First-Time Home Buyer Tax Credit for Closing Will Move Market

WASHINGTON, May 29, 2009

Consumers across the country can now take advantage of a Federal Housing Administration program to allow qualified home buyers to apply the $8,000 tax credit when purchasing a home. FHA will now permit its lenders to provide a short-term bridge loan that will let qualified home buyers use the tax credit to either make a larger downpayment above the FHA required 3.5 percent, cover closing costs, or buy down their interest rate.

A true housing recovery depends on buyers returning to the market and reducing inventory, said National Association of Realtors^® President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth.  Since many of the homes available are lower priced starter homes, the ability for individuals to use the tax credit at closing should have a meaningful impact on home sales and values and will allow thousands of families to achieve the dream of homeownership.

Shaun Donovan, secretary of the Department of Housing and Urban Development, announced the change today. In an address to several thousand Realtors^® gathered two weeks ago at NAR Real Estate Summit: Advancing the U.S. Economy, Donovan announced HUD plan to offer the tax credit as downpayment assistance. Donovan detailed the modifications to that original proposal and announcement.

We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans, Donovan said. According to Donovan, the FHA approved lenders will be permitted to monetize the tax credit through short-term bridge loans allowing eligible home buyers to access the funds immediately at the closing table.

NAR has supported monetization of the tax credit, which was part of an Obama administration housing stimulus plan enacted earlier in the year. NAR petitioned HUD to allow home buyers to use the $8,000 tax credit to help them cover downpayment or closing costs to bring new home buyers to the market and stimulate home sales.

We think this is a good program; our members have been getting many inquiries from potential buyers about it, McMillan said. NAR is pleased that this enhancement has been made to the administration housing recovery program. As we have heard before, there can be no economic recovery without a housing recovery. With an abundance of inventory, reduced home prices, historically low interest rates and now the availability of the tax credit at closing, we expect to see the housing market further stabilize and improve.

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: hhtp://www.irs.gov/newsroom/article/0,,id=204671,00.html?portlet7.

•  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.

         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.

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.

Conditions

•  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 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.

Due Diligence

•  Contact the borrower employer and review pay stubs to confirm there are no outstanding garnishments.
• Review the homebuyer 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

         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.

Sincerely,

Brian D. Montgomery

Assistant Secretary for Housing-

Federal Housing Commissioner

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