First-time buyers using FHA financing will be able to use their $8,000 federal housing tax credit at the closing table, rather than waiting for a tax refund, according to an FHA document released today.
The eagerly-awaited “mortgagee letter” spells out the details of the effort, which was first announced two weeks ago by HUD Secretary Shaun Donovan. This morning, Donovan spoke to the NAHB at its spring board meetings on the topic as well.
"This will assist home buyers at closing, but it will particularly benefit home builders across the country," Donovan said at the NAHB gathering.
Critically for builders, the program will allow all first-time buyers using FHA mortgages to apply their tax credit at settlement, not just FHA borrowers working with a state housing finance agency. (Many such agencies have already established programs that allow borrowers to do just that.)
Lenders, agencies, and others will be allowed to purchase the credit from buyers, who can then use the proceeds for closing costs or to boost their downpayment beyond the 3.5% required for an FHA mortgage. (Buyers cannot use the tax credit as part of that initial 3.5% downpayment.)
Lenders and agencies will then be able to convert the tax credit into a second lien on the property. If a borrower fails to repay the tax-credit advance by the agreed-upon date (i.e., sending a check after their federal tax refund arrives), then the loan will convert to a second mortgage. Lenders and agencies can either require monthly payments on this loan or simply hold it as a “soft” second, receiving the proceeds when the home is next sold.
There are other rules as well. Buyers cannot combine the tax credit advance and an FHA mortgage to get “cash back” on their loan. They also cannot borrow more for the tax-credit-funded second mortgage than the total required for their downpayment, closing costs, and prepaid expenses.
Alison Rice is senior editor, online, at BUILDER magazine.