Tax Edge

By Robert Steere, Toolkit Staff Writer

Perhaps you are one of the thousands thinking seriously about taking advantage of the new $8,000 first-time homebuyer tax credit to buy a new home. Well, the U.S. Department of Housing and Urban Development (HUD) just jumped on the bandwagon along with the IRS with a program to turn the tax credit into cash for closing. Housing officials announced a plan that gives borrowers who use Federal Housing Administration (FHA) financing for a home purchase the option to receive a cash advance based on the homebuyer credit that can be applied to closing costs or a higher downpayment.

"We believe that this is a real win for everyone," said HUD Secretary Shaun Donovan. "Today, the Obama Administration is taking another step toward accelerating the recovery of the nation's housing market. Families will now be able to apply their anticipated tax credit toward their home purchase right away."

The first-time homebuyer tax credit first came into being as a result of legislation in 2008. It was expanded in the administration's stimulus package in 2009 to provide a tax credit equal to the lesser of $8,000 or 10 percent of the purchase price of a home. However, the credit is available only after closing on your home purchase, and you can obtain the benefit of the tax credit from the IRS only by filing your income tax return along with IRS Form 5405, First-Time Homebuyer Credit. Even if the home purchase occurs in 2009, you can take the credit on your 2008 tax return (by filing an amended return if you have already filed it). In this way, you can speed up the actual receipt of the credit.

In the meantime, HUD will give FHA borrowers the option to "monetize" the tax credit by allowing FHA lenders to advance funds to qualified borrowers so that they can apply the cash toward their home purchases. While the amounts advanced cannot be used to meet the FHA's 3.5 percent minimum downpayment requirement, the advances can be used to pay closing costs or to increase the down payment to a level greater than 3.5 percent. Of course, an increase in the down payment would reduce the required monthly principal and interest payments during the term of the loan.

Some in the home-building and real estate industries are disappointed with the new program, thinking that it doesn't go far enough. They wanted the FHA borrowers to be able to apply the tax credit advance toward the 3.5 percent minimum down payment required on FHA loans. They argue that coming up with the down payment is the primary hindrance for many who are looking to purchase a home for the first time. But HUD officials and other industry analysts highlight the importance of requiring home buyers to use their own personal funds to obtain at least some equity in the home.

Guidelines for both lenders and borrowers were published by HUD on May 29, 2009, in Mortgagee Letter 2009-15. To be eligible for the tax credit, and thus, the program, a borrower cannot have owned a home used as a principal residence during the preceding three years. Income limitations apply, as well, so that the borrower's household income for the year of purchase cannot exceed $95,000 for single taxpayers or $170,000 for married couples filing jointly. The home purchase must be completed before December 1, 2009, to be eligible for the credit and the program. Borrowers will have to provide a variety of tax and other financial information to their lenders, including a completed Form 5405. Lenders fees for providing advances based on the tax credit will be restricted to 2.5 percent of the anticipated tax credit--a maximum of $200 based on an $8,000 credit.

It is anticipated that thousands of families will successfully purchase new homes this year because they can use a cash advance based on the first-time home buyer tax credit, in tandem with an FHA-insured mortgage, to complete their transactions.

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Posted June 25, 2009.