- Should I Refinance?Interest rates have crept up, but refinancing may make sense for you.
- Mortgage CalculatorPurchase price, interest rate, taxes and PMI determine your monthly payment.
- Rent Vs. BuyFind out if owning a home will save you money.
By Jennifer Acosta Scott, bankrate.com | Published: 9/10/2009
Passed in February as part of the American Recovery and Reinvestment Act of 2009, also known as "the stimulus package," the credit gives a tax allowance of up to $8,000 to first-time homebuyers who purchase a home before Dec. 1. The credit itself is already well-known, but here's a lesser-known fact: Buyers now don't have to wait until tax time to use it.
On May 29, the Department of Housing and Urban Development announced that it will allow buyers who qualify for the tax credit to "monetize" it by using it as a down payment or toward closing costs on a home. HUD Secretary Shaun Donovan said this new feature is intended to not only ease the costs of homeownership but also boost home sales in areas where properties have been sitting on the markets for months or years.
Figuring out how to use the credit upfront, however, isn't as easy as signing a form and collecting your cash.
Not everyone is eligible to use the federal housing tax credit. You must be a first-time homebuyer -- meaning that you have not owned a home that is your principal residence for at least three years leading up to your home purchase. Both spouses of a married couple must pass this test to qualify.
To claim the full amount of the credit, your modified adjusted gross income can be no more than $75,000 if you're single, and $150,000 if you're married. If you earn more than that, you can still take advantage of the credit, but at a lesser amount. The credit phases out entirely at $95,000 for unmarried homebuyers and $170,000 for married couples.
If you want to use the tax credit to pay for upfront home-buying costs, you must have a mortgage insured by the Federal Housing Administration. You can find a list of such mortgage programs at www.hud.gov.
Still, Realtors worry that first-time buyers will wait too long to complete the closing process by the Nov. 30 deadline.
If you've met all of the requirements, familiarize yourself with the two options available for monetizing your tax credit.
First, the most common way is accomplished through secondary financing, in which certain government or nonprofit organizations like state housing finance agencies can give you a short-term bridge loan and place a second lien on your home. Then, you would pay it off with the refund you receive after filing for the credit on your 2009 income tax return.
The other option for monetization is the purchase of the tax credit. In this scenario, the homebuyer assigns the credit to a lender. This option can be used by for-profit, FHA-approved lenders, as well as some government or nonprofit organizations.
"You sign a form that the lender provides for you that forfeits your right to the credit, and they will file the credit on your behalf for them," says Edward Collins, a wealth adviser at Artisan Wealth Management in Lebanon, N.J.
If you choose to sell your tax credit, additional restrictions apply. Homebuyers who take this option can't use the money from the sale of the credit toward the minimum 3.5 percent down payment that is required for FHA loans. However, they can use it to increase their down payment above 3.5 percent.
"So if you want to come up with more down and reduce your monthly payment a little, this would be one way to do it," Collins says.
Lastly, a tax credit purchase may be subject to nominal administrative fees of no more than 2.5 percent of the amount of the credit.
Once you know how the monetization of the federal housing tax credit works, it's time to find an organization that participates in such a program.
State-chartered groups are dedicated to affordable housing, and a growing number of them are beginning to offer monetization programs. As of mid-July 2009, 13 state housing agencies offered tax-credit loan programs: Colorado, Delaware, Florida (began Aug. 1), Idaho, Kentucky, Massachusetts, Missouri, Nebraska, New Jersey, Ohio, Texas, Tennessee and Virginia. Be aware that each state agency has its own requirements.
Under HUD's requirements, housing finance agencies that serve certain cities or communities may issue tax-credit loans or purchase tax credits from homebuyers, but finding one that offers such a program may be difficult.
"Most local housing finance authorities probably don't have the cash lying around to go and do this," says Jim Shaw, executive director of the Capital Area Housing Finance Corp., which serves central Texas.
If you can't find a housing agency that is offering down payment assistance in conjunction with the tax credit, some private FHA-approved lenders may be able to monetize your credit by purchasing it. A searchable database of such lenders is available on the HUD Web site.
Distributed by Scripps Howard News Service. Reach Jennifer Acosta Scott at editors@bankrate.com.
