Yesterday HUD issued Mortgagee Letter 2009-15 which gave official guidance on how exactly you can turn the 8000 Tax Credit for new home buyers into cash to help you cover your closing costs and possibly part of your down payment.
Home Buyer Tax Credit Monetization: How To Claim The 8000 Tax Credit
While many people have many questions, I decided to cover the most popular ones that I hear. What people are asking me about the first time home buyer tax credit being used as a down payment:
What Do I Fill Out To Claim The 8000 Tax Credit?
In order to claim your tax credit, you will need to obtain the IRS Form 5404 from the IRS.gov website.
Can You Assign The Tax Credit To Someone Else?
The IRS will only issue the tax credit to the taxpayer, not a third party. You cannot assign the claim for this credit to a third party.
Can You Use The Tax Credit For Your Down Payment?
The hot topic recently is “can I use the tax credit for my down payment?” and the answer to that question is technically yes – but – you cannot use the tax credit to cover the first 3.5% of your down payment, you must come up with that on your own or have it gifted to you from a blood relative.
Once you come up with the initial 3.5% down payment that is required by FHA, if you would like to use the 8000 tax credit to add to that down payment, that is allowed.
Who Will Provide The Bridge Loan / Monetization Of The Tax Credit?
FHA will permit FHA lenders and other approved government organizations or non-profits to issue you a bridge loan in exchange for a second lien on the property.
If I Take This Bridge Loan, Do I Have To Make Payments?
You might, it will depend on who you get the money from.
If payments on the loan are going to be required on the loan before 36 months, then your monthly payment will have to be considered in your debt ratios when qualifying for your first mortgage.
If payments are not required by the lender before 36 months and you decide to just “not pay” by the deadline you agreed on, the loan will convert into a “soft second” mortgage – at which time principal and interest payments will start to be required.
Is It Possible To Get Cash Back At Closing?
No. The tax credit advance, when combined with getting an FHA loan may not result in you getting any “cash back” when buying the home.
How Much Will Using Your Tax Credit For Down Payment Assistance Cost?
Any costs to you from the lender or organization who “purchase” your tax credit are supposed to be “reasonable”. FHA has even went further on this issue – they have said that any amount charged to you over 2.5% of the anticipated credit are considered excessive.
As an example, if you were going to receive a $6,000 refund, after all fees associated with the transaction, it should not cost you more than $5,850.
If You Wish To Use The $8000 Tax Credit For A Down Payment or Closing Costs:
If you are planning on using the 8000 tax credit for part of your down payment or closing costs, be ready for these things to happen when getting your file ready:
- You will be required to complete the IRS Form 5405
- The lender will contact your employer and review your pay stubs to confirm there are no outstanding garnishments
- The lender will ensure that you have no unpaid student loans or other debts that could offset the 8000 tax credit – including IRS debts
- The lender will have to validate that all requirements to receive the tax credit have been met