Fed Turns $8,000 Tax Credit into Down Payment

There has been a good amount of speculation regarding the $8,000 First Time Homebuyer Tax credit to be modified to allow you to use that money as part of your down payment or your closing costs. The U.S. Department of Housing and Urban Development announced on Friday that this will become reality, as they are taking steps to finalize this offer. Previously, you had to wait until you filed your tax returns before you could take advantage of this tax break.

This is good news for those looking to buy or sell their property, as every incentive helps to move the large inventory of available homes. As expected, there are certain requirements that will need to be met in order for you to apply the $8,000 to a down payment or closing costs. Your loan must be FHA approved and will also need to file an IRS form 5405 which allows the government to pull and audit your tax returns. As a way to require borrowers to have some “skin in the game”, you must pay at least 3.5% of the home value as a down payment. You can still receive this money as a gift from relatives, but this is a way the government can avoid 100% financing.

If you take advantage of this benefit, your lender will provide this money to you at closing for a nominal fee. This amount is expected to be no larger than 2.5% of the expected credit amount. So if you expect the full $8,000, it will cost you 2.5% of that ($200) to receive those funds to apply towards down payment or closing costs. That’s not a bad price to pay for $8,000 at closing.

It will be interesting to see if this new modification will cause an up tick on home purchases. When the $8,000 tax credit was announced, it was expected to stimulate homebuyers, but evidence of an increase is hard to pinpoint to the credit. Similarly, this new measure is expected to increase home buying activity, but it can be argued that many potential buyers are still waiting until the market shows more signs of improvement. This change will help those who are already in the market for a purchase, but may not provide enough benefit to cause a significant increase in home sales.