Recently, HUD has announced that you can now get access to the new home buyer tax credit of up to $8,000 to help pay for closing costs rather than wait for your refund to come from the IRS. To make the announcement, HUD issued an official Mortgagee Letter outlining how the “New Home Buyer Tax Credit Monetization Plan” works.
Using The 8000 Tax Credit For Closing Costs
According to the new rules, you must come up with the initial 3.5% required by FHA for your down payment, and then you can basically use the tax credit for your closing costs and more of a down payment if you choose to. For example, if you were going to be due the full $8000 tax credit from the IRS, and your total closing costs were going to be $5000, you could apply the other $3000 to your down payment (less administrative fees of the program).
From the official HUD announcement:
Pursuant to 12 U.S.C. 1709(b)(9), the homebuyer’s downpayment required for eligibility for FHA insurance may not consist of any funds (including funds derived from a sale of the homebuyer tax credit) provided by the mortgagee, the seller, or any other person or entity that financially benefits from the transaction (or by any third party or entity that is reimbursed, directly or indirectly, by the financially benefiting person or entity). Accordingly, the proceeds of the sale of the tax credit to FHA approved mortgagees, the seller, or any other person or entity that financially benefits from the transaction (or any third party or entity that is reimbursed, directly or indirectly, by the financing benefiting person or entity), may not be used to meet the 3.5% minimum downpayment, but may be used as additional downpayment, buying down of interest rate, or other closing costs.
Using the 8000 Tax Credit For Closing Costs
All closing costs are eligible for the new home buyer tax credit monetization plan - you can use the money for any “normal” closing costs that are associated with buying a home. Lender fees, title fees, inspection fees — these are all “normal” closing costs and you can use the 8000 tax credit monetization plan for these costs.
How To “Monetize” The 8000 Tax Credit
HUD has designated that organizations who are approved by FHA can administer the 8000 tax credit monetization plan. These include FHA approved lenders and other non profit organizations. HUD outlined clearly what was a “reasonable” fee - not more than 2.5% of the amount of the credit - so for a $6,000 credit, you could expect the fee to be about $250.
Many organizations are just now figuring out how to implement programs based on the guidelines - so if you speak with a loan officer at a FHA approved organization and they tell you that they don’t yet have the official mechanics in place, be aware that it may take some time. Also, the best place for more information about how this program works is probably to ask a loan officer at an FHA approved lender - they should at least know the basics!
Other Resources:
HUD Official Announcement
Official Mortgagee Letter 2009-15
New Home Buyer 8000 Tax Credit Down Payment: Answers To Questions
8000 Tax Credit Questions and Answers
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