The First-Time Homebuyer Tax Credit is an IRS tax credit for qualified first-time homebuyers that purchase a principal residence before December 1, 2009. It’s for 10 percent of the purchase price of the home, up to a cap of $8,000. While this is a boon to many first-time homebuyers, it hasn’t been much of a help in the up-front process of buying a home, since the credit is taken on your tax return “after the fact.”
That’s about to change. The Federal Housing Administration (FHA) has announced a policy that lets borrowers of FHA-backed mortgages opt for a second short-term loan roughly equivalent to 97% of the amount of the first-time homebuyer tax credit they will be eligible for. This second loan places a lien on the property that’s purchased, and is repaid once the buyer files a tax return and receives the credit.
Some details:
- The tax credit loan may not be used to fund the minimum FHA 3.5% down payment requirement. It’s to be used to obtain a lower interest rate on the mortgage, pay closing costs, or make a larger down payment.
- The second lien can’t exceed the total amount of the minimum down payment, closing costs, and prepaid expenses. The advance, when combined with the first mortgage, cannot result in cash back to the borrower.
- If monthly payments are required on the second lien, the amount of the payments must be included within the qualifying ratios for the FHA loan (front-end: 31%; back-end: 43%), unless the payments will be deferred for 36 months. No balloon payment may be required for 10 years.
- The borrower cannot be subject to any outstanding pay garnishments, have defaulted student loans outstanding, or owe any unsettled obligations to the IRS.
Details may be obtained from the FHA here. As always, the borrower should be clear on any details before signing on the dotted line.
Filed under: Finance
