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Sales Boost Expected From New FHA Tax Credit Rules
The recent decision to allow home buyers to apply the Obama Administration’s $8,000 first-time home buyer tax credit toward the purchase of an FHA-insured home is expected to provide a further boost to homes sales, said Robert Dietz, NAHB’s director of tax issues.
In order to maximize the impact of the latest changes to the credit, home builders are well advised to scrutinize the details, which can be found in FHA Mortgagee Letter 09-15, Dietz said.
State Housing Finance Agency Role
Under the new FHA rules, state housing finance agencies and other government entities can “monetize” up to the full amount of the tax credit to enable borrowers to immediately apply the funds toward the FHA-required 3.5% downpayment, he said.
The announcement of the new rules on May 29 by HUD Secretary Shaun Donovan “blesses” the tax credit loan programs that have been established by 10 state agencies, he said, and will encourage more states to join this list. (Click here to read a related story in this issue of NBN.)
Under these programs, state housing finance agencies make a short-term loan in an amount that is approximately equal to the anticipated tax credit, as calculated on IRS Form 5405.
The loan is backed by the tax credit itself and secured by a second lien against the purchased home, and it is generally paid off when the home buyer receives their tax refund from the IRS. If it is not paid off at this time, the loan becomes a self-amortizing second mortgage at a fixed interest rate.
For a continuously updated list from the National Council of State Housing Agencies describing the state programs, click here.
FHA-Approved Lender Role
In contrast to the housing finance agency rules, home buyers who are using FHA-approved lenders can only apply the tax credit to a downpayment exceeding the 3.5% minimum required on an FHA-insured mortgage — or to their closing costs, Dietz advised.
The mortgagee letter permits lenders to purchase the anticipated tax credit from the home buyer. The proceeds from this sale can be used by the home buyer to provide an additional downpayment or to pay closing costs, such as escrow for taxes, insurance and community association assessments. The funds can also be used to buy down the interest rate of the mortgage.
FHA-approved lenders are not allowed to place a second lien on the home, he said. Instead, they must secure repayment through a contract with the home buyer.
It is unclear at this time what form the lender option for monetization of the tax credit will take. NAHB will be following this issue and providing updates as they develop.
In all cases, the FHA limits fees associated with either a tax credit loan from a government entity or the purchase of the tax credit by an FHA-lender to no more than 2.5% of the tax credit amount, or $200 for an $8,000 tax credit.
Prospective first-time home buyers should be cautious in participating in programs that offer monetization, Dietz said. If the organization is part of the state government, it is safe to assume that its program is reputable. Otherwise, home buyers may want to check with their local Better Business Bureau or a state or local government’s department of consumer affairs.
Expected Market Benefit
Assessing the impact of the tax credit on the housing market, NAHB Economics earlier this year calculated that it would help to stimulate 160,000 incremental home sales — 101,000 to first-time buyers who receive the credit and another 59,000 to existing home owners who will be able to buy another home after selling their current home to a first-time buyer.
In an update of those projections following the FHA announcement and including the impact of prior state monetization programs, NAHB analysis indicates that the tax credit program now will generate 192,000 incremental home sales, including 121,000 to first-timers and an additional 71,000 to move-up buyers. These transactions will add 73,000 jobs to the economy this year.
More than 560,000 taxpayers claimed the tax credit for sales in 2008, according to data from the Treasury Inspector General for Tax Administration, and NAHB forecasts that more than one million taxpayers will claim the $8,000 tax credit for 2009 purchases.
Under current law, the first-time home buyer tax credit only applies to home sales completed prior to Dec. 1, 2009. More information on the tax rules of the program is available at www.federalhousingtaxcredit.com.
For further information, e-mail Rob Dietz, or call him at 800-368-5242 x8285.
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