San Diego Real Estate Professionals at eXp Realty

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On May 29 the Obama administration announced final guidelines to provide first-time home buyers with an $8,000 cash advance that can be used to pay closing costs and part of the down payment for home purchases completed by November 30, 2009. The money is available to qualified buyers who obtain their home mortgage through the Federal Housing Administration (FHA loans). The program is welcome news to San Diego home buyers who have been on the fence about purchasing their first home.

The $8,000 incentive is a tax credit, but the new loan guidelines allow lenders to give cash advances to qualified home buyers rather than require the buyers to pay the money up-front and wait for a tax refund. For buyers who also qualify for the California Homebuyers Downpayment Assistance Program (SHDAP), this means that zero-down-payment 100% financing loans are again available to first-time buyers of homes in San Diego CA. Otherwise the general rule is that FHA loans require a minimum 3.5 percent down payment, which can come from personal savings or even as a gift from a relative.

To qualify for the $8,000 cash advance from the federal government, the borrower must be purchasing the property as a principal residence. This means that the borrower must intend to live in the home, and cannot have owned another home at any time during the prior three years. The maximum income threshold is $170,000 for married couples who file a joint tax return or $95,000 for unmarried persons. The borrower must meet the standard income and documentation requirements provided by the FHA-approved lender. Most large banks and reputable mortgage lenders are FHA-approved (more than 12,000 in all), but be sure to ask your lender in advance whether they can provide you with an FHA mortgage.

In addition to the standard loan documentation, your FHA lender will also require proof that you have no unpaid taxes, liens, civil judgments or other obligations that could offset your tax credit. For example, your employer will need to sign a letter stating that you are not subject to wage garnishment. The lender will also require a completed IRS Form 5405 which authorizes the federal government to issue the tax credit check. And since this is a tax credit, for expedited receipt of the credit money the buyer will need to file an amended 2008 tax return, or else wait to receive the credit after filing a 2009 tax return.

This $8,000 tax credit can be used toward the down payment or closing costs, including escrow and title charges, settlement fees, or “points” (interest rate buy-downs that lower the monthly payment on the home loan). The tax credit advance cannot result in cash back to the borrower, so the maximum allowable credit is the amount of the down payment and closing costs. Lenders will be prohibited from gouging the customer with fees to participate in this program. Lender fees must be “nominal” and “reasonable” which generally means up to 2.5 percent of the expected tax credit. In other words, the lender fees for the advance of the full $8,000 tax credit should be no more than $200.

If you are considering buying your first home in San Diego, please contact your San Diego Realtors for assistance. For more information about the first-time home buyer tax credit, visit the U.S. Department of Housing and Urban Development (HUD) for complete details about the American Recovery and Reinvestment Act of 2009. This is a wonderful initiative to help make home ownership in San Diego a reality for you and for others who you care about.

9 Responses

  1. It’s great that the government will help first time home buyers obtain no-down-payment 100% financing loans and I encourage all who qualify to take advantage of the opportunity. But isn’t that what got us into this mess to begin with?

    1. Thank you for your very astute observation. 100% financing did lead to some serious abuses, and it definitely contributed to the foreclosure issues that we’ve been facing. But there are differences with the program described here. First, the cash advance on the tax credit is only being offered to home buyers who take new FHA loans through the Federal Housing Administration. These federally guaranteed loans are not likely to be repackaged as mortgage-backed securities, so there shouldn’t be the unexpected backlashes from potential defaults. Also note that the FHA loan program still requires a 3.5% down payment. Down payment assistance may be available to qualified buyers through the state of California (and via bridge-loans in 10 other states), which makes 100% financing a possibility for some San Diego home buyers, but definitely not for all or even for most. Finally, the program is a temporary effort to jump-start the housing sector. To qualify, the purchases must be completed by November 30, 2009. So the risk won’t develop on the same scale as was undertaken by private banks from 2000 to 2005. But it does seem like a great way for first-time home buyers to enter the market in the short term to buy discounted homes in San Diego.

  2. Are you sure about that November 1st, 2009 deadline? I thought that in order to qualify for the $8K tax credit the home must be purchased between January 1st, 2009 and December 1st, 2009 inclusive.

    1. CORRECTION: I was quoting a news article that incorrectly stated the date as November 1, 2009. The correct date is actually November 30, 2009 (that is, BEFORE December 1, 2009 not inclusive of December 1). So to repeat, the $8,000 tax credit applies to home purchases completed by November 30, 2009. My apologies for the error. I am amending this post to correct the date. Details about the First-Time Homebuyer Credit are available on the Internal Revenue Service Website: IRS First-Time Homebuyer Credit.

    1. For now this is intended to be a short-term incentive to stimulate the housing market. The purchase needs to be completed by November 30, 2009. So, assuming a 30-day escrow, the offer would need to be accepted by the end of October 2009. If it is a short sale, then the time to have an offer accepted would be yesterday. Short sales are still taking an average of six months or more to complete in San Diego County.

    1. The $8000 tax credit to first-time home buyers will probably have a more significant impact where prices are lower. Some places in the U.S. a person can buy a home for as little as $20,000 (Detroit, Indianapolis, etc…) So the $8,000 tax credit is a huge incentive, almost 50 percent of the purchase price. It is still very difficult to buy homes in San Diego CA for less than $300,000, so the $8,000 is far less of an incentive to San Diego home buyers. Increases in home mortgage interest rates will have a much greater impact upon prospective San Diego home buyers than will the expiration of the tax credit. But the tax credit does go a long way toward paying escrow fees, title insurance fees, and discount points to buy down an interest rate.

  3. The 1st time buyers tax credit has been a big help in my area. This bill has certainly stimulated this segment of the market. I think we will see the date extended. We need to have more 1st time buyers entering the market in order for the move up market to flourish.

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