Shaun Donovan, the Secretary of Housing and Urban Development (HUD), dropped a bomb shell in a speech to the National Association of Realtors today. HUD, the administrator of FHA will soon allow the $8,000 first time home buyer credit to be “monetized” and used as a down payment on FHA mortgages. I’ve been saying for a while that this is going to be the year of the first time home buyer. With a combination of the lowest home prices in years, historically low mortgage rates, and the $8,000 first time home buyer tax credit, all the stars were aligned for this to be a huge year, and it has started out strong. But this should kick it into overdrive. The biggest obstacle to buying a first home has always been saving up the down payment. FHA allows a 3.5% down payment, and that has been a great way for many borrowers to make the step into home ownership. But even that has been a big hurdle for many other wise well qualified buyers. This move will mean that borrowers can buy with effectively no do down payment up to around $230,000, and having an extra $8,000 to go toward a down payment will help a lot of people bridge the gap between what they have saved (or can get as a gift) and what they will need to get into the home. With FHA you can use seller credits to pay the closing costs, so the amount of cash coming out of your pocket will be low.

The details of the program will be released next week, but the program will allow FHA approved lenders to monetize the tax credit through a short term bridge loan. This means the home buyer will be able to use the credit as funds at the closing table and won’t have to wait until after closing to get the money. Don’t expect this to be ready to go by next week. Once HUD releases the details each FHA lender will need to determine how they are going to incorporate this into their approval and closing process.  This means a process of how they will verify that the borrowers are eligible for the credit and a way to make sure that they (or more likely who ever is making the loan) will get the money from the credit paid directly to them from the government. It will require some tweaking to see how they will make this work and still fall within the FHA guidelines. My guess is that these are just details that will be worked out. This may take a little longer before everyone comes on board, but the announcement was made, so they will find a way to get this accomplished. This will be a huge incentive for first time home buyers to make their move now.

Here is how the first time home buyer tax credit works:

1. The credit is for 10% of the purchase price up to a maximum of $8,000. This means that if your purchase is $80,000 or more, the credit will be $8,000.
2. It is available only for first time home buyers. By their definition, a first time home buyer is anyone who hasn’t owned a home in the last 3 years.
3. The home has to be for your primary residence. Second homes and investment properties don’t qualify.
4. This is a true tax credit. The original bill released last year gave buyers a credit the first year, but they had to pay it back over the next 15 years ($500 per year). If they sold their home in that period they would have been liable for the amount of the credit they hadn’t paid back. This new version makes it a true credit as long as you stay in the home at least 3 years. If you sell before 3 years is up, you may need to pay the credit back.
5. If your tax liability is less than the $8,000 credit, you will get the difference as a check back to you. If you have already filed your taxes, you can file an amended tax return in order to take the tax credit this year and get the money back quickly.
6. Income caps apply. A single buyer qualifies as long as they earn up to $75,000 per year, and couples are maxed out at $150,000 per year.
7. This credit applies retroactively from January 1, 2009 to December 1, 2009.

Keep in mind that there is an expiration date to this tax credit. You have to buy the home and close by December 1^st of this year, which gives you about 6 ½ months to get it done. With record low mortgage rates and affordable home prices there is already a strong incentive to buy. If you want to see how much of a loan you qualify for, or what the best way would be for you to afford a home, give me a call.

Update 05/27/2009 – So far, no new details. FHA posted a mortgagee letter about the program, but took it down the same day. It appears that this was announced prematurely, and they are still scrambling to put the details of how it will work together. But the word is that it is still going to happen. Stay tuned, and check back in later. As soon as I have news on this program I will post it here.

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