$8000 housing tax credit can now be turned into cash at closing according to FHA

by Xin Lu on 9 June 2009 13 comments
Photo: gov loans

As part of the Obama stimulus plan passed in January, first time home buyers in 2009 are entitled to a tax credit of up to $8000 that they do not have to repay. This tax credit was supposed to be given to the taxpayer after they file their 2009 taxes in 2010, but it seems that a new set of FHA guidelines is allowing many to take the money during closing.  Here are some of the details.

First, to qualify for this tax credit you must not have owned a principal residence during the previous three years.  However, if you own a second home or rental it is okay.  Your household income also cannot exceed $95,000 for singles and $170,000 for married couples filing jointly. You also have to close on your new home by November 30th, 2009.

The FHA's new "tax credit monetization" program allows many state housing finance agencies to provide second mortgages in the amount of the tax credit so that the borrowers can use the money towards the required 3.5% downpayment for FHA loans.  These second mortgages are usually low interest and have very short terms.
 To check if your state's housing finance agency is participating in this monetization you can go to this website and then contact your local agency if there is a program you qualify for.   Essentially this is a form of downpayment assistance by the state government.  You do have to pay the money back to your state based on the terms of the second mortgage. 

If your state's housing finance agency is not participating in the monetization program it is still possible for an FHA approved lender to give you a cash advance towards your tax credit.  However, this cash advance cannot be used towards the 3.5% FHA downpayment requirement, but you can use the money to add to the downpayment, buy down interest, or pay any other type of settlement fees.  The lenders will charge a fee for advancing you the money, but the FHA is limiting the fee to 2.5% of the tax credit.  This means that the most a borrower would pay for the entire $8000 advance is $200.

I think this program could be very advantageous to people who can responsibly afford a home's monthly payments, but just do not have enough money saved up and cannot possibly save up $8000 in the next 5 months.  This especially makes sense in areas where home prices are not very high and a mortgage would cost less than rent after accounting for the "free" $8000.  In markets like the Bay Area or Manhattan where $8000 would barely make a dent in the price of the home it makes less sense to take a loan against the tax credit.  Additionally, in rapidly declining markets like Florida and Nevada a home might be worth a lot less in a few months anyway so there is no hurry to buy. 

Are you taking advantage of the credit? Why or why not?  Do you think the government is irresponsible in doling out this credit?

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Guest's picture
Justin

Very informative article. Thanks for sharing.

Guest's picture

I live in Florida and hope to buy a house this year BECAUSE of the tax credit. I qualify for a VA loan and am hoping to somehow use the tax credit to pay closing costs. The housing market may still be declining here, but since the homes I'm looking at are already priced below 60k (Many below 50k!!) I doubt prices can drop much lower in the areas I'm looking into. Hopefully I can attend a HUD function soon and start making the required contacts.
Any additional ideas or tips, ( I AM handy and am hoping for a sweat equity arrangement) would be greatly appreciated!!

Guest's picture
Johnathan

Hmmm....you can now buy a home without putting up any money. Sounds like what got us into this mess.

Guest's picture
Amy

My fiance just graduated and is looking for a job. We're really hoping to get his employment situation figured out as soon as possible so we can begin house hunting.

We would like to get in a home before Nov 30 so we can get the tax credit in 2010 and use it to pay for our wedding in 2011.

Guest's picture
Peter T

Whatever that is, it is not frugal: Housebuying without sufficient downpayments brought us the housing bubble and bust, and now it should help us out of the mess? Instead of distributing presents, the government should change the tax laws to make housebuying without downpayment more difficult, which would stabilize the economy in the long run.

Guest's picture
mike2

I feel cheated with this. I saved every penny and bought the house on cash - no debt 2 years back. I could have taken a mortgage, but, since I was staying very much within my means, the interest+taxes was far below standard deduction. If people have a tough time paying even the bare minimum, may be buying a house may not be most prudent, isn't that what got us in this crisis. It feels like private interests are at play in keeping the housing moving along.

Guest's picture
Guest

is part of the problem.

And 3.5% down is still too little skin in the game.

Even for those buying in California (where you can walk with no deficiency judgment)

Guest's picture
Guest

My husband and I bought a condo this year, and we made the decision to buy based on the 8,000 dollar tax credit. Once I found out about the tax credit, I realized that the housing prices and interest rates had also fallen.

