sale of tax credit.)

Now for what I think:

All of this shows real promise for increasing sales activity even more. Both for those considering to list their homes for sale and the buyers who will purchase them. But will even do more good once the DPA’s are released from state and county agencies. Nevertheless, let’s break it down:

1. Like it or not — how many people are really going to want to increase their down payment if they already have 3.5% to put down? With interest rates at record lows, and banks lending again once buyers look at the minimal amount an additional down payment really decreases the monthly mortgage payment, many will choose to keep that money in their pocket.
2. With many Sellers and builders and some REO’s and Short-sales already willing to pay up to 3% of the Buyers closing cost when negotiated properly in the sales contract, again, a first time homebuyer may see it in their best interest to keep that money in their pocket.
3. Buying down the rate, as I already mentioned most people with even a modest FICO credit score in the range of  630 – 650 are already getting the bragging rights to interest rates below 5.5%⁴ so again why would a buyer buy down an already incredible rate? Now for the people who should be buying down their rate. It has been my experience that either the greedy mortgage brokers who are increasing their spread, or the ones that do not explain the benefits of buying down the rate properly are to blame for the first time home buyers who should be, don’t!

The Federal Government, HUD, and FHA are in my opinion really trying to entice buyers by offering these incentives the ability to increase the equity a homeowner has from the very beginning. For that; I am a fan of this program. Let’s face it many of the foreclosures, and short-sales that are now taking place are not just because of 80/20 loans, or other creative financing: It is because persons financed every bit of the home, and it’s closing cost and then had to sell way too soon from the time of purchase — not allowing even in a normal market the time to increase in value or annual appreciation.

Wrapping up:

As I have said in the comments to other articles, I know hundreds of you in the past week have either found this site searching for this information, or are returning visitors checking back in for the information to be broken down for the down payment assistance programs. I also realize I am baiting some of you into coming back here again for my analysis. Guilty as charged! But I hope I am providing some with a new outlook. I can say I do have the information on what is going to be released, but I am not at liberty to post it up yet — Because much of it may change yet again with some of the new verbiage. Many of you will most likely be ineligible due to income restrictions, others will be unwilling due to what is required of you to participate, and others of you will not even realize what you are missing because you are not working with me, or one my partner lenders. I can only help you you one of those.

1. Housing and Urban Development [↩]
2. Down Payment Assistance [↩]
3. Texas Department of Housing and Community Affairs [↩]
4. May 2009 [↩]

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