The Obama administration has put out the official word: Starting soon, first-time home buyers nationwide will be able to turn their $8,000 federal tax credits into cash for use at closing if they use Federal Housing Administration mortgage financing.
But in its final guidelines to lenders and buyers issued May 29, the Department of Housing and Urban Development clarified that buyers obtaining FHA loans through private lenders would have to invest at least some of their own funds -- whether from personal savings or gifts from relatives -- in the form of a minimum 3.5% down payment.
In other words, you'll need equity in the house to participate. This won't be a zero-down plan, with one exception: If you obtain your FHA loan through one of about 10 state housing agency "tax credit monetization" programs, you'll be allowed to pay for your entire down payment with the help of a bridge loan provided by the agency.
Those bridge loans generally are low-interest or no-interest short-term second liens secured by the property, and convert into second mortgages if they are not paid off with the proceeds of the tax credit.
For FHA lender-supplied cash advances, you'll be able to use the $8,000 tax credit -- or whatever-size credit you qualify to receive -- for settlement fees, escrow charges, higher down payments or to "buy down" your interest rate to cut monthly payments.
How will this all work in practical terms? How do you apply? Here's a quick guide:
To start, you'll need to qualify as a first-time buyer under the generous definition permitted by Congress -- that is, you cannot have owned a principal residence during the previous three years, and your household gross income cannot exceed $95,000 for single taxpayers or $170,000 for married couples filing jointly.
To get the process rolling, you'll have to write a contract on a house you can afford to buy and apply for a mortgage through an FHA-approved lender. There are more than 12,000 lenders with that designation. Large banks or bank-affiliated mortgage lenders are more likely to be geared up for the program in the near future, according to industry experts. Home builders, who have advocated credit-monetization programs for months, are likely to be major participants. The tax credit program requires all eligible purchases be closed no later than Nov. 30.
Besides the usual mortgage application information, the lender is likely to require some extra paperwork, based on FHA guidelines:
* A filled-out IRS Form 5405, which is your request to the federal government to send you a tax credit check. You can file an amendment to your 2008 return and get the credit within a matter of weeks, or you can file for it on your 2009 taxes. Most buyers are expected to opt for the amended return route. Form 5405 is available for download at www.irs.gov.
* Proof that you have no outstanding judgments, liens, unpaid taxes or other obligations that could reduce or eliminate the tax credit you're seeking.
* Confirmation from your employer that you are not subject to wage garnishments, which could also affect the amount of the credit.
Your lender will be strictly limited on what it can charge for providing you tax credit money in advance. According to FHA guidelines, fees must be reasonable and nominal -- generally no more than 2.5% of the expected tax credit. For example, if you're in line to receive the full $8,000 credit, that would mean the most you could be charged for the cash in advance typically would be $200.
A senior HUD official said that the agency wanted to keep these fees as low as feasible to avoid abuses or gouging, and that HUD would be monitoring transactions to make sure participating lenders were adhering to the guidelines.
Distributed by the Washington Post Writers Group.