First-time home buyers may now utilize their $8,000 tax credit towards additional down payment requirements on the FHA mortgage loan program.
As many of you know on May 29th, FHA issued the latest mortgagee letter regarding the use of the $8,000 tax credit towards down payments. There is still much confusion over the details but here are some clarifications which you may find helpful:
Can the tax credit be utilized towards the down payment?
Yes, but only after the first time home buyer has provided the initial 3.5% FHA down payment.
After that, additional down payment funds can come from the tax credit.
Yes, the tax credit can be utilized for normal fees associated with buying a home such as closing costs and buying the interest rate down. (points)
Can the tax credit be utilized to pay buyer’s closing costs?
Can the buyer obtain the tax credit upfront?
Yes, but there are several requirements which follow:
Purchase of the tax credit may be by a non-profit organization or a Federal, State or Local government agency.
Proceeds of the tax credit may not exceed the anticipated credit due by the home buyer. The borrower must submit a signed certification that the
tax credit is not subject to offset other indebtedness, such as student loans, etc.
A copy of the borrower’s tax refund and IRS 5405 must be collected and retained in the FHA case binder.
Any costs associated with the purchase of the tax credit should be no more than 2.5% of the credit. (For example, if $6,000 is to be refunded with
all fees discounted, the borrower should receive $5,850 for the sale of the tax credit).
No part of the minimum required 3.5% down payment can come from the sale of the credit, the seller or any other person that financially benefits
from the transaction.
Can the tax credit be utilized as secondary financing?
Yes, but there are several requirements:
The tax credit advance, when combined with the FHA –insured first mortgage may not result in cash back to the borrower.
The second lien may not exceed the total amount needed for the down payment, closing costs and pre-paid expenses.
Secondary financing may be soft (silent) or require a monthly repayment.
If payments are required, they must be included within the qualifying ratios and, when combined with the first mortgage, cannot exceed the borrower’s reasonable ability to repay.
Payments must be deferred for at least 36 months to not be included in the qualifying ratios.
If the tax credit advance loan has a short term for repayment, it must also provide that if the borrower fails to repay by the designated deadline,
Principal and interest payments begin automatically or the loan coverts to a “soft” second.
The secondary financing may not require a balloon payment before ten years.
Call me today.