First Time Homebuyer Tax Credit to be Allowed for Down Payment

by Rodney Forbes on May 15, 2009

In a story that continues to go back and forth, it seems first time home buyers will be able to use the $8,000 federal tax credit for up front costs including down payment. Until now the tax credit could only be claimed when filing taxes.

The tax credit has been partially responsible for a rise in first time home purchases, but the government wants to do more and actually let buyers use the tax credit up front for down payments and/or closing costs.

The following is an excerpt from the Wall Street Journal.

Now U.S. housing officials are working on a plan that would essentially allow some first-time buyers to purchase homes by paying little money upfront. Rather, they would be able to put an $8,000 income tax credit for first-time buyers towards their down payment on loans backed by the Federal Housing Administration. The idea is to allow home buyers to “monetize” the tax credit. Right now, home buyers must wait until they file their taxes to receive the credit.

The FHA is finalizing a program that would allow approved lenders, non-profits, and state and local governments to fund short-term loans that could be used as down payments to be repaid once the borrower received the tax credit. Once they received their tax credit, they would pay off the short-term loan and put equity into their home.

The FHA requires a minimum 3.5% down payment on loans backed by the agency, which means that buyers could put little or nothing down on homes up to $230,000. “It is close to having nothing down,” says Thomas Lawler, an independent housing economist.

The proposal, hailed by home builders and Realtors, is drawing some comparisons to the no money down programs that the FHA has worked to shut down. Congress ended a program last year that allowed home sellers to fund down payments to home buyers through nonprofit groups, and the FHA has blamed that program for an outsized share of loan defaults. Under that program, nonprofit groups would “gift” the 3% minimum down payment to a home buyer, often funded by the seller of the home. Buyers would move into the home without paying any of their own money for the down payment.

There is no definitive answer as to when this will be official, but it seems clear the government will pass the measure.

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