FHA Approves The Use Of The Homebuyer Tax Credit!!

FHA Approves the Use of the Homebuyer Tax Credit!!

HOLD ON!!

NOT SO FAST!!

IT'S NOT THAT EASY!!

THERE'S MORE TO BE DONE!!

It was announced today at the National Association of Home Builder's Spring Board of Directors Meeting that FHA will now allow homebuyers to apply the new $8,000 first-time homebuyer tax credit towards down payment or closing costs. U.S. Housing and Urban Development Secretary, Shaun Donovan said "We believe this is a real win for everyone. Today, the Obama Administration is taking another important 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. At the same time we are putting safeguards in place to ensure that consumers will be protected from unscrupulous lenders. What we're doing today will not only help these families to purchase their first home but will present an enormous benefit for communities struggling to deal with an oversupply of housing."

There will be two ways for the homebuyers to obtain the $8,000 first-time homebuyer tax credit: Option One: through government agencies or non-profit agencies; Option Two: FHA approved mortgagees (Lenders), non-profit organizations as well as Federal, State, and local government agencies.

Option One:

• Eligible government agencies or "instrumentalities" of government will be allowed to offer a tax credit advance with a second lien. These funds can be used towards the down payment and closing costs. Based on what I read on the announcement the borrower doesn't have to contribute the minimum 3.5% down payment requirement.

Conditions:

1. The borrower will not be allowed any cash back at closing when utilizing the tax credit and a FHA insured mortgage.

2. The second lien may not exceed the total amount needed for the down payment, closing costs and prepaid expenses

3. The second mortgage may be a silent (no payments) or require a monthly payment.

4. If payments are required, they must be included within the qualifying ratios and, when combined with the firs mortgage, cannot exceed the borrower's reasonable ability to pay.

(See mortgagee letter for more details: www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-15ml.doc )

Option Two:

• FHA-approved lenders, non-profits and government agencies may purchase the tax credit up to the amount anticipated by the homebuyer. However, the buyer would still need to bring in the minimum down payment of 3.5% and the tax credit would be used towards additional down payment and closing costs.

Conditions:

1. The proceeds of the sale of the tax credit may not exceed the anticipated tax credit due the homebuyer based on computations from form IRS 5405

2. The borrower must submit a certification that the tax credit is not subject to any other indebtedness (outstanding tax liens, student loans etc).

3. A copy of the borrower's tax refund and/or IRS 5405 must be collected and retained in the file.

4. Any additional fees to purchase the tax credit must be nominal and must be deducted from the anticipated tax credit. The cost should not exceed more that 2.5% of the tax credit. (Example: $6,000 to be refunded, with all fees subtracted, borrower should receive $5,850 for sale of tax credit).

5. The proceeds of the sale of the tax credit to FHA approved lenders, seller or any party that financially benefits from the transaction, may not be used to meet the 3.5% minimum down payment, but may be used as additional down payment, buying down of interest rate or other closing costs.

FHA also expects entities purchasing tax credit assets to employ appropriate due diligence measures:

1. Require the homebuyer to draft and provide the IRS form 5405 "First-Time Homebuyer Credit."

2. Contact the borrower's employer and review pay stubs to confirm that there are no outstanding garnishments.

3. Review the homebuyer's credit report to ensure there are no unpaid student loans, or other obligations that could reduce the amount of the tax credit.

4. Validate that all the eligibility requirements for the tax credit are fulfilled

5. Review previous tax returns and IRS tax assessment letters, if any, to determine that the borrower does not have unsettled obligations to the IRS.

This will be a great opportunities for first-time homebuyers once we have clear guidance from all parties. As with anything new, lenders, government agencies and non-profit organizations will need a few weeks to absorb the new ruling from FHA and determine the appropriate implementation of the guideline. Some will choose not to participate. Some will participate. Lenders must make certain that they fully understand the new ruling so that there will be no issues that could cause FHA not insure their first mortgage loan.

Right now we have to wait and see where the lenders, government agencies and non-profit organizations stand. We all want to help homebuyers with their dream of homeownership. As a Realtor, if you really want to start writing contracts with the hope of using the tax, you will probably need to write a 90 day contract with the contingency of the buyer qualifying for the "First-Time Homebuyer Tax Credit". The question is, will the seller or REO Company accept a contract with this type of contingency. Would you?

I personally think, this is my opinion, that you should wait until the dust settles and we have clear answers before writing or accepting an offer with this type of contingency. Until all the pieces of the puzzle are put together, you don't have a clear picture. You really don't know if the buyer will qualify for the tax credit. Do you want to take the chance?