The details are still a bit unclear as to how the program will be implemented. However, HUD Secretary Shaun Donovan announced this past week that first-time buyers using FHA loans would soon be allowed to "monetize" the $8,000 federal first-time buyer tax credit and use the funds for their down payment.
"We, like you, believe that this new tax credit is not only a tremendous opportunity for first-time home buyers, but also an enormous benefit for communities struggling to deal with an oversupply of housing.
We all want to enable FHA consumers to access the tax credit funds when they close on their home loans so that the cash can be used as a down payment. So FHA will permit trusted FHA-approved lenders and HUD-approved nonprofits, as well as state and local governmental entities to "monetize" the tax credit through short-term bridge loans. We think the policy is a real win for everyone, ensuring that borrowers can tap into the numerous organizations that are already part of the FHA network to receive this additional benefit," Donovan told attendees at the National Association of Realtors, Real Estate Summit in Washington.
As mentioned, the details of the program still haven't been announced, but the revised policy seems to offer a benefit to potential first time home buyers without the full down payment for the purchase of a home.
The policy should help boost the housing market by allowing first-time buyers using FHA loans to stretch their dollar by using the federal credit at settlement as part of their closing funds, rather than waiting months for a refund on a tax return. "This allows them to solve the 'chicken or the egg' question: the promised tax credit or the closing" that allows them to get the money, said Rob Dietz, director of tax issues of the National Association of Home Builders, adding: "They have a right to this credit amount as a first-time buyer. It makes sense to turn this credit into their home equity."
Still two questions remain unanswered: Will first-time home buyers be able to monetize the tax credit using any FHA-approved lender? Or will they need to be working with a state housing finance agency, which usually requires additional documentation and provides financial and homeownership counseling to those who qualify for their help?
"We will attempt to answer those questions once we've published our mortagee letter," HUD spokesman Brian E. Sullivan said.
If buyers could monetize the tax credit, they would essentially receive a short-term bridge loan for the amount of the credit (which could vary based on their income and the home's sales price). They could apply that money to their down payment or as additional equity in their home. For buyers working with a state housing finance agency, the monetized tax credit often becomes a "soft" second mortgage, which they must pay back once they receive their tax refund.
Dietz added that," There's no doubt that the purpose of the tax credit is to stimulate housing demand. We estimate new and existing home sales will increase by 160,000. But it's not a tax credit that is in anyway large enough to reinflate the market-it's just a useful and limited tool to smooth out the market," he said.
"As for causing sales to return to 2005 levels or push prices up, this tax credit is not capable of doing that."
As the details of the new program and the mortgage letter from FHA are published we will provide additional information and details. The final version of this program will tell the story of whether or not this will be a program that enables first time buyers an option to purchase a home and truly take advantage of the $8,000 home buyer tax credit at closing.
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