$8,000 Tax Credit

$8,000 TAX CREDIT – Soon To Be Available As A Down Payment – 5 – no, make that 6 – Things You Need To Know
Written by Carl Medford, Agent in Fremont
May 14, 2009 9:25 AM Home Buying in Fremont
28 comments1,901 viewsWhile I normally refrain from cutting and pasting news into this post, the following news update from the National Association of Realtors “Realtor Magazine”, May 12, 2009, deserves to be posted in its entirety:



“Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, on Tuesday said that the Federal Housing Administration is going to permit its lenders to allow home buyers to use the $8,000 tax credit as a down payment.



Previously, most buyers wouldn't receive the funds until after they filed their tax return, and that deterred some people from using the credit. The NATIONAL ASSOCIATION OF REALTORS® has been calling for the change.



“We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a down payment,” Donovan says. His remarks came in an address to several thousand REALTORS® gathered Tuesday morning at "The Real Estate Summit: Advancing the U.S. Economy," at the 2009 REALTORS® Midyear Legislative Meetings&Trade Expo in Washington, D.C..



He says FHA’s approved lenders will be permitted to “monetize” the tax credit through short-term bridge loans. This will allow eligible home buyers to access the funds immediately at the closing table.”



Here are my thoughts:



1. On the surface, COOL. REALLY GOOD NEWS.



This is great news for first-time buyers who have been looking at the market, wanting to get in but have not had any capital to do so. This will open the doors for yet another level of prospective buyers to get into the market. For responsible individuals who just haven’t been able to get together a down payment, this is the great news they’ve been waiting for.



2. On second look, NOT SO MUCH.



While this may be good news for first-time buyers who have no cash, it is a return to the scenario that got us into this mess to begin with. This will be, in reality, a return to 100% financing. FHA programs require 3.5% of the purchase price as a down payment. 3.5% on a $230,000 home is $8,050.00. I’ve sold a number of homes in the past 12 months that easily fit into this price category. In addition, FHA guidelines allow the seller to credit up to 6% of the purchase price for closing costs.



I like Warren Buffet’s concept of “skin in the game.” Although I’m just like the next guy and love a free ride, having watched the recent meltdown, I know there is no such thing as a free lunch. Those who participated in the previous 100% financing schemes that had nothing personal invested in their homes were the very ones who walked away the moment they got upside down.



In addition, the question needs to be asked, “Why don’t they have a down payment?” We’re not really talking a lot of money here. I understand that life gets in the way and expenses happen, but I also have watched a generation grow up that believe that excessive consumer debt is their god-given right of passage.



My opinion is this:



“If you don’t have the discipline, dedication and skills to build up a small down payment, then I believe the odds that you will get into serious financial difficulty in the near future are significantly increased.”



If that’s true, maybe you should wait to buy a house until you learn how to control your debts. Just a thought.



3. Funds not going where they were intended.



One of the realities of the tax credit that made sense for many first-time buyers was the fact that it provided much needed cash to improve their homes once they moved in. Most of the homes being snapped up by those eligible for the tax credits have been foreclosed properties. Many of these need carpet, paint and so on to make them nice places to live. If the tax credit is used up front, then instead of having the rebate to help fix up their homes, many will most likely rely on plastic to “get-er done.” This takes us back to point number 2 above.



Secondly, the tax credit was intended to help fuel local economies. If used up front as a down payment, the money will not make it to the local businesses that truly need a financial shot in the arm; businesses like home improvement stores, furniture companies, contractors, etc.



4. An additional layer of complexity.



For those who’ve never had the joy of working with FHA loans, I’d suggest you sign up to work on an Alaskan crab boat for the Discovery Channel’s Deadliest Catch series. That way, you could experience thrills, excitement, pain and even death WITHOUT having to deal with the FHA. For those of us not so lucky, we know what’s coming.



This suggestion actually means adding another moving part to an FHA loan.



A bridge loan of some kind. Another layer of complexity in a process that is already WAY too complicated. Even more governmental involvement in a process that’s already extremely arduous. I feel like I just clicked my heels and ended up back in Kansas (I was born there and don’t plan on returning any time soon …). Someone PLEASE tell me it’s not just me …



5. An Extension?



Lastly, if this is the direction we are going, can an extension to deadline for the tax credit be very far behind? We’re talking about the government here, and this proposal will take time to implement. It really makes no sense to go to all the trouble of making this accessible to thousands more without adding more time for it to actually happen.




6. NEWS FLASH … It’s Been Retracted!!!




Since this post was originally launched, the possibility of using the credit for a down payment seems to have been rescinded! At least for now. My guess is that someone at HUD read my blog, saw the wisdom and changed their minds! I know, I’m being silly … quit dreaming. Here’s the scoop:



Those receiving FHA loans to purchase a home have very strict guidelines attached to where they can and cannot get their minimum 3.5% down payment monies from. These include:



Funds they’ve saved themselves
A gift from a relative
Employer contributions
Secured borrowed funds (example your 401K)
From governmental agencies
FHA approved non-profit organizations
The bridge loan as proposed for the $8,000 tax credit does not qualify. Therefore, until they can work out some bugs, this is off the shelf for now.



SO … good news, right? Maybe … maybe not … we’ll see.