There has been much talk in recent weeks about giving buyers the ability to use their $8,000 first time home-buyer tax credit in lieu of cash as downpayment (you, in essence, sell your tax credit back to the lender) on a home, and a great deal of the information is, at worst, errant, and at best, incomplete. The bottom line is that the details are still being hammered-out, but here are the basic requirements:
- The proceeds of the sale of the tax credit may not exceed the anticipated tax credit due the homebuyer based on the computations of form IRS 5405;
- The borrower must submit a signed certification that the tax credit is not subject to offset due to other indebtedness.
- A copy of the borrower’s tax refund and/or the IRS 5405 must be collected and retained in the FHA case binder.
- Any costs attendant to the purchase of the tax credit are to be nominal and discounting the anticipated credit to cover the costs and expenses of the transaction must be reasonable and disclosed to the homebuyer. In FHA’s view, fees and costs that total more than 2.5% of the anticipated credit are considered excessive. (Example: $6000 to be refunded, with all fees and costs discounted, borrower should receive not less than $5850.00 for sale of tax credit.)
- Pursuant to 12 U.S.C. 1709(b)(9), the homebuyer’s downpayment required for eligibility for FHA insurance may not consist of any funds (including funds derived from a sale of the homebuyer tax credit) provided by the mortgagee, the seller, or any other person or entity that financially benefits from the transaction (or by any third party or entity that is reimbursed, directly or indirectly, by the financially benefiting person or entity). Accordingly, the proceeds of the sale of the tax credit to FHA approved mortgagees, the seller, or any other person or entity that financially benefits from the transaction (or any third party or entity that is reimbursed, directly or indirectly, by the financing benefiting person or entity), may not be used to meet the 3.5% minimum downpayment, but may be used as additional downpayment, buying down of interest rate, or other closing costs.
There are more stipulations, but I just wanted to make sure you had the basic framework for this new program. I have posted the mortgagee letter on my website to help clarify some of the confusion, but the bottom line is that the funds can be used for closing costs, prepaids and to reduce the loan amount beyond the 3.5% down payment required by FHA, however the advancement CAN NOT be used to meet the minimum 3.5% down payment requirement. In other words, the homebuyer still must come in with at least 3.5% down. The funds will be made available to home buyer through the “sale” of their future tax credit, and according to the mortgagee letter, FHA-approved mortgagees and FHA-approved nonprofit organizations as well as Federal, state, and local governmental agencies and instrumentalities thereof may purchase the tax credit anticipated by the homebuyer.
I hope that this information is useful to you, and if you think you know someone who might benefit from this information, please pass it along. Remember that at Arizona Premiere Living, we do more than just show you the best deals for Phoenix real estate; we help you get the most out of living in Arizona.
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