Bank owned sign posted on a boarded up house in ForeclosureThe other day, a reader asked an outstanding question.  He’s in the process of buying a duplex using an FHA 203(k) construction loan and wondered what number his first time home buyer tax credit would be based on.

The 203(k) loan is one in which a buyer can purchase a distressed property at a discounted price, but borrow an amount up to 110 percent of the value of the home were it in good condition in order to finance the repairs.

In this case, the purchase price of the property is $108,000, he is planning on borrowing an additional $20,000 to use for rehabbing the duplex.

The combination of the two will leave the buyer with a mortgage of $128,000.

So is his first time home buyer tax credit based on the owner occupied portion of the purchase price ($108,000 x .5 = $54,000 as the basis for his home. Ten percent of this, or $5400 may be applied toward the tax credit.)

OK, but a 203(k) loan is based on the purchase price and the repairs. Shouldn’t he receive a credit for the final loan amount of $128,000?

Sadly, no. According to a loan officer friend who does a great deal of these with a major national bank (who won’t allow him to speak on the record), the tax credit isn’t based on the loan amount, but the price reflected in the purchase agreement. The 203(k) loan amount isn’t recorded on that document.

The 203(k) is viewed more as a first mortgage plus a construction loan.

In other words, the tax credit here is based on one half of the purchase price or $54,000.

Great question!