Housing Credit Becomes Down Payment

The first-time homebuyer tax credit is changing yet again, this time to allow some buyers to get their hands on the tax money as a down payment. When it was created last year, it was a $7,500 (or 10 percent of the home's purchase price, whichever was less) tax break that basically operated as an interest-free loan that eligible buyers got when they filed their tax returns. It has to be repaid in subsequent tax filings.

Then came the American Recovery and Reinvestment Act. When that stimulus package was signed into law on Feb. 17, it included provisions that increased the credit for eligible 2009 purchases to $8,000 (or 10 percent of the home's purchase price, whichever is less) and made it a true credit that didn't have to be paid back. The IRS followed up the new law by allowing flexibility on when the credit could be claimed. Still, the tax break was available only after the qualifying taxpayers closed on their first home. That's now changing for some buyers.

HUD tweaks: A ruling by the Department of Housing and Urban Development (HUD) will allow some homebuyers to "monetize" their credit as a down payment. Eligible buyers can use their credit amount to secure a piggyback or bridge loan from private lenders, state housing agencies and some nonprofit groups and use that money as a down payment.

HUD Secretary Shaun Donovan, in announcing the plan, said the down payment option "will not only help these families to purchase their first home but will present an enormous benefit for communities struggling to deal with an oversupply of housing." Donovan pointed to a home builders' study that claimed that the tax credit will stimulate 101,000 sales to first-time buyers. Another 59,000 home sales will follow, according to the study, by folks who then will be able to buy homes because first-time buyers purchased their properties.

The tax credit down payment program is available only for FHA loans and buyers still must follow some of the federally-insured loan rules. FHA loans will continue to require a minimum 3.5 percent down payment, which the buyers much come up with on their own. However, they can use loans from certain nonprofits and state and local housing agencies to reach the 3.5 percent amount. Any additional funds from a tax credit secured loan can be used as an additional down payment amount. The bridge or piggyback loan would be paid back when the homebuyer receives his or her tax credit.