First Time Home Buyers

First Time Home Buyers

Rumor has it that US Housing Officials are putting together a plan that would allow first time homebuyers to put an $8,000 income tax credit towards the down-payment on a new home.  The idea is to allow first time homeowners to “monetize” their tax credit, rather than having to come to the table with a larger down payment, and receiving a credit come tax time.

The program, which will be backed by the FHA, or Federal Housing Administration, would allow approved lenders to fund short term loans that could be applied as down payments for first time homeowners, and repaid once they receive their income tax credit.

FHA purchases require a 3.5% downpayment on loans backed by the Agency.  This translates to little to no money down on homes up to $230,000.  Its interesting to note that one of the causes of the current housing crisis is that many homeowners we’re able to purchase homes with little to no down-payment.  These 100% financing loans made it such that homebuyers did not have to place a down-payment on their homes.

On a positive note, borrowers that seek financing through FHA must fully document their income, and clearly show a low DTI (debt-to-income) ratio, or, in layman’s terms, the ability to easily afford the mortgage.  The FHA offers security to investors and servicers through a mortgage insurance policy on most all FHA originated loans.

It is interesting to find that the FHA would endorse homeowners recieving tax credit funds basically up front to purchase a home with little money down after they worked so hard to remove DPA programs, that allowed for sellers to “gift” money to homebuyers to allow for less money down.  According to today’s WSJ:

“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.”

Ultimately, time will tell whether this pending program will help or hinder economic recovery.  It does provide a huge incentive to first time homebuyers looking for homes as they would not have to save as much money to purchase a new home.  At the same time, much of the current housing crisis is due to similar low/no down payment programs.  On average, however, homeowners in FHA mortgages are usually less prone to default, need a loan modification, or face foreclosure.

Most are of the opinion that this program will be a huge benefit to first time homebuyers, and encourage more to buy a home for the first time.  While this will certainly not provide a huge stimulus to the US Housing Economy, an increase in first time homebuyers may provide the nudge that signifies to long term real-estate investors that the market is turning, and to begin purchasing more properties.