Should You Use Your $8,000 Tax Credit as Your Down Payment?

So there has been a lot of rumors regarding the $8000 first time home buyer tax credit and that it can be used as a down payment for a new home with an FHA loan.

At first, I thought it was just another “mortgage scam”. Trust you me, the real mortgage industry always leaves room for the next “million-dollar-idea”. If you pay close attention, you may even end up seeing your next door neighbor on the 6 o’clock news getting caught for selling “ARMS” from the back of his van in a dark alley.

After doing a little bit of research to see the legitimacy of this rumor, I ended up finding the official HUD Mortgagee Letter 2009-15.

Who Can Offer It

Let’s begin with who can offer this “loan” on a loan. (Is that a conundrum?)

According the letter, Federal, state, local governmental agencies, non-profit governmental subsidiaries, and FHA-Approved nonprofits will be able to offer this to home buyers.

How It Works?

Essentially, this is a bridge loan. You are borrowing this money for a short amount of time until you get your tax credit, and then it is paid back to these agencies.

What happens is you are taking out a second lien on your home, and that amount CANNOT be more than:

Down Payment + Closing Costs + Pre-Paid Expenses

Here is a list of some more facts on how this works:

1.) You cannot get any cash back at closing.
2.) You will have a deadline to pay this money back, and if you do not, principal and interest will begin automatically. (What a concept!)
3.) If payments are required, it will be calculated as a monthly liability when qualifying for the loan.
4.) If payments are deferred, it must be for at least 36 months and will not be used against you when qualifying.

I cannot stress to you enough -BE VERY CAUTIOUS with this type of transaction. It leaves so much room for deception, and if you end up in the wrong hands, you may kiss your $8k tax credit goodbye very fast!

While it may bring an influx of new potential buyers to Realtors and open a lot of doors to potential buyers, it is a double-edged sword and I do not particularly agree with it. In my opinion, it can do more bad than good and is basically bringing back “100% financing” and that is part of what has caused the “Mortgage Meltdown”.

I would suggest stopping and thinking as to why many down-payment assistance programs went bye-bye towards the end of 2008. It was simply because more buyers defaulted on those types of loans. The LAST THING we need is the Federal Housing Administration (FHA) getting into financial issues.

Tommy’s 2 Cents:

Use it IF you absolutely HAVE to. The $8,000 is yours one way or another.

May 16, 2009