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FHA issues guidelines to lenders
May 30, 2009
The FHA (Federal Housing Administration) has issued guidelines allowing first-time homebuyers to apply a federal
tax credit of up to $8,000 toward the purchase of a home with an FHA-backed mortgage. The tax credit can't be
used to meet the FHA's 3.5 percent minimum down-payment requirement. But the tax credit can be used as an
additional down payment and for other closing costs, which can help borrowers obtain a lower interest rate.
For the average FHA-insured mortgage of $182,000, buyers must bring to the closing table or finance about $8,600
in costs on top of their down payment -- about $5,460 in closing costs (typically around 3 percent of the sales price)
and $3,185 for FHA's initial 1.75 percent mortgage-insurance premium.
In announcing the release of the guidelines, Secretary of Housing Shaun Donovan called them "another important
step toward accelerating the recovery of the nation's housing market." The ability to "monetize" the tax credit and
apply it to a home purchase will not only help families purchase their first home, Donovan said, but "present an
enormous benefit for communities struggling to deal with an oversupply of housing."
The National Association of Home Builders has estimated that the tax credit will generate 160,000 home sales.
The final guidelines for lenders, spelled out in Mortgagee Letter 2009-15, explain the conditions under which
FHA-approved lenders and nonprofits, and federal, state and local government agencies may purchase the tax
credits anticipated by homebuyers.
Those offering tax-credit advances with second liens can't charge more than 2.5 percent of the anticipated credit,
which works out to $200 in fees and costs for the maximum $8,000 tax credit. The second lien can't exceed the total
amount needed for the down payment, closing costs and prepaid expenses, and can't result in cash back from the
borrower.
The homebuyer's 3.5 percent minimum down payment can't come from the lender, the seller, or any other third party
or person benefiting from the transaction. But FHA does allow parents, employers and other governmental entities
to contribute towards the 3.5 percent minimum down payment. A number of state housing finance agencies offer
down-payment assistance loans that can be used to meet FHA minimum down-payment requirements, some of
which already incorporate the first-time homebuyer tax credit.
"This guidance will enable more housing finance agencies to go forward with programs they've been waiting to
launch until the guidance came out," said Garth Rieman, director of housing advocacy and strategic initiatives for
the National Council of State Housing Agencies.
Rieman said that the mortgagee letter appears to allow housing finance agencies to continue to offer second loans
that incorporate the tax credit as one of many underwriting factors, and those loans can still be used to meet the
FHA's 3.5 percent down-payment requirement.
But the letter does appear to prohibit borrowers who obtain second loans based solely on their eligibility for the
first-time homebuyer tax credit from using those funds to meet FHA's minimum down-payment requirement, Rieman
said. "We think the guidelines are flexible enough to allow housing finance agencies that already have
(down-payment assistance) programs to continue to use them, and to allow them to use them with FHA loans,"
Rieman said.
The process described as "purchases" of tax credits in the FHA's letter to mortgagees is a new approach, Rieman
said. "You want to make sure it's done responsibly," and HUD has done an "artful" job balancing the need to
stimulate homebuying against risk to the FHA insurance fund, he said. "When you consider all the fees and costs
homebuyers must come up with, this will be very valuable in helping them raise the funds to close."
The first-time homebuyer tax credit is equal to 10 percent of the purchase price of the home, up to $8,000, for
first-time homebuyers purchasing a home before Dec. 1. A first-time homebuyer is anyone who hasn't owned a
primary residence in the last three years.
Individuals making $95,000 or more and married couples earning $170,000 or more can't claim the credit. Lesser
tax credits are available for individuals with a modified adjusted gross income of $75,000 or more but less than
$95,000, and for married couples earning $150,000 or more but less than $170,000, and filing jointly.
The IRS has created a landing page with links to a Q&A and Form 5405, the form used to claim the credit after
closing on a home purchase.
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$8000 Obama Tax credit can be used for down payment