New Information on Use of $8000 Tax-Credit for Down Payment

We all keep hearing about the possibility of using the $8000 first-time homebuyer tax credit for a down payment and/or closing costs on a home. There seems to be much confusion on this program which I hope to clear up. The state of Washington has a limited program to give first-time buyers, loans for the 3.5% down payment required by FHA, but the new HUD guidelines seem to have killed a state-approved measure to expand how buyers could use tax-credit loans.

The new guidelines will allow the State Housing Finance Commissions, including Washington’s, to give the loans for the 3.5% down payment that FHA requires. But other approved lenders could only give the loans to increase the down payment ABOVE the required 3.5% or to cover closing costs. Lenders, other than the Commission, could NOT use the tax-credit as the source for the required 3.5% down payment. On the surface, it seems to be promising that the Washington State Housing Finance Commission is allowed to use the tax-credit as a source for down payment but this is much more complicated than many may think. One of the major issues with this proposal is that the IRS will not allow the tax-credit to be paid to a third party, only to the person(s) filing the tax return. This would mean that the Commission would need to issue a bridge loan for the down payment, which they currently offer through their existing programs and has a repayment term of 15 years. Due to the fact that the using tax credit through the Commission would bring little benefit to the homebuyer, the Commission will not be offering the tax-credit program and has discontinued the development of it.

The key to making this program successful is allowing the tax payer to assign the amount of the tax-credit needed for the down payment to the lender directly. Otherwise, the lender would have to be willing to issue a second mortgage with an expectation that it will be paid off when the homebuyer receives their tax refund. This would put the lender in a position of 100% financing, something that mortgage lenders view as too high risk in our current environment.

On a positive note, I can share with you through first-hand experience, I have not had any buyers who have the desire or need for a zero down payment loan, be unable to find a source for money. There are still down payment assistance programs and zero down programs that we offer through the Washington State Housing Finance Commission as well as the USDA. These programs have helped many of our buyers get into their first home with no money out of their pockets (other than the cost of a home inspection). It’s great news that there are options out there for buyers who are credit worthy but are cash poor.

If you or someone you know is looking to purchase their first home and do not have the required 3.5% down payment, my team and I would be more than happy to help them. Please feel free to email me at michelle.coolidge@cobaltmortgage.com or call me at (206)909-3930. Helping people find the right home loan program that will enable them to purchase a home is what I love to do. I am here to answer questions or help in anyway possible.