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May 29th, 2009 (Modified on June 11th, 2009)

Update5 The Latest On ‘$8,000 Tax Credit As Downpayment’

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UPDATE5: IT”S OFFICIAL — for the time being at least. 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. While the tax credit CANNOT be used to meet the downpayment requirement, it can be used to contribute to either a higher downpayment or to pay for closing costs:

Currently, borrowers applying for an FHA-insured mortgage are required to make a minimum 3.5 percent downpayment on the purchase of their home. Current law does not permit approved lenders to monetize the tax credit to meet the required 3.5 percent minimum down payment, but, under the terms of today’s announcement, lenders can now monetize the tax credit for use as additional down payment, or for other closing costs, which can help achieve a lower interest rate.

Click here to view Mortgagee Letter 09-15 which outlines the details of the initiative.

It’s not clear yet if the $8,000 can be used to pay for the initial mortgage insurance premium. For the time being we’re ignoring HUD’s projections of how many borrowers will benefit from this initiative, but so far the experts seem to think this program will do some good.

“This should accelerate that process — getting them to homeownership sooner. The resulting incremental increase in buyer demand may help promote more firming in the housing market,” said HSH VP Keith Gumbinger.

UPDATE4 (published on 5/27/09): Apparently the reason why HUD pulled Mortgagee Letter 09-15 off their website after Secretary Donovan’s speech was due to an objection by the Office of Management and Budget. According to National Mortgage News, previous reports that the plan is still a “go” are completely accurate.

From National Mortgage News:

HUD took the letter off its website a few hours later — after the Office of Management and Budget objected. Apparently HUD had not consulted with OMB officials on the issue. Meanwhile, HUD has drafted new guidance that is expected to be posted any day now, according to sources.

UPDATE3 (published 05/21/09): According to statements published today in the National Association of Realtor’s (NAR) online magazine, plans to allow the first-time homebuyer tax credit to be used as a downpayment are still on track:

News reports that the federal government is backing away from its plan to permit eligible borrowers to monetize the first-time homebuyer tax credit are off the mark, a spokesperson for the U.S. Department of Housing and Urban Development says.

“The technical details are still being finalized and will soon be published in a mortgagee letter and posted on our Web site,” Lemar Wooley, a HUD spokesperson, told REALTOR Magazine Wednesday afternoon.

Perhaps Mr. Wooley means “re-posted” on HUD’s website. After digging around, we found an unofficial copy of Mortgagee Letter 09-15 — the same letter that HUD had supposedly removed from their site shortly after Secretary Donovan’s speech. We have provided a link to both the speech and the letter below, but cannot verify the accuracy or completeness of the letter, since it came from an unofficial source (please see both below).

UPDATE2 (published 5/20/09 @ 11:26 a.m.): The speculation continues over whether or not the $8,000 first-time homebuyer tax credit can be used as a downpayment. Last week HUD Secretary Shaun Donovan announced in a speech that “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 downpayment.”

Yet, the information, as described in HUD’s Mortgagee Letter 09-15, has been removed from their website. Today we were able to unearth what appears to be a copy of Mortgagee Letter 09-15. Please note that this came from a non-official (non-HUD) source, so its accuracy and completeness cannot be verified.

Yesterday we published an update stating that the Arizona Republic reported that the secretary’s announcement had been “reversed.” After consulting with the reporter who wrote the story, as well as doing some additional research on our own, it seems as though the program is not technically dead, but rather more likely sidelined for further discussion.

As we continue to learn more about the tax credit as a possible downpayment, we’ll be sure to share it with you.

See Original Post Below (published on 5/18/09):

At the end of April we published a story titled “Can I Use My Homebuyer Tax Credit As A Down Payment?” After consulting with the IRS as well as several mortgage professionals, the initial answer was “no”.

