After a sticky situation, debating on whether a proposed $8K tax credit could be used toward the down payment of a home purchase without conflicting the requirements for first time home buyer’s already set forth by federal standard, HUD has manifested a plan.

A first time home buyer can use their tax credit toward their down payment, if a buyer is using FHA insured financing. The credit will be considered a tax advance, in which a nominal fee will be charged to the home buyer at settlement. This charge is not to exceed 2.5% of the advanced amount. For example if an advance is $6,000 the fee should only be $150.

The advance tax can not exceed closing costs; therefore a buyer can not walk away from settlement with cash in hand. Buyers also can not establish a second mortgage that would exceed the amount of their down payment, closing costs, and prepaid expenses. Basically what FHA wants first time home buyers to know is that they are not purchasing a home “Scott Free,” 3.5% of the purchase amount of their home is still required.

For additional information please visit www.irs.gov and www.hud.gov.

In an address yesterday to The National Association of Realtors^®, Secretary of the U.S. Department of Housing and Urban Development, Shaun Donovan announced, “We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a downpayment.”

How the current $8K tax credit for first time home buyers work, is that they would file an amendment to their 2008 tax returns, and in a few weeks following settlement they'd have an $8K check in hand or 10% of the purchase price; $8K being the maximum return.  Unlike the year prior, when the $7500 credit was offered, this tax credit does not have to be repaid. To take advantage of this tax credit you must settle on a home prior to December 1, 2009.

Since the news is fresh, no set date as to when this new tax credit will take effect and what rules will apply.  And just so you know, the law defines a first time home buyer, as being one that has not owned a home within 3yrs prior to purchase. 

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