FHA HOME PURCHASE TAX CREDIT

Conditions:

• The home tax credit advance, when combined with the FHA-insured first mortgage loan may not result in cash back to the borrower.

• The second lien may not exceed the total amount needed for the down payment, closing costs, and prepaid expenses.

• Secondary financing may be “soft” (silent) or require a monthly repayment.

• If loan payments are required, they must be included within the qualifying ratios and, when combined with the first mortgage, cannot exceed the borrower’s reasonable ability to pay.

• Loan payments must be deferred for at least 36 months to not be included in the qualifying ratios.

• If the home ax credit advance loan has a short term for repayment, it must also provide that if the borrower fails to repay by the designated deadline, principal and interest payments begin automatically or the loan converts to a “soft” second.

• The secondary financing may not require a balloon payment before ten years.

• The proceeds of the sale of the home tax credit may not exceed the anticipated tax credit due the homebuyer based on the computations of form IRS 5405;

• The borrower must submit a signed certification that the home tax credit is not subject to offset due to other indebtedness to the Federal Government (IRS Liens and Student Loans)

• A copy of the borrower’s tax refund and/or the IRS 5405 must be collected and retained in the FHA case binder.

• Any costs attendant to the purchase of the tax credit are to be nominal and discounting the anticipated credit to cover the costs and expenses of the transaction must be reasonable and disclosed to the homebuyer. In FHA’s view, fees and costs that total more than 2.5% of the anticipated credit are considered excessive. (Example: $6000 to be refunded, with all fees and costs discounted, borrower should receive not less than $5850.00 for sale of tax credit.)

• Pursuant to 12 U.S.C. 1709(b)(9), the homebuyer’s down payment required for eligibility for FHA mortgage 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 down payment, buying down of interest rate, or other closing costs.

This last statement is probably the biggest issue that will arise.  What this means is that the borrower will still need to come up with their 3.5% down payment.  The purchase tax credit can be used to pay for closing cost and additional down payment but not the initial 3.5% FHA down payment required by FHA loan. 

So situations where the Lender, Seller, Builder, Realtors "buys" the Tax Credit in exchange for cash to the borrower will be prohibited.

The exception to this would be State and Local Government Agencies and non-profits approved by HUD.  If their budget allow, expect many States to try an use this to stimulate FHA home purchases.