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HUD Says Yes to Using $8k Tax Credit for Closing Costs
In a sort of reversal of its former reversal, HUD announced that it would allow FHA approved lenders to monetize the tax credit to allow first time buyers to “apply the tax credit to their down payment in excess of 3.5 percent of appraised value or their closing costs, which can help achieve a lower interest rate.”
This is a modification of the original announcement that stated the credit could be used to meet the 3.5% FHA down payment requirement. In its new form, it may help some people. A buyer could certainly take advantage of that to write an offer that didn‘t ask the seller for help with closing costs. Since this type of concession is common practice in our market where most buyers are strapped for cash, not asking the seller to put out extra money might set the buyer apart from the crowd. Or the funds could be used in addition to any seller credit to buy the interest rate down further making monthly payments more affordable.
However, remember that it takes everybody a little while to figure out how to implement these new rules, and in this case, figuring out the details could be a little complicated.
June 20th, 2009 at 1:31 am
Yeah we’re also still scrambling here to make a sense of it. We expect to have an avalanche of first time homebuyers come September.
July 15th, 2009 at 12:44 pm
If someone can pay rent, that rent can be considered part of a mortgage payment. The government is providing $8,000 for first time buyers, so why can’t the government pay part of the payment and have the borrower repay the government in the future?? Here is an example of how it could work.
• Mr. and Mrs. ZZZZZ have a mortgage payment of $1,170 ($200,000 loan with 30 year payout at 5.75% interest).
• The ZZZZ’s lose their job and can only pay $470, so the government pays the difference of $700
• So the ZZZZ’s remain homeowners and work through their problem. It takes the ZZZZ’s 10 months to get back on their feet, the government paid out $7,000 and now the ZZZZ’s owe the government.
• But the government says okay, you can start paying us back in seven years and the payment will be over 10 years at an interest rate of 3%.
What the government has done is to provide assistance to the property owner (just like the bailout plans for the Financial Industry and Automotive Industry) and requires them to pay back the obligation starting in seven years. This is not a freebie, but short term assistance. Franklin Roosevelt called it Lend Lease.
This program is not perfect, but it can assist a lot of people who want to own homes. Most importantly, it is channeled directly to the property owner, not a large corporation that has other motives besides keeping the property owner solvent.
A significant benefit of this program is that payments to financial institutions will resume and cash flow will get back to normal levels, thus credit availability should improve.
There needs to be conditions such as confirming gross income via income tax statements; confirming employment and confirming current payroll. The only group of individuals who would be excluded are those who own more than one property (there should be no break to the investor who treated real estate as a business) and cases where mortgage fraud exists in the form of straw buyers and invalid sales (properties that sold more than three times within five years and the value change was greater than 150%).
This total assistance would be capped at $50,000 and could run for 24 to 36 months
In a given year up to $25,000 could be provided.
The government would be releasing the funds over 12 months, thus the federal outlay would be limited.
The total cost of $10 million loans receiving assistance would be $250 billion per year or $500 billion in total.
This is much cheaper than the TARP bailout and part of this can be funded with the current $70 billion in TARP repayments.
The greatest difficulty in implementing this program is processing and accounting. Loan Servicing companies would need to add staff (if one servicer can process 50 applications a week, 4,000 servicers would need to be hired, plus additional support staff) Wow, as many as 10,000 new jobs would be created. Add to this job creation the fact that several million homes do not go into foreclosure and more jobs are not lost due to desperate situations.
Yes it is possible and yes it can work.
The reason it can work is because real estate goes through cycles. If people are forced to sell at liquidation prices, everyone loses. Give property owners a chance to get back on their feet, get back to work and the whole economy starts to turn around.
As stated earlier, this is not perfect and many will complain about the injustice. But think about the injustice of the corporate bailouts, the injustice that first time home buyers get a break, the injustice that shareholders come before the individuals who created value in the companies by buying products. One can go on and on, or we can try.
We only fail if we do not try.
July 15th, 2009 at 2:41 pm
Thanks for your comment Ken. I like the idea.
August 4th, 2009 at 11:18 pm
How did the credit go from Fed saying ‘no’ to FHA ‘yes’? I don’t think leverage is going to fix the problem of people being overleveraged.
August 10th, 2009 at 8:19 am
Well, it was actually HUD, and they went from saying “yes” you could use the tax credit for the down payment to saying “no” you couldn’t.
You can still theoretically use it for additional down payment or closing costs, but the buyer must contribute 3.5% of the price as a down payment.