"Monetizing" the First-Time Homebuyer Tax Credit

After much ado, on May 29, 2009, the Department of Housing and Urban Development issued Mortgagee Letter 2009-15, which opens the door for homebuyers who are eligible for the $8,000 First-Time Homebuyer Tax Credit to use the tax credit as a down payment, to buy down the interest rate, or pay closing costs.

Before you start the celebration, let me explain how this will work. There are two methods for converting the $8,000 First-Time Homebuyer Tax Credit into "cash."

The first method is via secondary financing (second mortgage) equal to the tax credit. The following conditions apply:

a) The tax credit advance, when combined with the FHA-insured first mortgage may not result in cash back to the homebuyer;
b) The second mortgage may not exceed the total amount needed for the down payment, closing costs, and prepaid expenses;
c) Secondary financing may be "soft" (silent) or require a monthly payment. Soft or silent means that no repayment is necessary if certain conditions are met;
d) If a payment is required, it must be included in the homebuyers qualifying debt ratios and ,when combined with the first mortgage, cannot exceed the homebuyers' reasonable ability to pay;
e) Payments must be deferred for at least 36 months to not be included in the qualifying debt ratios;
f) The secondary financing may not require a balloon payment before ten years.

For the tax credit to be eligible to be used as any portion or all of the down payment it must be via secondary financing provided by state or local housing finance agencies, government agencies, or certain FHA-approved non-profit groups. Unfortunately, as of the typing of this blog post there is no agency or non-profit organization providing the secondary financing for California. I will notify you via another blog post if I hear of any agency or non-profit providing secondary financing but I wouldn't get my hopes up. For one, the First-Time Homebuyer Tax Credit is set to expire on December 1, 2009. And two, I predict that it will work like other programs of this nature, which is on a first come, first served basis, be underfunded, and require the homebuyer to be in escrow prior to applying for the tax credit advance.

The second method method allows FHA-approved lenders and FHA-approved non-profit organizations as well as Federal, state, and local government agencies to purchase the tax credit from the homebuyer and works a lot like a payday advance. A fee will likely be charged to access the tax credit advance. The following conditions apply:

a) The amount of money provided on behalf of the homebuyer may not exceed the anticipated tax credit due the homebuyer based on the computations of IRS Form 5405;
b) The homebuyer must submit a signed certification that the tax credit is not subject to or obligated to some other unpaid indebtedness (i.e., another debt owed to the government);
c) Any fees charged by an organization or agency for the purchase of the tax credit are to be no more than 2.5% of the anticipated tax credit (i.e., $8,000 to be refunded, with all fee considered, the homebuyer should receive not less than $7,800 for the sale of the tax credit);
d) The tax credit funds may not be used to meet the 3.5% minimum down payment, but may be used as additional down payment, buying down the interest rate, or other closing costs.

Under this option, the homebuyer must still come up with the required minimum 3.5% down payment using their own funds, a gift from a family member, or a combination of the two. Unfortunately, as stated above, as of the typing of this blog post there is no agency or non-profit organization purchasing the tax credit for California. I will notify you via another blog post if I hear of any agency or non-profit purchasing the tax credit.

By the way, non-profits that receive fees from sellers cannot provide down payment assistance under this program.

I hope this blog post brings a little clarity to the circumstances in which the First-Time Homebuyer Tax Credit can be utilized to aid in the purchase of a home versus waiting to receive the tax credit months after purchasing a home.