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$8000 Tax Credit to First Time Homebuyers Now Being Used as Downpayment?  Is this true?

5-14-2009

Well not really. Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, said that the Federal Housing Administration is going to permit its lenders to allow homeowners to use the $8,000 tax credit as a down payment. Secretary Donovan says, "We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a downpayment." The National Association of Realtors has been calling for this because it will allow first time home buyers the funds they need as downpayment on their home. A $200,000 home using an FHA loan would require a $7000 downpayment and then closing costs, loan fees etc. This now means that a first time homebuyer could potentially purchase a home with zero money of their own as downpayment depending on the price and other negotiation variables. Secretary Donovan goes on to say he sees signs that the housing market is starting to stabilize. One of those signs is that home prices are not on their continued rapid decline they are slowing down. This would be great news for first time homebuyers, builders, contractors and real estate agents alike. 

The problem is this cannot be implemented as there was no details for the plan currently. There is some reasoning as to why this would not work even if there were details. 

A. There would have to be some government agency put in place to be able to loan the money initially for the downpayment and then be able to track the recovery as well as the fulfillment of the tax credit (such as living in their home for 3 years).

B. Assuming #A above was done the banks or financial institutions loaning the money would have to accept loans using this credit. Many would not accept these because the default rate is 3 times higher on loans where the borrower does not have a personal investment. 

C. The banks or financial institutions that did accept this credit would end up putting some sort of surcharge on the rate, which would result in a higher monthly payment for the borrower. 

If a borrower is short on cash there are things that will help. First, when they do purchase they can set their loan up for a skip payment in which their first month's payment is financed into the loan. This allows them to not have to pay the first month up front. Also first time homebuyers will have the mortgage interest deduction on their taxes which will allow them to keep more of their paychecks thus freeing up cash. If applicable a first time homebuyer would get the $8000 tax credit next April as part of their taxes which means not having to either pay as much or getting more cash. Many times when you are a first timer purchasing a home gifts come out of nowhere from friends, relatives, mom and dad. This also helps your cash flow. 


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