The unveiling of the
program to monetize the $8,000 first-time homebuyer tax credit by FHA ended up
not being nearly attractive as many of us had hoped and been led to believe.
Early rumblings I am
hearing indicate many have already made the decision to write-off the
program. I believe that is a really bad
idea!
Consider the
following:
1. Many first-time homebuyers have
family members in a position to loan them the amount of the tax credit. Encouraging homebuyers to diligently explore
this option in advance likely will produce positive results for some. Planning in advance is key!
2. State governments should be part
of the solution! Lobbying elected
officials at the state and local level to act quickly to make this program
available to as many first-time homebuyers as possible seems like a really
good idea to me!
Do
you have an opinion or feedback on this topic?
Please click on “Comment” at the bottom of this post to share your
thoughts!
Jeff Simpkins, Book
Yourself Solid Certified Coach
Community Bank Consulting, Inc.
www.CommunityBankConsulting.
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The
information presented here is for informational
purposes only. Readers are advised
to seek competent professional advice prior to acting upon any information
presented here.
The following is a
summary of restrictions associated with the program FHA announced last week
allowing first-time homebuyers to monetize the $8,000 tax credit currently
available at closing:
1. The monetizing of the tax
credit cannot be used for the 3.5% down payment. It can only be used for
settlement costs, down payment in excess of the 3.5%, or to buy down the rate.
2. The funds to monetize cannot
come from anyone who may have an interest in the transaction. In other words,
they cannot be the seller, the lender, the realtor, the builder, etc. They can
be a family member, or any other non-interested party, or some other finance
shop. The limit however is that any finance firm cannot exceed a 2.5% fee which
would limit the interest of any consumer finance agency from participating.
3. You cannot record a lien
against the property for this financed amount unless the lender is one of the
narrowly approved government sponsored non-profits.
4. Repayment of the advance must
come from the buyer – the IRS will still send the tax credit to the buyer and
the buyer will have to repay the money to whomever loaned it. Again, no lien is
allowed.
This is significantly
different than what was discussed at the National Association of REALTORS (NAR)
meeting a few weeks ago.
These restrictions
will certainly dramatically decrease the value of this program to be far less
than the expectation that was set in the preliminary discussion at the NAR
meeting.
A few more points to
consider:
1. Family members are allowed to
monetize the tax credit. This is an for
some buyers.
2. The information I reviewed
indicates eleven states have approved non-profits to participate as lenders in
the tax credit monetization program.
Perhaps additional states will follow suite in an effort to stimulate
housing sales.
Additional Information
HUD has
republished Mortgagee Letter 2009-15. Mortgage lenders are not permitted to
monetize the tax credit for meeting the minimum down payment
requirements. Below is a copy and link to the letter.
At quick
glance, FHA has changed the letter by prohibiting FHA approved lenders from
using the tax credit to meet the 3.5% minimum down payment requirement.
While FHA approved lenders can “purchase” the tax credit, “the proceeds of the
sale of the tax credit… may not be used to meet the 3.5% minimum down payment
requirement”. The proceeds may be used for additional down payment
(above the minimum 3.5%), buying down the interest rate and closing
costs. HUD also effectively capped the lender fee at 2.5% of the tax
credit. In addition, HUD has added due diligence requirements for
participating lenders.
The letter
states:
“The
homebuyer’s down payment 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 down payment, but may be used
as additional down payment, buying down of interest rate, or other closing
costs.”
HUD will
continue to permit “government agencies and instrumentalities of government” to
offer tax credit advances with second liens that can be used for the down
payment, closing costs and prepaid expenses. Currently, ten state housing
finance agencies have programs that will apparently monetize the tax credit.
These states are Colorado, Delaware, Idaho, Kentucky, Missouri, New
Jersey, New Mexico, Ohio, Pennsylvania, and Tennessee. Information on
these programs is available at http://www.ncsha.org/section.
Analysis
Based on
feedback from many lenders, we are not sure how helpful this policy will
be. The Department is clearly concerned about risk with this
program. At a Congressional hearing last week, the Secretary mentioned
the need for “real equity” in the transaction. In light of the
current market situation and the push for “skin in the game”, HUD concluded,
consistent with the language from last year’s bill on seller funded DPA
programs, that the borrower must meet minimum down payment requirements on
their own before considering the tax credit and changed the letter
accordingly. State and local government agencies may continue to be used
for minimum down payment purposes.
