Monday, June 1, 2009

"Monetizing" $8000 Tax Credit for Down Payment

On May 29, 2009, HUD released Mortgagee Letter 2009-15.

Initially this letter appears to help First Time Homebuyer's to use their $8000 Tax Credit as a part of their down payment before they actually receive the credit back from the government.

Based on my research this is not the case!

Currently their are 10 States that are participating in "First Time Homebuyer Tax Credit Loan Programs" - for purposes of this blog and since I work in AZ, please note that Arizona is not on the list.

In addition, if you read the entire Mortgagee Letter there is a very important Condition listed:

"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 reimbured, directly or indirectly, by the financially benefiting persons or entity). Accordingly, the proeeds 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 benefitting 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." - See Mortgage Letter 2009-15, Page 2

Notice the first part that says, "including funds derived from a sale of the homebuyer tax credit". You cannot use the money in place of the 3.5% down payment, based on the comment above.

The secondary financing essentially works like this: A company could "purchase" your $8k tax credit, charge you $200 for lending you the $8K and put requirements on how you pay them back.

Important points on how they can be repaid:
  • No Cash Back to the Borrower
  • Second lien cant exceed the total amount needed for down payment, closing costs and prepaid expenses.
  • Secondary financing can be "soft" - Meaning no repayment required until the sale or refinance of the property.
  • Must include payments in qualifying ratios if they are required.

Basically the mortgagee letter is intended to let buyers use the $8K tax credit to help pay for closing costs and any extra down payment above the 3.5% required by FHA.

There is no way, up to this point and based on my research, to not be required to put 3.5% down into the new home, unless the money is gifted from a relative.

Hopefully that clarifies the new mortgagee letter. I don't know whether it is good or bad...I just know that it might not be what people were hoping for. Sure it would help get more 1st time homebuyers into homes, but the DPA programs were opposed by HUD for a while, why would they enact a new guideline to help bring DPA programs back???

Kind of makes you stop and think that the perception this might be available in the future is just that - perception and not reality.

here is good news though - 1st time homebuyers or people who haven't owned a home for the past three years, can still receive an $8000 tax credit on the purchase of their new home between now and December 1, 2009 (unless the bill is extended by President Obama).

Happy 1st week in June.

All Quotes taken from Mortgagee Letter 2009-15 from HUD Website:

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