First-time Home Buyers Can Use $8,000 Tax Credit Immediately when getting a Federal Housing Administration loan, but there is a catch. The borrower must still come up with at least 3.5 percent for a down payment from other sources. The tax credit can be used immediately, but will likely incur fees for a bridge loan. The effectiveness of this policy is yet to be seen. This has the potential to increase the cost of a house to borrowers since sellers will know about the $8,000 bridge loans available to first-time buyers and may keep their selling price artificially high if they know the buyer is also using an FHA-insured loan.

This limitation of not allowing the $8,000 tax credit to be used as the entire down payment is an unfortunate choice by the Federal Housing Administration and will affect the lowest income people who may be able to afford the monthly payments but are unable to come up with a down payment by December 1, 2009 - the deadline for eligibility of the tax credit.

Speaking to the National Association of Home Builders Spring Board of Directors Meeting, U.S. Housing and Urban Development Secretary Shaun Donovan today announced that the Federal Housing Administration will allow homebuyers to apply the Obama Administration's new $8,000 first-time homebuyer tax credit toward the purchase costs of a FHA-insured home. Donovan said that today's action will help stabilize the nation's housing market by stimulating home sales across the country.

The American Recovery and Reinvestment Act of 2009 offers homebuyers a tax credit of up to $8,000 for purchasing their first home. Families can only access this credit after filing their tax returns with the IRS. Today's announcement details FHA's rules allowing state Housing Finance Agencies and certain non-profits to "monetize" up to the full amount of the tax credit (depending on the amount of the mortgage) so that borrowers can immediately apply the funds toward their down payments. Home buyers using FHA-approved lenders can apply the tax credit to their down payment in excess of 3.5 percent of appraised value or their closing costs, which can help achieve a lower interest rate.

Currently, borrowers applying for an FHA-insured mortgage are required to make a minimum 3.5 percent down payment on the purchase of their home. Current law does not permit approved lenders to monetize the tax credit to meet the required 3.5 percent minimum down payment, but, under the terms of today's announcement, lenders can now monetize the tax credit for use as additional down payment, or for other closing costs, which can help achieve a lower interest rate. Don't forget that Credit Unions offer better interest rates to consumers, on average, compared to banks. Buyers financing through state Housing Finance Agencies and certain non-profits will be able to use the tax credit for their downpayments via secondary financing provided by the Housing Finance Agency or non-profit. In addition to the borrower's own cash investment, FHA allows parents, employers and other governmental entities to contribute towards the downpayment. Today's action permits the first-time homebuyer's anticipated tax credit under the Recovery Act to be applied toward the family's home purchase right away. Unlike seller-funded down-payment assistance, which was a vehicle for abuse, this program will allow homebuyers to shop for the best home price and services using their anticipated tax credit.

According to estimates by the National Association of Home Builders, the Administration's homebuyer tax credit will stimulate 160,000 home sales across the nation - 101,000 of which will be first-time buyers who will receive the credit. Another 59,000 existing homeowners will be able to buy another home because a first-time buyer purchased their home. Given FHA's current market share, it's estimated that thousands of families will be able to purchase a home by allowing the anticipated tax credit to be applied toward their purchase together with an FHA-insured mortgage.

Homebuyers should beware of mortgage scams and carefully compare benefits and costs when seeking out tax credit monetization services. Programs will vary from organization to organization and borrowers should consider whether the services make sense for them, as well as what company offers the most suitable and affordable option.

For every FHA borrower who is assisted through the tax credit program, FHA will collect the name and employer identification number of the organization providing the service as well as associated fees and charges. FHA will use this information to track the business closely and will refer any questionable practices to the appropriate regulatory agencies, as necessary.

The tax code defines a first time home owner as anyone who has not owned a home for the previous three years. So, if you relocated to another state and rented a home for three or more years, you are considered a first time home buyer and take advantage of the tax credit and loan programs available only to first time home buyers.

Once you are a home owner, there is also a tax credit available for making energy-efficient improvements to your home.

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