I have some good news and not so good news.
The Federal Housing Authority (FHA) finally released more details on whether or not you can use the $8,000 Homebuyer Tax Credit as a down payment.
In a nutshell, borrowers may be allowed to get the $8,000 Tax Credit prior to closing and use it as an additional down payment, buying down an interest rate or other closing costs. However, no investor has found a way to legally allow this to occur…meaning it still can not be used for a down payment, closing costs or buying down interest rates.
Keep reading for the details.
A Little Background
On May 13, 2009, there were exciting rumors about the possibility of buyers being able to use the $8,000 Tax Credit as a down payment. This all started when Secretary Shaun Donavan addressed the National Association of Realtors in Washington D.C. at the Real Estate Summit.
Unfortunately, HUD promptly retracted this “brilliant” idea of monetizing the $8,000 Tax Credit, and announced that we would see a revised version soon.
Update from HUD
On Friday, HUD released a new HUD Mortgagee Letter that has substantial changes concerning the use of the $8,000 Tax Credit for a down payment. Here’s an excerpt from page 2 of the letter:
Pursuant to 12 U.S.C. 1709(b)(9), the homebuyer’s down-payment 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 reimbursed, directly or indirectly, by the financially benefiting person or entity). Accordingly, the proceeds 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 benefiting person or entity), may not be used to meet the 3.5% minimum down payment, but may be used as additional down payment, buying down of interest rate, or other closing costs.
For those of you who still want to know more, here are more of the general highlights:
1. The borrower can monetize the tax credit, but it can not be used towards the minimum 3.5% down payment requirement (remember the legal snafu I mentioned in my blog from May 13?).
2. A company/individual charging for the service (meaning, they are charging a fee for providing a buyer with money to cover the tax credit temporarily) cannot charge more than 2.5% of the loan/credit amount. This would most likely be a company like Nehemiah or some other down payment assistance company.
3. FHA Lenders will have to document the file (and the due diligence) for the tax credit purchase – very carefully. HUD will be watching these closely to make sure the advance of the tax credit was not used for a down payment.
4. IRS Form 5405 must be completed, attached, and retained in the case binder.
5. No cash back to the borrower.
Here’s the Bottom Line
These changes totally take the wind out of this entire idea because the one major detail is that the borrower may be able to get the $8,000 prior to closing, but cannot use it for any portion of the required 3.5% down payment. It can only be used for additional down payment monies in excess of the minimum 3.5%.
In addition, as I stated earlier, there is no legal way for an investor to offer the $8,000 prior to closing to be used as a down payment, for closing costs or to buy down interest rates. Think about it. The IRS is not going to give a buyer their money until they know a house has closed…a closing must occur to get the $8,000 Tax Credit. This means a lender would have to offer a second or even a third mortgage to be used to cover the $8,000 prior to closing. What happens if the buyer does not qualify for the tax credit? How does the lender get repaid? There are a lot of things that HUD still needs to consider.
So I say, what’s the point? Why would any FHA approved lender create the program and details for offering to lend the $8,000 Tax Credit prior to closing if the buyer can not use it for the down payment?
It’s frustrating for lenders and more importantly frustrating for homebuyers. Will HUD ever get their act together?
I’ll be sure to share more details on the blog as I receive them.