Rising from the ashes is a revised guideline from HUD stating that home buyers using FHA loans are allowed to tap into the $8,000 first-time home buyer credit to pay closing costs at the time they settle on their home. They still need to have the 3.5% down payment.
HUD sent out a memo in early May announcing this program as many of you readers probably recall, but promptly pulled the memo when reasonable people like me pointed out the half-baked program. By the end of May they were ready to give it another shot.
There has been a ton of confusion over the specifics and, I admit, I was part of that group feeling that there would be loan sharks lining up to charge hefty fees to unsuspecting first-timers.
But the funny part to me is that the fee cap appears to be 2.5%, and the combined loan and fees cannot exceed the tax credit. The tax credit is 10% of the sales price or a maximum of $8,000, so the fee is less than $200? The use of the word “fee” seems vague because isn’t interest on these loans considered a fee? And HUD/FHA is asking the investor (yes, investor) to perform some due diligence to make sure the borrower is not a risk.
FHA expects that entities purchasing tax credit assets will employ appropriate due diligence measures including, but not limited to:
- Require the homebuyer to draft and provide the IRS form 5405 First-Time Homebuyer Credit.
- Contact the borrower’s employer and review pay stubs to confirm there are no outstanding garnishments.
- Review the homebuyer’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
So there will be some extra hoops to jump through, but if borrowers want the cash now then they will need to work just that much harder. The detailed specifics of the “fees” will be essential and if that includes interest? So my best recommendation for those folks planning to exercise this option, plan for settlement at least 60 days from ratification.