The Federal Housing Administration has issued formal guidelines allowing first-time homebuyers to apply a federal tax credit of up to $8,000 toward the purchase of a home with an FHA-backed mortgage.
The bad news, for those hoping that the initiative would allow homebuyers to buy a home with nothing down, is that the tax credit can’t be used to meet the FHA’s 3.5 percent minimum down-payment requirement.
But the tax credit can be used as an additional down payment and for other closing costs, which can help borrowers obtain a lower interest rate.
For the average FHA-insured mortgage of $182,000, buyers must bring to the closing table or finance about $8,600 in costs on top of their down payment — about $5,460 in closing costs (typically around 3 percent of the sales price) and $3,185 for FHA’s initial 1.75 percent mortgage-insurance premium.
In announcing the release of the guidelines, Secretary of Housing Shaun Donovan called them "another important step toward accelerating the recovery of the nation’s housing market."
The ability to "monetize" the tax credit and apply it to a home purchase will not only help families purchase their first home, Donovan said, but "present an enormous benefit for communities struggling to deal with an oversupply of housing."
The National Association of Home Builders has estimated that the tax credit will generate 160,000 home sales — 101,000 purchases by first-time buyers and 59,000 purchases by existing homeowners who will be able to sell their home and trade up. FHA’s market share has grown from 1.9 percent in the fourth quarter of 2006 to 23.7 percent in the last three months of 2008.
The guidelines for monetizing the first-time homebuyer tax credit have been anxiously awaited for more than two weeks. After Donovan announced the initiative in a May 12 speech to members of the National Association of Realtors (see story), HUD released and abruptly withdrew a set of guidelines that were later described as a draft version.
The final guidelines for lenders, spelled out in Mortgagee Letter 2009-15, explain the conditions under which FHA-approved lenders and nonprofits, and federal, state and local government agencies may purchase the tax credits anticipated by homebuyers.
Those offering tax-credit advances with second liens can’t charge more than 2.5 percent of the anticipated credit, which works out to $200 in fees and costs for the maximum $8,000 tax credit.
The second lien can’t exceed the total amount needed for the down payment, closing costs and prepaid expenses, and can’t result in cash back from the borrower.
The homebuyer’s 3.5 percent minimum down payment can’t come from the lender, the seller, or any other third party or person benefiting from the transaction. …CONTINUED