Yet last week, speaking at a daylong session at the National Association of Realtor’s (NAR) Midyear Legislative Meetings & Trade Expo, HUD Secretary Shaun Donovan announced that the first-time homebuyer tax credit could be supplemented as a downpayment:

Under the plan announced by Donovan, buyers can get a piggyback mortgage or an unsecured bridge loan for the amount of the tax credit when they get a Federal Housing Administration-insured mortgage. The piggyback or bridge loan can take the place of a down payment. Typically, FHA-insured loans require a down payment of at least 3.5 percent.

Borrowers will be expected to pay off the piggyback or bridge loans when they claim the tax credit on their 2009 returns next year or their amended 2008 returns this year. To claim the tax credit, buyers have to buy by the end of 2009.

“We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a downpayment,” Donovan said.

Perhaps more important than creating the next government-sponsored strategy or initiative designed to grease the real estate market back to health, is developing a coherent, well-thought-out exit strategy. The housing market could face a serious crash if its regulators and participants aren’t prepared to get back to business on their own.

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23 Responses to “Update5 The Latest On ‘$8,000 Tax Credit As Downpayment’”

  1. Wolf Says: May 18th, 2009 at 5:30 pm

    Which lender would accept this?

  2. Tim Manni Says: May 19th, 2009 at 9:11 am

    Hey Wolf,

    An FHA lender I suppose.

    I said it in our previous article at the end of April as well as in yesterday’s, this is such a new concept, I’m still learning about it myself. Besides what I printed, I haven’t been able to find out a lot of details. It was announced by the HUD Secretary and it’s for FHA only — so it must be aimed at lower-income borrowers.

    Thanks for commenting, hope to hear from you again soon,
    Tim

  3. B-Mac Says: May 19th, 2009 at 11:30 am

    I’ve heard it’s been rescinded from multiple sources, HUD being one of them. Apparently the mortgagee letter 9-15 was removed off of site after Donovan made that speach to the NAR. It’s in talks to be revisited and hopefully permitted, but as of this moment, not yet.

  4. Tim Manni Says: May 19th, 2009 at 11:37 am

    B-Mac,

    Thanks for the update. I literally just updated the story to say something similar not two seconds ago. The only news source I could find that correlates with the reversal was the AZ Republic, which I noted. Which sources did you hear it from? I would love to find out more.

    So you are in favor of allowing homebuyers to use the tax credit as a DP?

    Thanks again for info, follow up with us when you hear more,
    Tim

  5. B-Mac Says: May 20th, 2009 at 10:22 am

    Here and there, grumblings can be heard along the line of “isn’t that what got us into trouble in the first place – 100% financing?” However, it seems different b/c with home prices at such lows, there’s a huge discrepancy between programs of old and this new tax credit possibility – essentially this allows monies to be put to use now that, upon purchase, are coming to the new homebuyer anyway.

    The main difference I see is that 100% financing of a home with inflated value way beyond the scope of “normal” appreciation has obvious pitfalls, especially with loan terms that will adjust to something the 100% borrower can’t afford after the initial purchase – leaving the homebuyer with no options.

    (there’s so many folks saying so many things – contacting HUD directly for info seemed the best option. I believe housing wire ran a few pices on it, but it’s a popular subject b/c it affects so many: buyers, sellers, realtors, brokers, lenders, appraisers, etc.) S. Donovan, I assume, thought it sounded great and went ahead in front of the NAR and put it out there.

    At first glance, I like the possibility. Safeguards would be in place with the tax credit loan payments included with the DTI ratios, and fence sitting buyers that can afford home paymnents have that “extra little push” to say “why not – might as well jump”.

    Of course the devil will be in the details. (sorry for lengthy response)

  6. Tim Manni Says: May 20th, 2009 at 12:14 pm

    B-Mac,

    No sorry necessary, a lengthy response shows an engaged reader. I wrote another update b/c I found out some more details and unearthed a few interesting docs. Here’s what I know: Donovan made the speech where he described the nature of the program. HUD’s document, Mortgagee Letter 09-15, which detailed the initiative further, has been removed from their site. My guess is that the internal confusion at HUD may stem from the fact that FHA lenders may not even “be allowed” to do this. HUD has specific rules about downpayment assistance and where it can come from, and I feel this may interfere with it. As you said, “the devil will be in the details,” and I feel this initiative lands in a major gray area.