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U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, DC
20410-8000
ASSISTANT SECRETARY FOR HOUSING
FEDERAL HOUSING COMMISSIONER
May 29,
2009
MORTGAGEE
LETTER 2009-15
TO: ALL APPROVED
MORTGAGEES
SUBJECT:
Using
First-Time Homebuyer Tax Credits
The
American Recovery and Reinvestment Act of 2009 (Recovery Act) provides for as
much as an $8000 tax credit to qualified first-time homebuyers. FHA supports
this important initiative to promote homeownership. This mortgagee letter
provides:
•
Basic information on the first-time homebuyer credit obtained from
the Internal Revenue Service (IRS) website. Complete information on how the
first time homebuyer tax credit works, including the eligibility requirements
for the tax credit, the amount of the tax credit that a first-time homebuyer
may be eligible to receive, and how a homebuyer may claim the tax credit is
available on the IRS website at: http://www.irs.gov/newsroom/
•
Guidance on how FHA-approved mortgagees and FHA-approved nonprofit
organizations as well as Federal, state, and local government agencies or
instrumentalities may assist homebuyers that are eligible for the tax credit.
I.
About the First-Time Homebuyer Tax Credit
Please
check the IRS website to ensure you have up-to-date information. A brief overview
of the tax credit from the IRS website and a copy of IRS Form 5405 (including
instructions) are attached for reference.
Pursuant
to 31 U.S.C. 3727 and 26 U.S.C. 6402, a refund of the first-time homebuyer
credit will be made by the IRS only to the taxpayer, not to a third party. In
other words, any refund issued in response to a claim for this credit cannot be
assigned by a taxpayer to a third party.
II. FHA
Tax Credit Guidance
Secondary
Financing
Consistent
with existing FHA policy, FHA will permit entities covered by Section 528 of
the National Housing Act to use the current authority to offer tax credit
advances with second liens in a manner consistent with the requirements in 12
U.S.C. 1709(b)(9). Eligible government agencies and instrumentalities of
government are described in handbook HUD-4155.1 5.C3 and 5.C4. 2
Conditions:
•
The tax credit advance, when combined with the FHA-insured first
mortgage may not result in cash back to the borrower.
•
The second lien may not exceed the total amount needed for the
down payment, closing costs, and prepaid expenses.
•
Secondary financing may be “soft” (silent) or require a monthly
repayment.
•
If payments are required, they must be included within the
qualifying ratios and, when combined with the first mortgage, cannot exceed the
borrower’s reasonable ability to pay.
•
Payments must be deferred for at least 36 months to not be
included in the qualifying ratios.
•
If the tax credit advance loan has a short term for repayment, it
must also provide that if the borrower fails to repay by the designated
deadline, principal and interest payments begin automatically or the loan
converts to a “soft” second.
•
The secondary financing may not require a balloon payment before
ten years.
Purchase
of Tax Credit
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.
Conditions:
•
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 down payment
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 down payment, but may be used as additional down payment, buying down
of interest rate, or other closing costs.
Due
Diligence
FHA expects
that entities purchasing tax credit assets will employ appropriate due
diligence measures including, but not limited to:
•
Require the homebuyer to draft and provide the IRS form 5405
“First-Time Homebuyer Credit.”
•
Contact the borrower’s employer and review pay stubs to confirm
there are no outstanding garnishments.
•
Review the homebuyer’s credit report to ensure there are no unpaid
student loans, or other obligations that could be offset against the credit.
•
Validate that all of the eligibility requirements for the tax
credit are fulfilled
•
Review previous tax returns and IRS tax assessment letters, if
any, to determine that the borrower does not have unsettled obligations to the
IRS
III.
Monitoring
In order
to track the tax credit monetization activities, FHA will require FHA-approved mortgagees
to input into FHA Connection the following data:
•
Name and EIN of the party who purchased the tax credit,
•
The amount of the anticipated credit, and
•
The amount the homebuyer paid for the monetization services.
The lender
must also collect and maintain in the FHA case file the documentation that validates
all of the tax credit monetization data submitted via FHA Connection. FHA will monitor the purchase of tax credit
transactions closely. Charging of excessive fees or costs in the purchase of
the tax credit or increasing other fees or charges in the transaction without
FHA approval may result in referral to the Mortgagee Review Board, and
particularly with respect to entities that are not FHA-approved mortgagees,
referral to the Federal Trade Commission, or referral to the appropriate State
Attorney General office, as may be applicable.
If you
have any questions regarding this mortgagee letter, please call FHA’s Resource Center
at 1-800-CALL-FHA (
1-800-225-5342). Persons
with hearing or speech impairments may access this number via TDD/TTY by
calling 1-877-TDD-2HUD (
Sincerely,
Brian D. Montgomery
Assistant Secretary
for Housing- Federal Housing Commissioner
The
information presented here is for informational
purposes only. Readers are advised
to seek competent professional advice prior to acting upon any information
presented here.