We put down 5%, but this was still a large sum for a couple in their mid-20s in metro Boston. We are responsible, frugal, and have good credit, so why not take advantage of this situation?

Guest's picture
Guest

Same guest as above.

For those people who think we should make it harder for people to buy with a small down payment, it is harder btw! The guidelines are MUCH stricter than they used to be, my husband and I squeaked by, but there will be many people who won't qualify for loans at all.

It is no longer the era of easy credit, friends. Those of us without SPARKLING credit won't get to take advantage of this tax credit.

Guest's picture
Catherine

My husband and I currently live in a 1 bedroom (crappy) apartment in Florida. It costs us $650/month with no utilities. Our lease is up at the end of July, at which time our rent would increase to $850/month (I think it's because there are so many people needing apartments now that they've been foreclosed on). We're having a baby at around the same time, and to move to a decent 2 bedroom apt within a reasonable distance of hubby's work would cost us well over $1000/month.
After we heard about this $8000 refund thing, we started casually looking at houses. Next week we are closing on an $80,000, 1200 sq foot, 3 bedroom, 2 bath, beautiful house. Our 30 year fixed mortgage = $700/month (including property taxes!) We used an FHA loan with 3.5% down to buy the house.
No one can tell me that we're not being frugal when we'll be saving money every month AND getting back more than our down payment come tax time next year.

Guest's picture
Guest

This program pushed my husband and I into buying this year. We have great income, steady jobs and good savings. We are using the 8,000 as a boost for IRA savings and furniture. We were thinking of holding off but this talked us off of "the fence". We decided to get a co-op on the edge of Queens, NYC instead of streatching for a house right now and we did 10% down. It frees up our money for retirement, backup savings, daily life and allows us to not be at the edge of our budget and be "house poor". We can also still go out to eat and have vacations unlike our friends who got houses. When money needs to be spread around to keep the economy going (or in harder hit areas GET it going) this is a good thing to encourage people like my husband and I to stop holding our money on the sidelines.

We are holding off on the new car b/c hubby car didn't qualify for cash for clunkers (by ONE MPG) and we weren't comfortable with a first time mortgage AND another car payment.

As for the person who saved up 100% of their down payment and didn't have a mortgage- you need to learn that smart and responsible debt management is the way to make money grow- if budget was an issue you should still have been able to buy when you had 50% to put down! Any wealthy person I know uses SMART and SAFE money management to make money grow, take advantage of programs etc. Safe loans keep the money flowing in the economy. Subprimes were just irresponsible!!

Guest's picture
Guest

It's so funny how people think they know everything. I learn everyday that I know less and less than I thought I did, thank God for the lesson, and keep living life.

"Hmmm....you can now buy a home without putting up any money. Sounds like what got us into this mess."

My friend, what you don't see or understand is there are honest people out there in this country who are a product of the poor economy and the irresponsible companies that created it. During the dot com crash and Sept. 11th, I was laid off 3 times and sometimes went months in between desperately looking for jobs while working minimum wage to feed my wife and kids.

I have never owned property because of this run of bad luck that prevented my wife and I from even getting started, let alone getting back on our feet. I kept pushing until I found a steady job. But, it was difficult with looming bad credit and a tight income to even think of a 3.5% down payment.

I am happy to say that we are no longer stuck in $1500/month leases from the only real estate you can find out here, and that we are now closing on a home that will put us at $1200/month in a much more energy-efficient and healthy home BECAUSE of the $8,000 from the government. $300 a month means infinitely less stress for this hard working American, and the possibility that I can give up the second part-time job I work in addition to my full-time day job.

I don't agree with everything Obama says, but I can tell you this: the $8,000 tax credit is a start in the right direction to turning the economy around, and comes as a blessing for thousands of Americans like me who have wondered how and why all of their hard work could never amount to the "American Dream".

Guest's picture
Guest

I have found that many sellers are using the credit to their advantage in negotiations. Knowing the buyer is getting 8 grand back leads to higher market prices. And the many who are getting into homes with the credit are going to be stuck in houses that aren't worth what they paid for them. That is precisely what got us into this mess.

I have money saved and will wait for this "stimulus" to expire as I think I can get a better bargain on a home.