$8,000 home buyer tax credit can now be used at closing

UPDATE (NOV. 5, 2009): Read this for information about the newly extended and expanded $8,000 home buyer tax credit which is is open to more than first time homebuyers and extended to May 1, 2010.

After a few weeks of speculation on this becoming reality, yesterday Shaun Donovan, Secretary of Housing and Urban Development (HUD), announced details of the plan allowing the $8,000 first time home buyer tax credit to be received and used at closing.  The plan entitles borrowers who get FHA backed loans to receive what basically amounts to an "advance" of the $8,000 home buyer tax credit as a short term loan:

"We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans," Donovan said. According to Donovan, the FHA's approved lenders will be permitted to "monetize" the tax credit through short-term bridge loans allowing eligible home buyers to access the funds immediately at the closing table.

There are some limitations though.  The $8,000 can't technically be used as a down payment because the FHA will still require at least 3.5% down payment from a borrower to qualify for an FHA backed loan.  However, the tax credit advance can be used for closing costs, to buy points to pay down the interest rate, to put down as additional down payment above the required 3.5%, or presumably for anything else he borrower wanted to use it for provided it meets these conditions (from the HUD statement about the program):

• The tax credit advance, when combined with the FHA-insured first mortgage may not result in cash back to the borrower.
• The second lien may not exceed the total amount needed for the down payment, closing costs, and prepaid expenses.
• Secondary financing may be "soft" (silent) or require a monthly repayment.
• If payments are required, they must be included within the qualifying ratios and, when combined with the first mortgage, cannot exceed the borrower's reasonable ability to pay.
• Payments must be deferred for at least 36 months to not be included in the qualifying ratios.
• If the tax credit advance loan has a short term for repayment, it must also provide that if the borrower fails to repay by the designated deadline, principal and interest payments begin automatically or the loan converts to a "soft" second.
• The secondary financing may not require a balloon payment before ten years.

• Pursuant to 12 U.S.C. 1709(b)(9), the homebuyer's downpayment required for eligibility for FHA insurance may not consist of any funds (including funds derived from a sale of the homebuyer tax credit) provided by the mortgagee, the seller, or any other person or entity that financially benefits from the transaction (or by any third party or entity that is reimbursed, directly or indirectly, by the financially benefiting person or entity). Accordingly, the proceeds of the sale of the tax credit to FHA approved mortgagees, the seller, or any other person or entity that financially benefits from the transaction (or any third party or entity that is reimbursed, directly or indirectly, by the financing benefiting person or entity), may not be used to meet the 3.5% minimum downpayment, but may be used as additional downpayment, buying down of interest rate, or other closing costs.

For more details on the tax credit see my previous post: How the new $8000 first time homebuyer tax credit will work.

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