As you may have heard, the US Government, via FHA loans, is offering first time home buyers an up to $8,000 tax credit when they purchase a home. While this may seem straightforward, home buying candidates should know more about how they can qualify.
Here is further definition and clarification of the Government’s First Time Homebuyers Credit courtesty of Julian D. Hebron, Vice President, Mortgage Consultant with Residential Pacific Mortgage – 415-701-2638.
Besides the press and HUD propaganda, here’s the current status: it will take time (1-3 months in my estimates) for lenders to implement this—it’s not a deal on the table today. The reason is because homebuyers must live in the property and prove it’s owner-occupied for 3 tax filing years following purchase. So lenders assume significant risk (default, foreclosure, and sale-before-3-years risk) buying out tax credits in order for borrower to apply it to closing. So to use the credit at closing, borrowers will pay for the privilege, fees likely to be deducted from the credit. Below are some additional notes on how this IRS credit situation is evolving. Items 8-9 pertain to the FHA-lender credit purchases. Bottom line: Realtors should not tell clients that they can get a full $8k credit at closing because, FHA or not, borrowers won’t net $8k if they want an advance (from lender or government agency 2nd lien) on the credit.
1. The IRS tax credit refund can be made only to the taxpayer and not a third party.
2. Government agencies may offer tax credit advances with second liens.
3. The buyer cannot get cash back through the tax credit advance.
4. The 2nd lien may not exceed the down payment, closing costs, and prepaid expenses.
5. The 2nd lien may be “soft” or require payments.
6. Payments on 2nd liens must be included in ratios unless deferred for at least 36 months.
7. Balloon payments on 2nd liens may not be before 10 years.
8. FHA approved lenders and FHA approved non-profits may purchase the tax credit.
9. Tax credit purchaser may not charge more than 2.5% of the tax credit as a fee.
10. IRS may deduct from the tax credit: unpaid student loans, tax liens and garnishments.