Every time HUD makes a change in the first time home buyer tax credit, they announce it by issuing something called a mortgagee letter. These edicts announce the framework of whatever change may be in order.
On May 29, HUD’s mortgagee letter announced the $8000 first time home buyer tax credit may be used for closing costs or to add to the minimum down payment required for an FHA loan of 3.5 percent. And it explained how to get it.
That is if you can translate the mumbo jumbo.
Let me try.
There are two ways to get the $8000 tax credit applied toward closing costs, prepaids, discount points or, yes, even the down payment.
First, you can get a tax credit advance from an approved non-profit agency. These agencies, which may be government or non-profit organizations, must be approved for the program by the federal government and may, in fact, allow you to use the tax credit as part of the 3.5 percent down payment.
There are currently 10 states where such programs exist: Colorado, Delaware, Idaho, Kentucky, Missouri, New Jersey, New Mexico, Ohio, Pennsylvania and Tennessee.
While we don’t have such a program in Minnesota, I imagine “getting” the credit as a down payment will involve applying at one of the agencies providing this service prior to even shopping for a duplex.
The buyer will then receive the credit at closing. Repayment will be secured by the agency placing a lien on the buyer’s new duplex. This lien, or loan, may be “soft” or require monthly payments, which can’t start for at least 36 months. The amount of these future payments will be factored along with the first mortgage, in the buyer’s qualifying ratios.
More likely for most first time Minneapolis duplex buyers is a second scenario.
FHA approved lenders, as well as FHA-approved nonprofit organizations may also purchase the anticipated tax credit from the duplex buyer.
So, if a buyer is using a lender who provides FHA financing, they will be able to provide her with all the necessary paperwork. She will then be able to sell your rights to the tax credit to the bank. (Be patient, the lenders and government are still instituting the framework for this program.)
These lenders will be allowed to charge up to 2.5 percent of the amount of the tax credit as a fee for purchasing the tax credit. In other words, for the full $8000 credit, the lender will charge the buyer a $200 fee.
The buyer must submit a signed certification that the credit isn’t subject to any other indebtedness, a copy of the borrower’s tax refund and/or form IRS 5405, and not be receiving funds for their down payment from any party who would benefit financially from the transaction.
If I interpret HUD-speak correctly, this is simply a short-term loan from your mortgage provider. They will pay the closing costs and, in exchange, retain your tax credit when it comes.