FHA to Allow Use of $8000 Tax Credit for Down Payments

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[NEW UPDATE: It appears that this program was announced prematurely, as the mortgagee letter has been removed from the HUD web site. There has been no word if the program is dead or alive, and at this point the real estate and mortgage communities are in a “wait and see” mode until official notification of the program’s status is released. We will post information about the program as we get it.]

In a move that the NAR has been lobbying for and is sure to brings smiles to all first time home buyers, The FHA today announced that it would begin allowing its lenders to let first time home buyers use the $8000 tax credit as a down payment on a home.  Up until now, buyers wouldn’t receive the funds until their tax returns were filed and they received their refund, and this has caused some home buyers to hesitate in using the  credit.

HUD Secretary Shaun Donovan made the announcement during his address at the 2009 REALTORS(r) Mid-Year Legislative Meetings and Trade Expo being held in Washington, D.C..

“We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a down payment,” Donovan said. He added that FHA lenders will be allowed to “monetize” the tax credit through short-term bridge loans, which would allow eligible home buyers to have the funds immediately at the closing table.

Hopefully, this should be a further stimulus to a group of home buyers that have been slow to utilize the credit. According to a survey commissioned by Move, Inc. (which operates Realtor.com), as of a month ago almost 50% of home buyers didn’t know the credit exists, and nearly a third said the credit wasn’t large enough to get them into the market right away. With the release of this new announcement, we hope that those percentages will shrink considerably.

[Update: you can find the full 2009 HUD Mortgagee Letter describing the usage of the tax credit as a down payment on FHA loans here in MS Word format.]

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