HUD Re-Releases Guidance on Tax Credit Refund

May 29, 2009 – 3:48 pm

By Robin Medecke

After the premature release of Mortgagee Letter 2009-15, we were waiting on further clarification as to whether the First-Time Homebuyer Tax Credit (FTHBC) could be applied to FHA’s required 3.5% downpayment contribution from the borrower, thus creating a vehicle for 100% financing. With today’s official re-release of ML2009-15 (view as pdf) comes the answer, in HUD’s typical ambiguous style: “Yes, and no.”

“Eligible government agencies and instrumentalities of government” as defined in HUD handbook 4155.1 5.C3 and 5.C4 can offer advances against the tax credit secured by a second lien as long as it does not “exceed the total amount needed for the down payment, closing costs, and prepaid expenses.“

In English: State housing finance agencies and other government entities can use the tax credit advance to loan borrowers up to 100% of the downpayment, costs and expenses on a first-time home purchase. So in this case, “Yes.”

On the other hand, a second option in which the tax credit can be “purchased” as an asset but is not secured by a lien can not be used to meet the borrower’s required 3.5% contribution toward the downpayment. So for FHA-approved mortgagees and FHA-approved nonprofit organizations as well as Federal, state, and local governmental agencies and instrumentalities thereof who utilize this method of applying the FTHBC, the answer is, “No.”

“Pursuant to 12 U.S.C. 1709(b)(9), the homebuyer’s downpayment required for eligibility for FHA insurance may not consist of any funds (including funds derived from a sale of the homebuyer tax credit) provided by the mortgagee, the seller, or any other person or entity that financially benefits from the transaction (or by any third party or entity that is reimbursed, directly or indirectly, by the financially benefiting person or entity). Accordingly, the proceeds of the sale of the tax credit to FHA approved mortgagees, the seller, or any other person or entity that financially benefits from the transaction (or any third party or entity that is reimbursed, directly or indirectly, by the financing benefiting person or entity), may not be used to meet the 3.5% minimum downpayment, but may be used as additional downpayment, buying down of interest rate, or other closing costs.”

Those of you who feared that the FTHBC would just prove to be another avenue to facilitate 100% financing should feel much better now, right? Well, if it’s any consolation, the second option above is likely to be the most common application, and after all this only applies to purchases that occur up until December 31, 2009 (presuming it isn’t extended). Yeah, warm fuzzies all around. High-fives everyone!

With the final issuance of HUD’s guidance on use of the FTHBC comes one critical limitation that had some concerned about potential abuses of the program similar to the Earned Income Credit fiasco. You need worry no more – as previously predicted on this blog, the cap on fees has been distinctly defined and strictly limited to avoid any such abuses:

“Any costs attendant to the purchase of the tax credit are to be nominal and discounting the anticipated credit to cover the costs and expenses of the transaction must be reasonable and disclosed to the homebuyer. In FHA’s view, fees and costs that total more than 2.5% of the anticipated credit are considered excessive. (Example: $6000 to be refunded, with all fees and costs discounted, borrower should receive not less than $5850.00 for sale of tax credit.)”

HUD put some teeth behind this, too, with a stern warning that violations or abuses of the fees provision would be dealt with harshly:

“Charging of excessive fees or costs in the purchase of the tax credit or increasing other fees or charges in the transaction without FHA approval may result in referral to the Mortgagee Review Board, and particularly with respect to entities that are not FHA-approved mortgagees, referral to the Federal Trade Commission, or referral to the appropriate State Attorney General office, as may be applicable.”

Good, Bad or Ugly, this writer thinks FHA (for once) has taken a step back and come forth with unusually well thought out (or re-thunk, if you will) guidance on this particular program. Quoting an unnamed senior HUD official, Dow Jones said ‘it was important that FHA borrowers funded their own minimum down payment “because we want the home buyer always to have skin in the game.”’

Bravo, and wholeheartedly agreed.

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