HUD: Tax credit can be used for closing costs
HUD: Tax credit can be used for closing costs
President’s Message
Chris Sloan
First-time Utah home buyers will soon be able to use the federal home-buying tax credit to pay for their closing costs on a Federal Housing Administration loan, according to new guidance released by the Obama administration last week. According to the U.S. Department of Housing and Urban Development, FHA lenders can now begin developing bridge loans that will enable consumers to use the $8,000 first-time home buyer tax credit to help cover the costs of closing on an FHA-insured home mortgage.
“Families will now be able to apply their anticipated tax credit toward their home purchase right away,” said HUD Secretary Shaun Donovan.
The $8,000 tax credit for first-time home buyers, or those who haven’t owned within the past three years, was included as part of the American Recovery and Reinvestment Act of 2009 as an effort to stimulate U.S. home sales. The tax credit does not have to be repaid and is fully refundable, which means each qualifying individual or household will receive a check for any portion remaining after paying taxes.
The tax credit “monetization” plan, initially announced in mid-May but without details, is part of an effort to give buyers immediate access to the $8,000 tax credit, which is officially only available after filing with the IRS. Rather than delay access to the funds until 2010, the bridge loans allow home buyers to put the funds directly toward purchase expenses like closing costs or an interest-rate buy-down. The money can also be used for down payments in excess of 3.5 percent, FHA’s minimum down payment.
In essence, monetization of the tax credit means a buyer will get a short-term loan, which will be reflected as a second lien on the home, from an FHA-approved lender that will have to be paid back after the buyer files his or her tax return. Borrowers, who would have to find an approved lender, should note that the loan products and repayment terms will vary from lender to lender, and they should carefully shop for a bridge loan as they would any other loan.
“Home buyers should be aware of mortgage scams and carefully compare benefits and costs when seeking out tax monetization services,” HUD said in a statement. “Programs will vary from organization to organization, and borrowers should consider whether the services make sense for them, as well as what company offers the most suitable and affordable option.”
HUD will collect the name, employer identification number and fees charged for each lender participating in the tax monetization program. The new guidelines say FHA would consider any loan with costs above 2.5 percent of the tax credit to be excessive.
“We are putting safeguards in place to ensure that consumers will be protected from unscrupulous lenders,” Donovan said.
Although FHA still requires a minimum 3.5 percent down payment, the program will make big strides in helping lower some of the upfront costs associated with buying a home. Plus, those in need of down payment assistance can still turn to state and local entities, like Utah Housing Corporation, for financial assistance. For a list of local government down payment assistance programs, visit HomeSweetHomeUtah.org. Parents and employers can also contribute toward the down payment.
The $8,000 tax credit is only available to those who close on a home before Dec. 1, and buyers should be aware of the income and other restrictions associated with the tax credit. Given FHA's current market share, HUD said it is estimated that thousands of families will be able to purchase a home as a result of the new program.
To learn more about the tax credit, visit UtahHousingFacts.com. To learn more about getting the tax credit at closing through a bridge loan, talk to an FHA-approved lender.