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It’s Official: Now You Can Use The $8,000 1st-Time Buyer Credit Before You Close Escrow
May 31st, 2009 categories: Buying, Loans / Financing
If you’re a first-time home buyer in Benicia, Vallejo or anywhere else in Solano County (or the rest of the U.S. for that matter) and you’re planning on using an FHA loan to purchase your first home, you should be thrilled with HUD’s announcement on Friday.
For, effective immediately, you’ll be able to use the $8,000 income tax credit when you buy (instead of after you buy), either to increase your down payment (and lower your interest rate and monthly payment) or to cover your closing costs.
In case you didn’t understand all that, let me repeat it again — you no longer have to wait to get your tax credit until after you buy. If you’re using an FHA loan, now you can use it when you buy!
Need The Money Now?
This eliminates one of the real Catch-22’s for many first-time homebuyers. For, up until now, even though the $8,000 federal tax credit sounded great, buyers who were eligible to receive the credit couldn’t get their hands on it until at least several months after they closed escrow.
Of course, if you already have enough cash for your down payment and closing costs and plan to use the tax credit to replenish your savings or pay for things like new carpet, paint or furniture after you move in, then the new policy probably isn’t a big deal.
Use The Credit For Closing Costs
But FHA buyers who only have enough savings to cover the minimum 3.5% down payment, have discovered that today’s multiple-offer sales environment has made it increasingly difficult to make a competitive offer when that offer also must require the sellers to pay the buyer’s closing costs.
One way of getting around that has always been to raise the sales price to offset the closing cost credit. But if doing so pushes the sales price above the home’s current market value, then you run the risk of the home appraising for less than you need.
So until now, getting an FHA offer accepted when you needed the seller to assist with closing costs had become a real Catch-22 for many first-time FHA home buyers.
But now that the $8,000 tax credit can be used for closing costs (or to increase the down payment), that huge dilemma may become a thing of the past for many local first-time buyers.
On-Again, Off-Again Plan Is Now Official
The tentative plan was originally announced by HUD several weeks ago. But when the IRS objected to it, it appeared that the plan was doomed. However, over the past few weeks HUD and the IRS worked things out and the new policy was officially introduced by HUD secretary Shaun Donovan on Friday.
In order to use the $8,000 first-time home buyer tax credit ahead of time, you’ll actually take out a temporary second loan to cover the credit. After escrow closes, you’ll apply for the actual tax credit with the IRS and then use that money to pay off the temporary loan.
Under HUD’s new rules, the company or organization loaning the money can collect up-front fees to make the temporary loan. It can also collect payments on that loan until you pay if off. The loan fees, according to HUD, cannot exceed 2.5% of the amount of the anticipated credit.
So if you qualify for an $8,000 credit and the lender charges $200 in fees, you’d end up with a $7,800 tax credit instead.
Here are some things you should know:
- The tax credit advance can only be used for actual closing costs or to add to the down payment. It cannot be used to satisfy the minimum 3.5% down payment.
- The buyer cannot receive any cash back at close of escrow. So if you qualify for the full $8,000 but your closing costs only come to $5,500, then you can only borrow $5,500 now. You’d have to wait to get the remaining $2,500 from the IRS until after escrow closes.
- You can only borrow the amount of your anticipated tax credit. If you have a balance due with the IRS, they’ll deduct that amount from your credit. So even though you may qualify for an $8,000 credit, if you owe the IRS $3,000, you’ll really only be entitled to a $5,000 credit. If so, then that’s all FHA will allow you borrow.
Be sure to talk to your lender and find out how they’re intending the implement this new policy. Again, some lenders may require up-front fees to borrow against your tax credit and some may require monthly payments until the temporary loan is retired.
All in all, this should come is great news to many FHA buyers. For if you qualify for the $8,000 credit and want to avoid missing out on a house simply because you had to ask for a closing cost credit, you now have a legitimate way to overcome that obstacle.
For more information on the $8,000 tax credit, click here. For more information on HUD’s announcement on using the tax credit on an FHA loan, click here.
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