On May 29 the Obama administration announced final guidelines to provide first-time home buyers with an $8,000 cash advance that can be used to pay closing costs and part of the down payment for home purchases completed by November 30, 2009. The money is available to qualified buyers who obtain their home mortgage through the Federal Housing Administration (FHA loans). The program is welcome news to San Diego home buyers who have been on the fence about purchasing their first home.
The $8,000 incentive is a tax credit, but the new loan guidelines allow lenders to give cash advances to qualified home buyers rather than require the buyers to pay the money up-front and wait for a tax refund. For buyers who also qualify for the California Homebuyers Downpayment Assistance Program (SHDAP), this means that zero-down-payment 100% financing loans are again available to first-time buyers of homes in San Diego CA. Otherwise the general rule is that FHA loans require a minimum 3.5 percent down payment, which can come from personal savings or even as a gift from a relative.
To qualify for the $8,000 cash advance from the federal government, the borrower must be purchasing the property as a principal residence. This means that the borrower must intend to live in the home, and cannot have owned another home at any time during the prior three years. The maximum income threshold is $170,000 for married couples who file a joint tax return or $95,000 for unmarried persons. The borrower must meet the standard income and documentation requirements provided by the FHA-approved lender. Most large banks and reputable mortgage lenders are FHA-approved (more than 12,000 in all), but be sure to ask your lender in advance whether they can provide you with an FHA mortgage.
In addition to the standard loan documentation, your FHA lender will also require proof that you have no unpaid taxes, liens, civil judgments or other obligations that could offset your tax credit. For example, your employer will need to sign a letter stating that you are not subject to wage garnishment. The lender will also require a completed IRS Form 5405 which authorizes the federal government to issue the tax credit check. And since this is a tax credit, for expedited receipt of the credit money the buyer will need to file an amended 2008 tax return, or else wait to receive the credit after filing a 2009 tax return.
This $8,000 tax credit can be used toward the down payment or closing costs, including escrow and title charges, settlement fees, or “points” (interest rate buy-downs that lower the monthly payment on the home loan). The tax credit advance cannot result in cash back to the borrower, so the maximum allowable credit is the amount of the down payment and closing costs. Lenders will be prohibited from gouging the customer with fees to participate in this program. Lender fees must be “nominal” and “reasonable” which generally means up to 2.5 percent of the expected tax credit. In other words, the lender fees for the advance of the full $8,000 tax credit should be no more than $200.
If you are considering buying your first home in San Diego, please contact your San Diego Realtors for assistance. For more information about the first-time home buyer tax credit, visit the U.S. Department of Housing and Urban Development (HUD) for complete details about the American Recovery and Reinvestment Act of 2009. This is a wonderful initiative to help make home ownership in San Diego a reality for you and for others who you care about.