$8,000 first time Homebuyer tax credit can be used toward the costs of a FHA loan

The Federal Housing Administration (FHA) will allow homebuyers to apply the new $8,000 first-time homebuyer tax credit toward the purchase costs of a FHA-insured home. This is a fabulous step to further stabilize the housing market by stimulating home sales.

The American Recovery and Reinvestment Act of 2009 offers homebuyers a tax credit of up to $8,000 for purchasing their first home. Previously families could only access this credit after filing their tax returns with the IRS. Now FHA's rules allowing state Housing Finance Agencies and certain non-profits to "monetize" up to the full amount of the tax credit (depending on the amount of the mortgage) so that borrowers can immediately apply the funds toward their down payments. Home buyers using FHA-approved lenders can apply the tax credit to their down payment in excess of 3.5 percent of appraised value or their closing costs, which can help achieve a lower interest rate. Families will now be able to apply their anticipated tax credit toward their home purchase right away. This will help in two ways it will allow families to purchase their first home but most importantly it will benefit local communities by reducing the amount of inventory and will stabelize home prices.

Currently, borrowers applying for an FHA-insured mortgage are required to make a minimum 3.5 percent downpayment on the purchase of their home. Current law does not permit approved lenders to monetize the tax credit to meet the required 3.5 percent minimum down payment. However lenders can now monetize the tax credit for use as additional down payment, or for other closing costs, which can help achieve a lower interest rate. Buyers financing through state Housing Finance Agencies and certain non-profits will be able to use the tax credit for their downpayments via secondary financing provided by the HFA or non-profit. In addition to the borrower's own cash investment, FHA allows parents, employers and other governmental entities to contribute towards the downpayment. This will help homebuyers because it will allow them to shop for the best home price and services using their anticipated tax credit.