First-time home buyers will now have access to quick cash to help them with their down payments.
Last week, the U.S. Department of Housing and Urban Development (HUD) announced that first-time home buyers using FHA-approved lenders can now get an advance on the $8,000 tax credit created by the stimulus package and apply it toward their down payments or closing costs. As part of the stimulus package, Congress created a refundable first-time home buyers tax credit in hopes of helping on-the-fence buyers to take the home-purchase plunge. The problem was that buyers couldn’t collect the $8,000 credit until tax time, rather than at closing time…when it’s needed.
The delay created an obstacle to jump-starting the housing market because most first-time buyers (the ones who would buy much of the available inventory) have only saved enough to cover 4% of the purchase price, according to the National Association of Realtors.
The mechanics of the new program, according to NAHB Economist Robert Dietz, allow lenders to purchase tax credits from the buyers and then collect the rebate from the IRS. Homebuyers must still come up with FHA’s mandatory downpayment of 3.5% on their own, but they can use the tax credit to lower their principal balance and save on monthly payments.
The initiative also authorized downpayment help programs already offered in Colorado, Missouri, New Jersey, Pennsylvania, Tennessee, Washington and other states. To quickly infuse cash into their housing markets, the housing finance authorities in these states created bridge loans to allow buyers to borrow against the $8,000 credit and then repay it with their tax refunds.