For about two weeks, there has been quite a bit of speculation about whether or not HUD would allow the $8000 tax credit to be monetized since announced by HUD Secretary Shaun Donovan when speaking to the National Association of Realtors.
Now the speculation can end – HUD has gave official guidance in the form of a Mortgagee Letter 2009-15.
Note: According to the Mortgagee Letter 2009-15, you cannot use the monetization of the tax credit for your 3.5% down payment.
Conditions of the 8000 Tax Credit Monetization Plan
If someone wants to turn their tax credit into cash to help cover closing costs or add to their 3.5% down payment they are required to have for a down payment, these conditions apply:
- The tax credit advance, when combined with the FHA-insured first mortgage 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 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. - Payments must be deferred for at least 36 months to not be included in the qualifying ratios.
- If the tax 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.
Lender Due Diligence Required For 8000 Tax Credit Monetization Plan
If someone wants to turn their 8000 tax credit into cash/credit to help cover closing costs, they can expect the lender to do at least these things as part of the lender due diligence process:
- Require the home buyer to draft and provide the IRS form 5405 “First-Time Home buyer Credit.”
- Contact the borrower’s employer and review pay stubs to confirm there are no outstanding garnishments.
- Review the home buyer’s credit report to ensure there are no unpaid student loans, or other obligations that could be offset against the credit.
- Validate that all of the eligibility requirements for the tax credit are fulfilled
Review previous tax returns and IRS tax assessment letters, if any, to determine that the borrower does not have unsettled obligations to the IRS
8000 Tax Credit Monetization Plan: Still Must Have 3.5% For Down Payment
One of the most popular questions about the plan is “can you use the tax credit for your down payment” – and the answer to that question is “only after you have paid the initial 3.5% down payment yourself”.
If you want to use any part of the tax credit monetization plan as your down payment, you have to have the first 3.5% of your down payment yourself.
Other Resources:
Official Mortgagee Letter 2009-15
New Home Buyer 8000 Tax Credit Down Payment: Answers To Questions
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