Background:  The Foreclosure Prevention Act

On July 30th, President Bush signed H.R. 3221, also known as the Foreclosure Prevention Act of 2008, into law.   There are a ton of provisions in this legislation.  Before we get into the tax credit, let’s briefly look at some of the less buyer friendly aspects.  The bill eliminates down payment assistance programs like Nehemiah effective October 1, 2008.  (Though as I wrote about earlier, Nehemiah was something of a mixed blessing even when it was around, since often buyers getting the down payment assistance were competing for  low-priced, bank-owned homes with other buyers who were financing less than 100% or paying all cash).  Another bill, H.R. 6694, seeks to undo these provisions and restore down payment assistance programs like Nehemiah and AmeriDream.

In addition to eliminating third party down payment assistance programs, the bill raises the down payment for FHA loans from 3% to 3.5%, but (fortunately), allows the down payment to be gifted or borrowed from a relative.  (If it’s borrowed and secured against the home, it has to be in subordinate position to the FHA loan, and the total amount secured cannot exceed 100% of the value of the home).

The Tax Credit — An Interest Free Loan From The IRS

While on the one hand taking steps that make home ownership somewhat more difficult, on the other hand H.R. 3221 had at least one provision that’s great news if you’re a first time buyer buying between April 9, 2008 and June 30th, 2009.   First time buyers who buy during this period will be eligible for a tax credit of 10% of the value of their home (up to $7,500).  Since almost all single family homes and many condos in our area cost more than $75,000, most buyers will be eligible for the full $7,500 credit.  The credit must be paid back over 15 years, but since you only have to pay back the amount of the credit, what this means in effect is that you get a 15-year, interest-free loan from the IRS.

The National Association of Realtors® has put together an excellent FAQ that goes into the first time buyer tax credit in detail.  I think this FAQ will answer most questions you may have about this credit, but if you need additional information, please call us.

Can You Use This as a Down Payment?

One of our web site visitors inquired the other day whether there’s any way to use the tax credit as a down payment.

One answer to this is no, not really.  However, those of you who are buying the way my wife and I did — with help from the First National Bank of Mom and Dad — may note that a tax credit of $7,500 next year is pretty close to the amount of a 3.5% down payment on a median priced Sacramento County home this year.  In other words, if mom and dad will give you the interest free loan for year one, the IRS will give you an interest free tax credit the following year to pay them back with, and then you can pay the IRS back over the next 15 years.

For additional reading on H.R. 3221, see the following links:

Key Provisions of H.R. 3221

H.R. 3221 Overview (With Links to Summaries and Full Text)

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