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April 29th, 2009

Can I Use My Homebuyer Tax Credit As A Down Payment?



Several homebuyers have begun to ask their lenders whether or not they can use their $8,000 first-time home buyer tax credit as the down payment for their newly-purchased home. According to the Mortgage Grapevine, several borrowers have been told that this process is legit. We don’t know who is telling borrowers they can do this, but some mortgage professionals are warning borrowers that this practice may be considered tax fraud.

The following is from contributor lighthouse1 on the Mortgage Grapevine:

I’m not a tax professional either but I cannot see how this does not play out as tax fraud. You become eligible for the credit when you purchase the home and the form asks for that date. I guess they are betting on not getting audited. People could lose big time on this. I would love to hear from a tax professional how they are justifying this. I personally can tell you that I would not want to be an IRS test case for this. People (usually not the tax “professional”) end up in jail over this kind of thing.

So what’s the truth? It’s best to consult the IRS:

Q. I am in the process of buying a home. I expect to close the deal before December 1, 2009. Can I claim the first-time homebuyer credit now? That would allow me to use the refund for a down payment.

A. No. You may not claim the credit in anticipation of a purchase that has yet to happen. Until you have finalized the purchase of your home, which for most purchasers occurs at the time of the closing, you do not qualify for the credit.  IRS news release 2009-27, First-Time Homebuyers Have Several Options to Maximize New Tax Credit, contains details for filing options if the home is purchased after April 15, 2009.

Here’s what may be making this issue a gray area: the fact that some borrowers have applied for this tax credit, received it, and it’s already been deposited in their bank account. Does this justify the process?

We’re still learning as much as we can on this topic, so please feel free to share any additional information you may have regarding whether or not you may use the first-time homebuyer tax credit (IRS form 5405) as a down payment.

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9 Responses to “Can I Use My Homebuyer Tax Credit As A Down Payment?”

  1. Bill Rice Says: April 30th, 2009 at 1:20 pm

    I will play the mortgage broker advocate on this one.

    Our industry is changing and shifting in radical ways. This leaves the few overworked loan originators left trying to keep up. As a result much of the mortgage brokers’ continuing education is coming from the headlines of our teetering newspapers and 30 second cable soundbite coverage.

    Therefore, my conclusion is that politicians sold this tax credit to the public (and the media) in a similar fashion, which is showing up in mortgage broker presentations.

    This certainly doesn’t excuse the behavior or the tax fraud, but mortgage industry folks should reference and monitor industry specific news sources. And, the media needs to be better about reporting the news and not the political “spin.”

  2. Tim Manni Says: April 30th, 2009 at 2:09 pm

    Hey Bill,

    Good to hear from you. I think your advocacy is legitimate and certainly warranted. Not only is the industry changing (and changing fast), I’d argue it’s overworked. Lenders are dealing with new program after new program. As you said, and you would probably know better, lenders are learning from the news media who is publishing and exercising their own interpretations of the new laws.

    I partially think these types of questions have to be presented as the programs works out the kinks.

    That’s great ending advice: industry insiders (lenders, brokers, bankers) should stick to the news sources designed specifically for them.

    Great points, hope to hear from you again soon,

  3. Imee Says: May 7th, 2009 at 7:39 am

    Sadly, the first time homebuyer tax credit can’t be used as down payment. But $8,000 in tax credits is already a lot, considering how low prices of homes are right now.

  4. Tim Manni Says: May 7th, 2009 at 11:44 am

    Hey Imee,

    “No” seems to be the general consensus. You’re right though, $8,000 is a lot, especially since borrowers don’t have to pay it back.

    Good to hear from you again,

  5. 1sttimehomebuyer Says: May 20th, 2009 at 6:37 pm

    May 13, 2009 – HUD Secretary Shaun Donovan’s decision to allow consumers to use the $8,000 first-time home buyer tax credit to help cover their downpayment and closing costs on FHA-insured mortgages will be a big boost to the housing market, according to the National Association of Home Builders (NAHB).

    “The biggest obstacle for first-time buyers is coming up with a downpayment,” said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla. “We commend Secretary Donovan for acting decisively to enable buyers to access the tax credit at the time of closing. This will help to stimulate home sales, stabilize housing and get the economy back on track.”

    The measures announced by HUD would allow FHA-approved lenders; federal, state and local government agencies; and FHA-approved non-profit organizations to supply home buyers short-term or “bridge loans” up to the amount of the $8,000 first-time home buyer tax credit.

    Longer term loans secured by second liens can also be used by government agencies and FHA-approved non-profit organizations to facilitate home sales. Several state housing finance agencies have introduced such programs and a number of agencies are considering that possibility

  6. Matt Stigliano Says: May 28th, 2009 at 10:48 am

    1sttimehomebuyer – I just saw your comment and wanted to make a note about that. There were many people posting HUD Secretary Donovan’s “announcement” on May 12th (when he gave a speech at NAR Midyear), but by May 13th all the information about it on the HUD site had disappeared. HUD has said they are working on making it happen, but I wouldn’t hold my breath. They’ve run into some opposition on this one and I have a personal feeling, we’re not going to see it anytime soon.

    Unfortunately, shortly after he made his speech, the news spread like wildfire and a lot of real estate bloggers posted the news. Many had to post retractions the next day. Even the National Association of Realtors® had mentioned it on our members site. It was a mess, one which I’ve covered in several posts myself.

    Just thought I’d chime in.

    Tim – You wrote this on April 29th and I am still combating this theory of using the tax credit as a down payment. The IRS clearly states it can not be used as you cited in your post (I have posted that same bit in many posts). If one of my clients came to me with this advice from a lender I would advise them not to use that lender and would walk away from the deal if necessary. I think the IRS will come down on some people at some point and I think they will drag agents and lenders into as well (and rightfully so).

  7. Tim Manni Says: May 28th, 2009 at 11:03 am


    We appreciate your info and your interest in our reader’s questions. We have a much more updated post (one that has been updated almost daily) than this one — http://blog.hsh.com/?p=4005.

    Back to the IRS, when I posted that IRS info, the time was different — HUD had made no mention of this. I would think HUD would consult with the IRS before releasing a potential illegal program. From what I understand this will only be available to FHA loans.

    Check out the newer post and let me know what you think. You seem to be up to date on the pulse of this thing as well — please share any additional info you find and I’ll be sure to do the same.

    Great hearing from you Matt, please visit us again soon,

  8. jsmith Says: February 18th, 2010 at 4:45 am

    I’m not a tax professional either but I cannot see how this does not play out as tax fraud.
    hsh use to down payment…

    Mortgage Rates

  9. Tim Manni Says: February 18th, 2010 at 10:41 am


    Only FHA borrowers can use the tax credit as a downpayment.

    From May 29, 2009:

    HUD announced the finalized details of their plan to allow FHA borrowers to “monetize” the $8,000 first-time homebuyer’s tax credit provided under the president’s American Recovery and Reinvestment Act of 2009.

    Click here for more details.


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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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