Posted on Mon, Jun. 22, 2009

Clarifying first-time home credit

There have been a lot of questions regarding the first-time home buyer tax credit that was announced earlier this year. Some of the published information was unclear, and there was a great deal of confusion about how this plan was being implemented.

The U.S. Department of Housing and Urban Development initially released details regarding how this tax credit could be used to help first-time home buyers finance the purchase of homes using Federal Housing Administration loans. Here are the program details as they exist today:

Homes eligible for this credit are those purchased on or after Jan. 1, 2009, and before Dec. 1, 2009, by a first-time home buyer defined as a buyer who has not owned a principal residence during the three-year period prior to the present purchase. The tax credit is equal to 10 percent of the home's purchase price up to a maximum of $8,000. Any home that will be used as a principal residence will qualify for this credit, including single-family detached homes, townhouses and condominiums, manufactured and mobile homes, and houseboats.

Buyers are limited to modified adjusted gross incomes of $75,000 for single taxpayers and $150,000 for married taxpayers filing joint returns. Home buyers who exceed these income levels may be eligible for a partial tax credit up to income limits of $95,000 and $190,000, respectively.

Some taxpayers who have already purchased homes this year have elected to amend their 2008 tax returns to accelerate when the tax credit can be claimed. I strongly recommend that you consult your professional tax adviser/accountant for information relating to your specific circumstances.

Remember, unlike the tax credit announced in 2008, this tax credit does not have to be repaid and is refundable to the taxpayer. The home buyer credit can be claimed even if the taxpayer has little or no tax liability, and the federal government will send the taxpayer a check for some or all of the refundable tax credit.

Perhaps the most misunderstood aspect of this credit is the buyer's ability to "monetize" up to the full amount of the tax credit so the borrower can immediately apply these funds toward the home purchase. The government clarified its position that the credit can be advanced by HUD-approved nonprofit agencies to be used in addition to the 3.5 percent required down payment to pay closing costs and/or to increase the amount of down payment. In addition to the borrower's own cash investment, FHA allows parents, employers and other government entities to contribute toward the initial required funds. It is the aim of this program to help families purchase their first homes and help communities like ours that are struggling to deal with an oversupply of available housing.

If you are considering purchasing a primary residence and meet the qualifications listed above, the combination of this tax credit with discounted home prices and historically low interest rates is very enticing.

Written By Brian McMahon, a licensed mortgage broker.