Buyers hoping to use the $8,000 federal tax credit are arriving in builder showrooms across the country, but helping them use it for their purchase can be tricky.
Here are some details about the credit--which is only available for settlements happening on or before Nov. 30--as well as what it takes to get the money to the closing table, based on information from government Web sites and the NAHB.
How does the tax credit work?
Until the end of December, the credit--part of the stimulus package passed earlier this year--gives buyers in lower-end tax brackets up to an $8,000 break on income taxes for as much as 10% of the price of a home. For instance, if a taxpayer who owes $8,000 in income taxes qualifies for the maximum credit, he will owe nothing to the IRS that year. If the taxpayer has already paid $8,000 in taxes through payroll deductions, he will get the money back in the form of a refund.
First-time home buyers. The government’s definition of that is broader than what you might think. The federal definition is someone who has not owned a “principal residence” for three years. For married couples, neither could have owned a home for three years. For unmarried purchasers, the credit can be claimed by one of the buyers if he or she hasn’t owned a home in three years.
Are there income limits?
A single taxpayer who makes no more than $75,000 or married taxpayers who file a joint return and make no more than $150,000 in “modified adjusted income” can qualify for the full $8,000. But those who make no more than $19,999 over those limits can qualify for a portion of the $8,000 credit. For instance, a single taxpayer making $85,000--or $10,000 more than the limit--could get a credit for $4,000.
How do buyers access the money now?
Any lender can offer a program that allows a first-time home buyer to apply the tax credit immediately help fund a home loan. But, as of now, only the FHA has issued guidance outlining how to use the first-time home buyer tax credit to pay for closing costs and down payments on FHA-insured mortgage loans.
FHA has agreed to allow lenders who issue FHA-insured loans and non-profit groups to offer borrowers short-term loans to against the tax credit they will receive later. One caveat: Buyers who go directly to FHA-approved lenders will still need a 3.5% minimum down payment from another source if the lender is making a short-term loan that is only secured by the promise to repay the loan when the tax credit is received.
However, the borrower can still use the $8,000 tax credit for closing costs such as prepaid expenses, including escrow for taxes, insurance, and community association assessments. It could also be used to increase the down payment beyond the required 3.5%, or to “buy down” the interest rate on the loan.
Are there any circumstances when the $8,000 can be used for a down payment?
Yes. If housing finance agencies and other government entities securitize the short-term loans by putting a second lien on the homes until the money is paid back, the credit can be used to satisfy the 3.5% down payment required for FHA-insured loan. The National Council of State Housing Agencies (NCSHA) maintains a list of such tax credit loans programs.
In addition, those participating in a first-time home buyers program financed by tax-exempt bonds can be provided with short-term credit acceleration loans that can be used to fund a down payment. Check with the applicable state housing finance agency to determine whether it is available in your area.