There was a lot of commentary by various housing-related groups when HUD announced that the $8,000 first-time home buyer tax credit could be used as the buyer’s down payment. This was hailed as a sure-fire method of stimulating the housing market by providing thousands of otherwise-qualified buyers with the down payment money they lacked. The fire was stoked when HUD made a formal announcement about this at the end of May. Upon further review, however, all of the talk was misguided. Let’s try to address this one last time.
In summary, nothing has really changed. The announcement by HUD was essentially a public relations move after HUD Secretary Donovan jumped the gun (or “put his foot in his mouth,” to be more specific) at the NAR Real Estate Summit on May 12th. Unfortunately, Mr. Donovan wasn’t aware that using the funds in the manner that he described actually violated two rules – one an IRS guideline, and the other an FHA underwriting guideline. The recent announcement on May 29th (see Mortgagee Letter 2009-15) proclaimed two things. The first was that the tax credit can be used in connection with secondary financing from HUD-approved lending sources, but this provision has been available for years. The second point was that the tax credit can be sold for cash. However, the status of the purchaser of the credit will determine whether or not the funds can be used for the down payment. If the purchaser is an FHA-approved non-profit organization or a federal, state, or local government agency, the proceeds of the sale can be used for the down payment. However, if the tax credit is sold to the lender, the seller, or any other entity that has a financial interest in the transaction, then the proceeds can only be used to increase the down payment (after the buyer has already come up with their own 3.5% down payment), or the buyer can use the money to pay closing costs or reduce the interest rate.
In reality, the restrictions that HUD has placed on the selling of the tax credit make it such that no private party will entertain this notion as there is a fee limit to the purchaser of the credit (no more than 2.5%). In addition, to my knowledge there aren’t any government agencies equipped to make such purchases at this time. Since the $8k credit expires December 1, the window is closing quickly, and it’s not likely that we’ll see any agency come up with the funding to make such purchases within that time frame. Furthermore, if buyers were enabled to purchase a home without any of their own money invested in the process, we’ll likely see FHA’s default rates climb higher since loan performance statistics clearly show that those loans fare far worse than loans with down payments from the buyer’s own funds.
In summary, the first-time home buyer credit is a nice reward to buyers that managed to come up with the down payment on their own. While technically they could sell the tax credit to create the funds for the down payment, the reality is the marketplace won’t be able to accommodate this, and in the end that’s a good thing.
