An Advance on Your Tax Credit

WASHINGTON (MarketWatch) -- Federal Housing Administration-approved lenders can now provide short-term loans to first-time borrowers eligible for the $8,000 home buyer tax credit.

But under guidance issued by the Department of Housing and Urban Development late last week, the loans must be on top of -- not instead of -- the minimum 3.5% down payment normally required on FHA-insured loans.

Buyers can still receive down-payment assistance from their parents, employers, nonprofit groups and certain government entities. But other than that, the down payment must come from their own funds. See previous Realty Q&A.

Thus, FHA borrowers relying on the lender to finance the tax credit will have to come up with their own money for the 3.5% down payment. But after that, they can use the proceeds from the short-term loans to increase their down payments, cover their closing costs or buy-down their mortgage rate.

The rules for advancing the tax credit from a refund received weeks or even months after an eligible buyer files a tax return to cash at the settlement table were announced by HUD. Secretary Shaun Donovan, who said allowing buyers to take advantage of the credit right away is "a real win for everyone."

"What we're doing today will not only help families purchase their first home but will present an enormous benefit for communities struggling to deal with an oversupply of housing," Donovan told the National Association of Home Builders' annual spring board meeting in Washington.

NAHB Chairman Joe Robson hailed the move to "monetize" the credit, which actually was announced earlier last month but without any details of how it would work. "With the spring home buying season in full bloom," the Tulsa, Okla., builder said, "it could not have come at a better time."

Charles McMillan, president of the National Association of Realtors, agreed. "We think this is a good program," he said. "With an abundance of inventory, reduced prices, historically low interest rates and now the availability of the tax credit at closing, we expect to see the housing market further stabilize and improve."

HUD did not estimate how many FHA buyers would benefit from tax-credit advances, which cannot result in cash back to the borrowers, cannot exceed the total amount needed for the down payment and closing costs and may not be for more than the anticipated tax credit due the borrowers.

But the NAHB figures it will lead to 160,000 more sales -- 101,000 to first-time buyers and 59,000 to move-up buyers who are selling their current residences to first-timers.

It won't result in much more activity than that because the tax credit is set to expire on Dec. 1 unless it is extended by Congress, an action for which the housing sector is heavily lobbying.

To prevent third-party down-payment assistance outfits from "buying" the tax credit refunds from borrowers, the rules state that the buyer's down payment may not consist of any funds provided by the mortgagee, the seller or any other person that financially benefits from the transaction. That prohibition specifically includes third-party entities that are reimbursed, directly or indirectly, by anyone benefiting from the deal.

HUD didn't want to do anything that would allow "these seller-funded schemes back in," a senior HUD official said at a briefing on the program. The department also plans to monitor the purchase of tax-credit transactions closely, warning that missteps would result in referral to HUD's Mortgage Review Board, the Federal Trade Commission or the appropriate state attorney general's office for disciplinary action.

"We are putting in place the necessary safeguards and consumer protections, and if monitored the right way, tax credit loans can be used efficiently and safely," Donovan told the home builders.

-Market Watch