Wednesday, June 24, 2009

Home buyer tax credit can be used as down payment

A new federal government program will allow some home buyers to use the $8,000 first-time home buyer tax credit at closing. Prior to the new program, buyers could claim the credit on their 2008 or 2009 federal tax return, but couldn't immediately make use of the funds.

Through this new program, the home buyer tax credit can be used:

  • as a down payment
  • to pay settlement fees or other closing costs or
  • to pay discount points to buy down the interest rate on the loan.

"We believe this is a real win for everyone," said Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, in a statement. "Families will now be able to apply their anticipated tax credit toward their home purchase right away."

How to use tax credit at closing
To use the tax credit at closing, home buyers must obtain a loan that's insured by the Federal Housing Administration (FHA). To obtain an FHA-insured loan, be sure to apply through an FHA-approved lender.

The credit can't be used toward the first 3.5 percent of the down payment on an FHA loan. That means borrowers who want to use the tax credit as a down payment must still bring at least that amount to the transaction in addition to the tax credit. The 3.5 percent down payment must come from the buyer's own funds or a gift, subject to FHA rules. However, if the borrower obtains a loan through a state housing finance agency, the minimum down payment requirement to use the tax credit at closing may be waived.

$8,000 first-time home buyer tax credit guidelines
If you want to take advantage of the first-time home buyer tax credit, make sure you understand the rules. Here’s an overview of how the tax credit works:

  • The first-time home buyer tax credit is worth $8,000 or 10 percent of the purchase price of the home, whichever is less.
  • The amount of the tax credit is reduced for single home buyers who earn more than $75,000 and married couples who earn more than $150,000.
  • It's phased out completely for single and married buyers who earn more than $95,000 and $170,000, respectively.
  • The tax credit can be taken by buyers who haven't owned a home in the last three years.
  • The home must be purchase between Jan. 1, 2009, and Nov. 30, 2009.
  • The credit is refundable, and there is no repayment requirement.

More information about the first-time home buyer tax credit can be found on the IRS website.

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