    “Here and there, grumblings can be heard along the line of “isn’t that what got us into trouble in the first place…” That’s a good point, I haven’t thought about that too much. I can understand the thought of “if you don’t have enough for a DP, you may not be financially sound enough to own a home.

    If you do get through to HUD directly let me know (I know that’s a small feat in itself). I’d be interested to hear what they have to say.

    Good to hear from you again, thanks for commenting,
    Tim

  7. Tim Manni Says: May 20th, 2009 at 12:47 pm

    Wolf,

    I had a chance to think about your question some more. At first I thought the question was unassuming, but as I delved deeper into the $8K tax credit as a DP, your question became much more prudent.

    This is a thought: perhaps the internal confusion at HUD which led the secretary’s statements to be removed was for the very question you proposed. The program is designed for FHA lenders. HUD has very stringent regulations regarding downpayment assistance. Perhaps the tax credit either violates, or lands in a gray area of those regulations or rules?

    Is that where you were going with that?
    Thanks,
    Tim

  8. Craig Anderson Says: May 20th, 2009 at 2:17 pm

    Just a quick comment for anyone who might be interested. I’m the reporter at the Arizona Republic who wrote that the program had been scrapped, based on reports from mortgage-lending and housing-assistance sources in Phoenix. I spoke yesterday at length with Brian Sullivan of HUD, and he insisted the program isn’t dead. I wrote a follow-up article you can read here:

    http://www.azcentral.com/business/articles/2009/05/20/20090520biz-downpayment0520.html

    Sullivan was unable or unwilling to say whether banks would be among the third parties allowed to offer bridge loans, nor would he discuss any other details of the program or its potential problems. He made a pretty good point, that all such questions are hypothetical until an actual program is initiated and its details can be examined. I just thought I’d share that additional tidbit.

  9. Tim Manni Says: May 20th, 2009 at 3:10 pm

    Hey Craig,

    Thanks for the follow up as well as the link — our readers will appreciate it. I think HUD just got ahead of themselves. Sullivan’s comments speak volumes. HUD can’t comment on an initiative that, forget about being initiated, doesn’t seem to exist. Great work, we know how stressful this can be.

    Thanks,
    Tim

  10. Real Estate Marketing, What is REALLY Happening with the Tax Credit? | BRER Real Estate Marketing Blog Says: May 21st, 2009 at 7:37 am

    [...] [...]

  11. Kathleen Allardyce Says: May 21st, 2009 at 10:29 am

    Glad to see so much discussion about this issue. I do wish there would be some official statement, but lacking that, it’s good to at least get tidbits.

    I agree that using the tax credit to achieve 100% financing would be a stupid move. But, my understanding is that the tax credit doesn’t have to be paid back.

    So, it could be useful for people who have the income to comfortably afford the mortgage, but are a bit short on the downpayment, or who want to put as much down as possible. It could be that a buyer has 20%, but wants that extra 8000 upfront to reduce the mortgage amount, since they know they’ll be getting it shortly anyway.

    Either way, clear direction from those in charge would be really helpful!

    Kathleen

  12. Tim Manni Says: May 21st, 2009 at 11:53 am

    Hey Kathleen,

    I’m really glad to see all the discussion as well. The lack of an official statement is making things super confusing — I’m betting HUD is still unsettled on the issue that’s why they’re not jumping the gun (for the second time).

    The tax credit doesn’t have to be paid back, but what it does do is lower your income by $8K for next year’s tax return.

    I do believe the lack of a sufficient DP has limited (potentially) thousands from 1st-time home ownership. There are many Americans who could have no problem covering a monthly payment, it’s just ponying up that 10%-20% upfront which is the hard part. Eight grand would be a nice addition to really bulk up on a DP.

    “Either way, clear direction from those in charge would be really helpful!” Couldn’t have said it any better.

