Friday, May 15, 2009

Presidential Order Provides $8,000 Down Payment for First Time Home Buyers

As it stands right now, the announcement made by HUD Secretary Donovan earlier this week will make it possible for first time home buyers to use the $8,000 tax credit as down payment toward the purchase of a home. All the details have not been released, but the broad brushstrokes of understanding have. “We think the policy is a real win for everyone”, Donovan said in a speech delivered May 12th to the National Association of Realtors. “FHA will be publishing the details shortly.”

This plan is part of the American Recovery and Reinvestment Act of 2009 and is supported by the FHA (Federal Housing Administration) to promote homeownership. The plan contains stipulations from the IRS as well as guidance on how Federal, State, and local government agencies and other FHA approved nonprofits may assist homebuyers that are eligible for the tax credit.

Generally the tax credit is the lesser of $8,000 or 10% of the purchase price of the home. A phase-out of the credit amount begins when the taxpayer’s modified adjusted income exceeds $75,000 for an individual or $150,000 if married filing jointly. The credit is eliminated completely at $95,000 or $170,000 if married filing jointly. For those considering taking advantage of this tax credit, it should be understood that is a “refundable” tax credit, and as such includes taxes owed by or refunds due to the taxpayer in the calculation. Please consult your tax advisor for the specifics of how the “refundable” tax credit affects your specific situation.

To claim the tax credit, IRS form 5405 must be filed (available at along with the 2008 tax return, if not already filed, or an amended 2008 tax return if already filed; or included with 2009 taxes when filed early next year. The IRS defines “first-time homebuyers as those not having had any ownership, including that with a spouse if married, during the three-year period ending on the date of purchase.

Closing on the home purchase must take place on or before December 1, 2009 and first-time homebuyers must purchase the property from a source unrelated to them. This rules out purchasing a house from a spouse, parent, grandparent, child, or acquiring the home as an inheritance.

Because the $8,000 is a tax credit and not immediately available as liquid cash, secondary financing must be acquired to substitute for the down payment (as a tax credit advance) until such time as the tax credit is received and applied to any unpaid balance. We should expect a rush of “willing providers” of this secondary financing to appear, and it should be noted that only FHA approved entities will be allowed to provide this type of financing. The list of these providers will be available on the FHA website.

The tax credit advance when combined with the FHA-insured first mortgage cannot provide any cash back to the borrower. And the secondary financing may not exceed the total needed for the down payment, closing costs and prepaid expenses. The secondary financing must provide language that if the borrower does not repay the amount borrowed by the agreed deadline that principal and interest payments will automatically begin.

If payments on the secondary financing are required, the lender must include this amount when qualifying the borrower for the first mortgage financing. If payments on the advance are deferred (for a minimum of 36 months), these payments are not included by the lender for buyer qualification. Any secondary tax advance financing may not have a provision for any balloon payment before the ten year mark.

These are just the rough guidelines for this portion of the Recover Act of 2009. Full details will soon be released. In the meantime it is important that potential home buyers who are considering taking advantage of this plan have a clear understanding of just how the system works. It is also important that lenders, brokers and real estate agents understand how to set clear and appropriate expectations in the minds of clients and home buyers.