The $8,000 Tax Credit Announcement

There are multiple announcements about how Pasadena home buyers can now use the $8,000 tax credit to use as the down payment on their home purchase. I am sorry, but somehow, I can not get excited by this announcement.

Why? Well… let’s take a look at the announcement made by HUD (US Department of Housing and Urban Development) first:

DONOVAN ANNOUNCES RECOVERY ACT’S HOMEBUYER TAX CREDIT CAN IMMEDIATELY HELP THOUSANDS OF FIRST-TIME HOMEBUYERS TO BUY A HOME

FHA plan will stimulate new home sales and help stabilize housing market

WASHINGTON – Speaking to the National Association of Home Builders Spring Board of Directors Meeting, U.S. Housing and Urban Development Secretary Shaun Donovan today announced that the Federal Housing Administration (FHA) will allow homebuyers to apply the Obama Administration’s new $8,000 first-time home buyer tax credit toward the purchase costs of a FHA-insured home. Donovan said that today’s action will help stabilize the nation’s housing market by stimulating home sales across the country.

The American Recovery and Reinvestment Act of 2009 offers homebuyers a tax credit of up to $8,000 for purchasing their first home. Families can only access this credit after filing their tax returns with the IRS. Today’s announcement details FHA’s rules allowing state Housing Finance Agencies and certain non-profits to “monetize” up to the full amount of the tax credit (depending on the amount of the mortgage) so that borrowers can immediately apply the funds toward their down payments. Home buyers using FHA-approved lenders can apply the tax credit to their down payment in excess of 3.5 percent of appraised value or their closing costs, which can help achieve a lower interest rate. To read the FHA’s new mortgagee letter, visit HUD’s website.

“We believe this is a real win for everyone,” said Donovan. “Today, the Obama Administration is taking another important step toward accelerating the recovery of the nation’s housing market. Families will now be able to apply their anticipated tax credit toward their home purchase right away. At the same time we are putting safeguards in place to ensure that consumers will be protected from unscrupulous lenders. What we’re doing today will not only help these families to purchase their first home but will present an enormous benefit for communities struggling to deal with an oversupply of housing.”

First of all, let’s get this straight. You will only qualify for the full $8,000 if your adjusted gross income is not over $75,000 if you are single or $150,000 for joint filers. If you are make anywhere between $75,000 and $95,000, this tax credit begins to phase out. And, if you are fortunate enough to make over $95,000 or $170,000 for joint filers, you will not qualify for any tax credit!

Second, the tax credit is only 10% of purchase price UP TO $8,000.

Third, let’s face this… this loan will be considered as DPA or better known in the lending industry, Down Payment Assistance. Any type of down payment assistance has to be accounted for in the borrower’s Debt to Income Ratio. If you are an FHA buyer and already are trying to qualify for 96.5% of the value of a home and now you will have yet another DPA on top of that, the chances are no bank will ever approve you for the mortgage.

Fourth, this essentially is a short term, bridge loan. I do not see HUD stating anywhere that this loan is going to be free. Short term bridge loans are usually expensive. Would you, as a first time home buyer, be willing to pay 8% to 10% interest on this money?

Five, how long do you think it will take the government to approve you for this loan? Do you think that they’ll be able to make the 7 to 10 day loan contingencies that we’re seeing on our contracts now? I doubt it!

And, finally, how much will the banks charge to set up this loan, to print loan docs or any other expenses associated with processing tihs loan?

Sounds like a lot of fairy dust to me. What do you think?

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