FHA First-Time Homebuyer Tax Credit

Date: 6/1/2009

In support of the American Recovery and Reinvestment Act of 2009, offering homebuyers a tax credit up to $8,000 for purchasing a new home, FHA announced the authorization of the First Time Homebuyer Tax Credit Program. This credit is available to first-time homebuyers purchasing a home between April 8, 2008 and December 1, 2009 and who have not owned a home in the 3 years prior to purchase. Credit applies only to owner-occupied properties. In a May 29, 2009 press release, U.S. Housing and Urban Development Secretary, Shaun Donovan, stated this will "...help stabilize the nation's housing market by stimulating home sales across the country... We believe this is a real win for everyone."

The tax credit can be used as secondary financing as a silent second or require monthly payments. Homebuyers financing through eligible state Housing Finance Agencies and non-profit agencies can use the tax credit towards the down payment or closing costs.

Secondary Financing:

1. The buyer may not receive cash back through the FHA-insured first mortgage combined with the tax credit.
2. The second lien cannot exceed the total amount needed for the down payment, closing costs and prepaid expenses.
3. If payments are required, they must be included within the qualifying ratios and, when combined with the first lien, cannot exceed the borrower's ability to repay the loan.
4. To omit payments from the qualifying ratios, payments must be deferred for at least 36 months.
5. If the tax credit advance loan has a short repayment term and the borrower fails to repay by the designated deadline, P&I payments begin automatically or the loan converts to a "soft" second.
6. A balloon payment before ten years is not allowed.

Another approved use is the purchase of tax credit anticipated by the homebuyer. This applies to FHA-approved mortgagees, FHA-approved non-profit organizations, Federal, State and local governmental agencies and instrumentalities.

Purchase of Tax Credit:

1. Proceeds of the sale of the tax credit cannot exceed the anticipated tax credit due the homebuyer based on IRS form 5405.
2. A signed certification stating the tax credit is not subject to other indebtedness must be submitted.
3. Copies of the borrowers tax refund and/or the IRS 5405 must be retained in the FHA case binder.
4. Costs for the purchase of the tax credit are to be nominal, and discounting the anticipated credit to cover the costs and expenses of the transaction must be reasonable and disclosed to the borrower. FHA's views of excessive charges are fees and costs totaling more than 2.5% of the anticipated credit.
5. Homebuyers can apply the tax credit to additional down payment (in excess of 3.5%) and closing costs, and to help lower interest rates. Tax credit cannot be applied to down payment below the 3.5%.

Refer to Mortgagee Letter 2009-15 for additional information.