Q: Is it true that if you are a first-time homebuyer and you purchase your home in 2009 that you can use the $8,000 tax credit toward the downpayment?
A: You’ll find, in the real estate and mortgage world, that there are a number of big gaps between what is allowed, technically, and what is feasible, realistically. You have hit on one of those gaps, my friend.
Mortgage rules and guidelines change very rapidly these days. It can be very tough to keep up with them, and sometimes difficult to know what you can and cannot do at any given moment in time. It helps to get clear on how these things work, especially when you are dealing with a government-insured mortgage situation.
The U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) set forth the minimum guidelines mortgage lenders must ensure a given loan and borrower meet in order for the lender to obtain the government’s insurance on that loan (meaning the government will cover the lender’s damages if the borrower defaults on the loan).
However, lenders are able to apply more restrictive guidelines on top of the minimum requirements. So, for example, you’ll hear people say that FHA has no minimum FICO score requirement. That’s true, but the lenders who actually extend mortgages to consumers do have minimum FICO score requirements.
Since HUD and FHA do not actually make loans, their declarations and guidelines should be thought of as carving out the outer boundaries of the universe of what’s possible for federally insured loans. The inner boundaries of that universe — the bounds of what is actionable, feasible and realistic, per the actual lenders — are often quite a bit more restrictive.
Similarly, when you read news of government tax credit policies and loan modification programs, you are smart to wait a few weeks, then talk with your mortgage broker or real estate professional to see how the outer boundaries of possibility relate, in actuality, to what you can and cannot do in your personal situation. …CONTINUED
In the spring, HUD announced that it would be allowing homebuyers to apply the 2009 First-Time Homebuyer Tax Credit upfront in their transactions. This was limited to buyers who are using FHA-insured loans to purchase their homes. These buyers would be allowed, HUD said, to apply the tax credit to boost their downpayment and/or cover their closing costs.
(HUD did clarify that applying the credit upfront could be used to reduce the 3.5 percent minimum downpayment contribution, which had to come from the buyer; it could only go on top of the 3.5 percent, if used toward the downpayment.)
The way this setup would work was that a state’s Housing Finance Agency (HFA) would offer buyers a loan that could be used toward their downpayment or closing costs, then the HFA would recoup those funds after close of escrow when the tax credit monies came in. Sounds great, right?
And it was great, in theory. The problem is that most states are broke! Seriously broke. My state, California, temporarily paid state employees with IOUs, and even now, many states are forcing employees to take unpaid time off, putting inmates out of the prisons, and taking other extreme cost-cutting measures. So they just plain old had no money available to use to make the loans HUD authorized buyers to use in order to apply their tax credits upfront to their transactions.
So, at this point, there are only about 17 states in which the HFAs offer these loans. (Note: The state HFAs do impose small fees, which vary by state, for the transaction.) Only if you are a first-time buyer in those states are you able to apply the tax credit toward your downpayment or closing costs. If you are an eligible homebuyer in another state, your tax credit will be issued immediately upon your filing of either an amended 2008 return or your 2009 tax return.
Find a list of the states in which the HFA offers a loan you can use to apply your tax credit, upfront, toward your downpayment or closing costs at the National Council of State Housing Agencies Web site.
If you’re a buyer in another state, consider borrowing the $8,000 from your retirement plan (and paying it back when you get the credit, after closing) and other alternatives for taking advantage of your tax credit during your transaction. Ask your real estate agent and mortgage broker to suggest some workarounds that might work for you.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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