Friday, May 15, 2009

FHA Borrowers Soon Can Use $8,000 Tax Credit at Closing
HUD Secretary Shaun Donovan

Exerpts from

In a significant boost to the housing market, HUD Secretary Shaun Donovan announced yesterday that first-time buyers using FHA loans would soon be allowed to “monetize” the $8,000 federal first-time buyer tax credit and use the funds for their downpayment.

The details of the program still haven’t been announced, but the revised policy seems to offer two main benefits.

First, it clarifies HUD’s position regarding state finance agencies that had already established programs to help first-time buyers use the tax credit as part of their downpayment or additional equity in their home purchase. While a handful of states had already begun doing this, according to Rob Dietz, director of tax issues at the NAHB, others had been waiting for more information; Donovan’s remarks appear to give HUD’s blessing to the practice.

Second, the policy should bolster the housing market by allowing first-time buyers using FHA loans to stretch their dollar by using the federal credit at settlement as part of their closing funds, rather than waiting months for a refund on a tax return. “This allows them to solve the ‘chicken or the egg’ question [of which comes first]: the promised tax credit or the closing” that allows them to get the money, Dietz told BUILDER Tuesday, adding: “They have a right to this credit amount as a first-time buyer. It makes sense to turn this credit into their home equity.”

If these buyers could monetize the tax credit, they would essentially receive a short-term bridge loan for the amount of the credit (which could vary based on their income and the home’s sales price). They could apply that money to their downpayment or as additional equity in their home. For buyers working with a state housing finance agency, the monetized tax credit often becomes a “soft” second mortgage, which they must pay back once they receive their tax refund. If buyers don’t pay it back quickly, Dietz explained, the bridge loan typically converts to a 10-year second mortgage, ensuring that the agency gets its money back no matter what.

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