HUD Tweaks First-Timer Credit

Written by: Steve Cook   Mon, June 1, 2009 Beyond Today's News, Crisis Programs, Market Analysis

HUD announced last week it has found a creative way to made the $8,000 Federal tax credit for first-time home buyers even more useful than it was when passed by Congress last February.

The tweak to the program allows those buyers using FHA financing to use the money to pay closing costs at settlement, such as title, inspection, points or taxes. However, buyers cannot use the tax credit to pay down payment costs.

Lenders, agencies and others can “purchase” the credit from buyers to create a second lien, to be repaid with proceeds from the credit when buyers claim it on their taxes.  If a borrower fails to repay the tax-credit advance by the agreed-upon date (i.e., sending a check after their federal tax refund arrives), then the loan will convert to a second mortgage. Lenders and agencies can either require monthly payments on this loan or simply hold it as a “soft” second, receiving the proceeds when the home is next sold.

It’s hard to know how many more sales the latest tweak will make possible, though FHA estimates “thousands.”  The credit has come a long way from the version that passed Congress nearly a year ago.  The initial legislation capped the credit at $7500 and required buyers to pay it back before they sold the house.

According to estimates by the National Association of Home Builders, the current credit will stimulate 160,000 home sales across the nation - 101,000 of which will be first-time buyers who will receive the credit. Another 59,000 existing homeowners will be able to buy another home because a first-time buyer purchased their home.

NAHB may have lowballed its estimated.  According to very preliminary figures from the IRS, some 567,685 taxpayers claimed more than $3.9 billion worth of first-time homebuyer credits on their 2008 tax return, though 38,158 may be disqualified because the IRS has found they had ownership. In a personal residence within the past three years, the total will certainly exceed the $4.6 billion estimated by Congress last year.  The preliminary figures were from returns received by March 6-five weeks before 2008 returns were due,  See First-timer Tax Credit is Working.

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