First-time buyer credit not a cure-all

A few weeks ago, I was taking the van service from my hotel in Manhattan to Newark Airport. It was early in the morning and the driver was listening to a talk show. I was half asleep and wasn't paying much attention to the squawking except at commercial breaks when I kept hearing advertisements from a local mortgage company about first-time homebuyer tax credits.

The reason my thought processes kept waking up at the commercials was that:

1. It was such anomaly. There was a time, in the middle of this decade, when we probably heard nothing but commercials from mortgage companies, but that was at least two years ago. With the collapse of the housing market and, to some extent, many of the country's largest mortgage firms, we enjoyed mostly silence on the airwaves about residential lending.

2. Why would a mortgage company run ads about the tax credit, since credits really had nothing to do with getting a mortgage?

The $787 billion stimulus bill President Obama signed into law earlier this year included an $8,000 tax credit for first-time homebuyers. There is a time limit on this offer; the sale of the home must close between Jan. 1, 2009 and Dec. 1, 2009.

Now, a tax credit will not help anyone get into a new home. It comes at the very end of the home-buying process; it is put into place after all the paperwork has long been completed. Months later when it's time to do your taxes for 2008 (or for 2009), you fill out the appropriate forms if you haven't done so already, and then weeks later, you open your mailbox to find -- depending on your tax situation -- a refund check from the U.S. government.

(First-time homebuyers may be able to sell their anticipated tax credit or obtain a loan against it that can be used toward their down payment. The Federal Housing Administration issued guidelines in May allowing FHA-approved lenders, nonprofits and government agencies to purchase the tax credits. In most cases, the tax credit can't be used to meet the FHA's 3.5 percent minimum down-payment requirement. Down-payment assistance loans offered by some state housing finance agencies are an exception.)

How does this work?

The tax credit is a refundable credit, which means that if you pay less than $8,000 in federal income tax, the government will send you a check for the difference. If you owe $4,000 in federal taxes, your payment to the Internal Revenue Service would be nil, plus you would get a $4,000 payment from the government. What happens if you didn't owe any money to the federal government and instead were expecting a $2,000 refund? That's even better because the refund would grow to $10,000 once the tax credit gets added into the mix.

While it's a great deal for the homebuyer, I was curious, if the tax credit was included in a "stimulus" bill, why wouldn't the government incite buyers to acquire homes with actual mortgage help at the beginning of the process. ...CONTINUED

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