In a blog on February 5, 2009, I expressed some hope that we would soon see new congressional proposals that would offer incentives to everyone interested in buying property and thus provide a means by which sales would increase and excess inventory would be sold off.
As it turned out, the final congressional bill, although missing a broader opportunity to help all buyers, does provide assistance for first-time buyers. The law defines first-time home buyer as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For full particulars on the tax credit, go to Fact Sheet, put out by NAHB (National Association of Home Builders).
The proposal as originally designed was created to stimulate sales of housing inventory by offering a tax credit for first-time buyers. I guess the thinking was that this future savings on taxes to be applied at the end of the tax year would have people rushing out to buy a first home. Guess what? There was no great rush. This is due mostly to the fact that many potential first-time buyers would not be able to come up with the 3.5% down payment required for an FHA loan or the requisite 20% toward a conventional loan.
To address this down payment need, a revision has been enacted, at least for FHA borrowers. Announced on May 12, 2009, the FHA will now permit its lenders to allow first-time buyers immediate access to the earlier enacted tax credit. Lenders will “monetize” the tax credit by providing a temporary loan to borrowers that, in effect, will allow up to $8000 to be available and used as a down payment in the purchase transaction.
Is this a good deal? Yes, if you are a qualified first time buyer, this is a gift. Now, through this 100% government-backed FHA loan program, prospective buyers who have low FICO scores (620 minimum), can buy a home, essentially with nothing down, finance all closing costs by including them as part of the mortgage, and even get their down payment from the government, as well. The tax credit does not have to be repaid unless the buyer sells this residence within three years after its purchase. What a deal!
Will this new policy help move a lot of our excess housing inventory? I hope so. Will we see some of this inventory back on the market in a year or two? I hope not. Although the government missed a great chance to create incentives for ALL types of buyers, this legislation does provide a great incentive for qualified first-time buyers to act now. To read about the tax credit on the IRS site, go to IRS Explains Housing Tax Credit.