Guidance for Use of Tax Credit on FHA Loans

Guidance for Use of Tax Credit on FHA Loans

Currently, just 10 state housing finance agencies (HFAs) offer a product that buyers can use to monetize the tax credit for downpayment purposes. Generally, these programs offer tax credit advances with second liens on the home being purchased. The second lien may be "soft" (silent) or require monthly payments but may not result in cash back to the borrower and may not exceed the total amount needed for the downpayment, closing costs and prepaid expenses. The 10 states offering these programs are Colorado, Delaware, Idaho, Kentucky, Missouri, New Jersey, New Mexico, Ohio, Pennsylvania and Tennessee. Other states, including Minnesota, are developing programs so members are encouraged to regularly follow up with their respective HFA.

For all other states where such programs do not exist, the tax credit may not be used to fund the 3.5 percent downpayment required for FHA loans. As always, the 3.5 percent downpayment may be a gift from a family member, employer or nonprofit, charitable organization. FHA-approved nonprofit organizations and FHA-approved lenders may monetize the tax credit for downpayments in excess of 3.5 percent, closing costs and interest rate buy-downs. Mortgage industry leaders have indicated that this type of product may not be immediately available to consumers.

NAR Info on 2009 First-Time Home Buyer Tax Credit

Sources: The Washington Report, National Association of REALTORS®