CAUTION: “Although it remains to be seen how the program is actually implemented, the plan resembles former seller-funded down payment assistance programs,” writes housing analyst Ivy Zelman in a research note Wednesday.
One of the problems during the housing boom was that many people were able to buy a home with little or no money down, giving them little financial incentive to work hard to hold on when times got rough.
Now U.S. housing officials are working on a plan that would essentially allow some first-time buyers to purchase homes by paying little money upfront. Rather, they would be able to put an $8,000 income tax credit for first-time buyers towards their down payment on loans backed by the Federal Housing Administration. The idea is to allow home buyers to “monetize” the tax credit. Right now, home buyers must wait until they file their taxes to receive the credit.
The FHA is finalizing a program that would allow approved lenders, non-profits, and state and local governments to fund short-term loans that could be used as down payments to be repaid once the borrower received the tax credit. Once they received their tax credit, they would pay off the short-term loan and put equity into their home.
The FHA requires a minimum 3.5% down payment on loans backed by the agency, which means that buyers could put little or nothing down on homes up to $230,000. “It is close to having nothing down,” says Thomas Lawler, an independent housing economist.
The proposal, hailed by home builders and Realtors, is drawing some comparisons to the no money down programs that the FHA has worked to shut down. Congress ended a program last year that allowed home sellers to fund down payments to home buyers through nonprofit groups, and the FHA has blamed that program for an outsized share of loan defaults. Under that program, nonprofit groups would “gift” the 3% minimum down payment to a home buyer, often funded by the seller of the home. Buyers would move into the home without paying any of their own money for the down payment.
“Although it remains to be seen how the program is actually implemented, the plan resembles former seller-funded down payment assistance programs,” writes housing analyst Ivy Zelman in a research note Wednesday. “We remain concerned that the lenient underwriting standards, low down-payment requirements and now the ability of FHA borrowers to purchase a home without putting any of their own equity into the purchase is creating a tremendous risk for the program and taxpayers in the future.”
Several states, including Pennsylvania and New Mexico, had already instituted similar programs. Housing Secretary Shaun Donovan outlined the plan Tuesday during a speech to the National Association of Realtors. “We think the policy is a real win for everyone,” he said.
Congress approved the tax credit in February’s stimulus bill, which provides up to $8,000 for first-time home buyers on a new or existing home. The tax credit expires Dec. 1.
Readers, would you be more likely to buy a new home if you could spend this tax credit before you file your tax returns?
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