Bob Bregitzer

The Missing (Tax Credit) Link - Part II

Good news for 1st time home buyers!

HUD has once again allowed a homebuyer to "monetize" their $8000 1st Time Homebuyer Tax Credit. Monetization means obtaining an advance on the tax credit for the use of paying a down payment and other costs associated with a home purchase. Without an advance, the tax credit would only be available once a tax return is filed after the purchase of a home.

Buyers beware: not all tax advances are the same. Only advances made by State agencies and Hud-approved non-profits can be used for both the 3.5% down payment and other purchase related costs. If the advance is made by any other party, including the lender, seller or an interested person to the transaction, then the down payment can only be used to pay costs in excess of the 3.5% required down payment.

Big difference.

Several states already have their programs in place. So now it is up to the Housing Finance Authorities of the State of Georgia to implement the program set-up by HUD.

I say do it quick............... this is good news of everyone!

UPDATE: TO DATE, THE STATE OF GEORGIA NEVER DID IMPLEMENT A PROGRAM TO PROVIDE THE FUNDING FOR STATE AND HUD-APPROVED NON-PROFITS TO MAKE TAX CREDIT ADVANCES POSSIBLE.

Wow! The financial markets are so unpredictable and volatile right now.

Thursday, a week ago, it looked like rates had a chance to improve to levels we have not seen yet. Now, a few business days later, we are at 6 month highs. What in tarnation happened?

Here is the perfect storm that hit quickly:

1) The AAA rating of the US government became has been questioned and made a big topic
2) The Treasury is selling a record $162 Billion of US debt the week of 5/25
3) Consumer confidence rises
4) NABE saying recession may end in 3rd quarter
5) Several big names in the news talking about inflation being a factor once the economy turns around

So what happens from here? That's a tough one but here it goes: The markets are known to overreact and they have definitely overreacted this week. We should see a correction simply from the overreaction. Looking forward, the Fed still has availability to purchase substantial amounts mortgage-backed securities. We should improve from here. Will we get back to rates below 5%? Don't know.

For those who are waiting for rates to reach 3% before you act, let this be a wake up call. Sub-5% fixed rates are something we'll see possibly once in a lifetime. Take advantage of it before it's gone.

Update: After this post on HUD allowing TAX CREDIT ADVANCES, they have withdrawn the idea - typical HUD move. Hopefully, they will address whatever their concern is and once again allow the tax credit to be used for down payment - the housing market needs it.

The Missing (Tax Credit) Link!

The $8000 tax credit is a great incentive for first-time homebuyers. However, in a period when lenders are requiring larger down payments than anytime in recent history, it still keeps homebuying out of reach for many people.

HUD has just announced that they will be allowing TAX CREDIT ADVANCES in the form of second liens through certain Federal, State and local government agencies and FHA-approved nonprofits.

In summary, you can obain a temporary second lien, not to exceed the amount of the tax credit, to pay for the down payment, closing costs and pre-paid expenses. When you receive the proceeds of the tax credit you will pay-off the second lien.

As a CPA, I'd like to help you understand and take advantage of this new development. Please call or email.

Further details of the HUD announcement:

II. FHA Guidance

The Tax Credit: Secondary Financing:

Entities that can offer tax credit advances with second liens.

• Federal, state, and local governmental agencies and nonprofit instrumentalities of government.
• FHA-approved nonprofits.

Additional information about these entities:

• Government agencies and instrumentalities of government are described in handbook HUD-4155.1 REV-5, paragraphs 1-13 A and B.
• FHA-approved nonprofits can be found, per each Homeownership Center jurisdiction, at: http://www.hud.gov/offices/hsg/sfh/np/np_hoc.cfm

How the secondary financing works:

• 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 needed for the downpayment, closing costs and prepaid expenses.
• The tax credit advance must provide that if the borrower does not repay the amount borrowed by the designated deadline, that principal and interest payments begin automatically.
• If payments on the tax credit advance are required, they must be included in qualifying the borrower and, when combined with the first mortgage, cannot exceed the borrower's reasonable ability to pay.
• If payments on the tax credit are deferred, the deferment must be for a minimum of 36 months in order for the payment to not be included in the qualifying ratios.
• The tax credit advance second mortgage must not provide for a balloon payment before ten years.

The Tax Credit: Short-Term Loan:

Entities that can offer the tax credit advance with short-term loans:

• Federal, state, and local governmental agencies and nonprofit instrumentalities of government, FHA-approved nonprofits, and FHA-approved mortgagees may provide short-term or "bridge loans" secured only by the anticipated tax credit due the homebuyer as collateral.

How the short-term tax credit advance loan works:

• The amount that may be borrowed in this manner may not exceed the anticipated tax credit due the homebuyer based on the computations of form IRS 5405.
• Fees and charges for the tax credit advance loan are not to exceed a nominal amount necessary for preparing and administering the loan.