    Hope to hear from you again soon,
    Tim

  13. Falling Home Prices Also Hurting Sales | US Economics News Says: May 22nd, 2009 at 6:20 pm

    [...] announcement that the first-time homebuyer tax credit can be used as a downpayment has been big news the past two weeks. The inability of many first-time homebuyers to comply with today’s stringent downpayment [...]

  14. Tina Johnson Says: May 28th, 2009 at 9:56 am

    I value everyones input on this page. I am a first time home buyer and would really love that 8k to put along with the rest of the down payment Ive worked so hard to save. I was just wondering/hoping if yall felt my opinion would matter at all to the big guys debating this matter. If so could you please give me names, emails, phone numbers, fax numbers, anything i could reach them at. If you feel my say will not matter if there are any other good suggestions anyone has for me it is greatly appreciated more than you know.

    Thank you for your time and again the knowledge on this page is somewhat dizzying,

    ~ tina danae

  15. Micha Says: May 29th, 2009 at 3:43 am

    This idea is a really good one, I really think this could help out a lot of people who normally wouldn’t take up the offer of the original First Time Home Buyers Tax Credit.

  16. Tim Manni Says: May 29th, 2009 at 11:10 am

    Hey Tina,

    Here’s the link to find a HUD office nearest you: http://www.hud.gov/localoffices.cfm.

    Since HUD announced the program, I bet they would be the best avenue for you to express your support. Sorry I didn’t get back to you sooner.

    Thanks for commenting,
    Tim

  17. Tim Manni Says: May 29th, 2009 at 11:19 am

    Micha,

    In terms of establishing a downpayment for those who need it, the program should certainly help. But these borrowers are going to need more than $8,000 for a downpayment right?

    Hope to hear from you again,
    Tim

  18. New $10,000 Tax Credit for New Home Buyers in California « Visionary Realty News Says: May 30th, 2009 at 11:37 pm

    [...] $8K Tax Credit CAN Be Used As FHA Downpayment (hsh.com) [...]

  19. Ron Barham Says: May 31st, 2009 at 2:32 am

    The government needs to be doing anything they can to help the people! I dont mean hand outs either! But tax incentives are great to stimulate the housing market! I think at least right now the housing melt down is fresh in peoples minds! I do not see any abuse of the system for the near future! A short term opportunity might spark purchasing and lead to a more stable market! Besides it’s a tax incentive, it cant hurt this market in the short term, let buyers use it as down payment assistance! Lets not go from stated evrything loans to over strident regulations! Rates are still low, and so are housing costs! If we can get a good loan product for first time home buyers now, we can jump start this economy. If HUD sits on this i am afraid the rates are gonna take off soon. We are already at Zero, they cant go lower and rates are starting to climb. It is not like we have all options on the table. I am not a fan of no dog in the hunt when buying a home, but under the circumstances i see it as a worth while risk in a portion of the market. Not zero down stated, stated, stated, as before, but what they mention is well within reasonable lending! Go for it HUD!

  20. Tim Manni Says: June 1st, 2009 at 11:57 am

    Ron,

    The good thing is borrowers aren’t being given a free rise on this. It’s only for FHA, and the money can only be used to add to a DP or to pay for closing costs. It seems most are on board for this plan — we’ll see right!

    Tim

  21. ethan Says: June 10th, 2009 at 11:54 pm

    don’t know if there is an updated post, but letter 9-15 and included attachments can both be found here:
    http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/

  22. Tim Manni Says: June 11th, 2009 at 12:48 pm

    Hey Ethan,

    At first I couldn’t understand why you were asking for an updated post and why you were providing a link to the letter until I went back and viewed the post (I haven’t viewed it for a couple weeks). It seems something happened with the HTML coding and the whole post was in disarray.

    The post is fixed now and the proper links are in place.

    Thanks, visit us again soon,

    Tim

  23. First Time Home Buyer Tax Credit As A Down Payment? | San Antonio Real Estate | RErockstar.com Says: July 15th, 2010 at 3:57 pm

    [...] $8K Tax Credit CAN Be Used As FHA Downpayment (hsh.com) [...]

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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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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