At the National Association of Home Builders Spring Board of Directors meeting on May 29, 2009 HUD Secretary Shaun Donovan announced the rules for using the $8,000 tax credit. They are not what was hoped for. The tax credit cannot be used for the initial 3.5 percent down payment required for FHA loans. The tax credit can be applied to a down payment in excess of the required 3.5 percent, points to buy down the interest rate and/or closing costs.

“We believe this is a real win for everyone,” said Donovan. “Today, the Obama Administration is taking another important step toward accelerating the recovery of the nation’s housing market. Families will now be able to apply their anticipated tax credit toward their home purchase right away. At the same tim e we are putting safeguards in place to ensure that consumers will be protected from unscrupulous lenders. What we’re doing today will not only help these families to purchase their first home but will present an enormous benefit for communities struggling to deal with an oversupply of housing.”

What Does The New HUD Announcement Say?

Currently, borrowers applying for an FHA-insured mortgage are required to make a minimum 3.5 % down payment on the purchase of their home. Current law does not permit approved lenders to monetize the tax credit to meet the required 3.5 % minimum down payment, but, under the terms of today’s announcement, lenders can now monetize the tax credit for use as additional down payment, or for other closing costs, which can help achieve a lower interest rate. Buyers financing through state Housing Finance Agencies (HFA) and certain non-profits will be able to use the tax credit for their down payments via secondary financing provided by the HFA or non-profit. In addition to the borrower’s own cash investment, FHA allows parents, employers and other governmental entities to contribute towards the down payment. Today’s action permits the first-time home buyer’s anticipated tax credit under the Recovery Act to be applied toward the family’s home purchase right away. Unlike seller-funded down payment assistance, which was a vehicle for abuse, this program will allow home buyers to shop for the best home price and services using their anticipated tax credit.

The $8,000 tax credit is available to first-time home buyers who purchase and settle on a home prior to December 1, 2009.

With home prices down and interest rates hovering at near record lows, 2009 will go down in history as one of the best home buying opportunities for both first-time home buyers.

Many thanks to Alan Gross of National City Mortgage for passing this information along