Altadena Real Estate

Making The First Time Home Buyer Tax Credit Even Better

Some excellent news for Buyers hoping to take advantage of the $8,000 first time home buyer tax credit:

The Federal Housing Administration issued formal guidelines allowing first-time home buyers to apply a federal tax credit of up to $8,000 toward the purchase of a home with an FHA-backed mortgage. While the tax credit can’t be used to meet the FHA’s 3.5% minimum down payment requirement, it can be used as an additional down payment and for other closing costs. For the average FHA-insured mortgage of $182,000, buyers must bring to the closing table or finance about $8,600 in costs on top of their down payment — about $5,460 in closing costs (typically around 3% of the sales price) and $3,185 for FHA’s initial 1.75% mortgage-insurance premium.

In announcing the release of the guidelines, Secretary of Housing Shaun Donovan called them “another important step toward accelerating the recovery of the nation’s housing market.” The ability to “monetize” the tax credit and apply it to a home purchase will not only help families purchase their first home, Donovan said, but “present an enormous benefit for communities struggling to deal with an oversupply of housing.”

The National Association of Home Builders has estimated that the tax credit will generate 160,000 home sales — 101,000 purchases by first-time buyers and 59,000 purchases by existing homeowners who will be able to sell their home and trade up. FHA’s market share has grown from 1.9% in the fourth quarter of 2006 to 23.7% in the last three months of 2008.

The guidelines for monetizing the first-time homebuyer tax credit have been anxiously awaited for more than two weeks. After Donovan announced the initiative in a May 12 speech to members of the National Association of Realtors, the U.S. Department of Housing and Urban Development released and abruptly withdrew a set of guidelines that were later described as a draft version. The final guidelines for lenders, spelled out in Mortgagee Letter 2009-15, explain the conditions under which FHA-approved lenders and nonprofits, and federal, state and local government agencies may purchase the tax credits anticipated by homebuyers.

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