$8000 Tax Credit History
The current $8000 tax credit has been motivating first time home buyers to start looking for homes. However, there is one perceived problem with the program. The money is not available until after closing. This means buyers still have to come up with a minimum down payment of 3.5 %. This requirement prevents many from taking advantage of the current market.
Kentucky recently addressed this issue by creating a $4500 Down Payment Assistance program through KHC. Again, this excludes many Louisville area buyers because of income limitations.
What the industry has been clamoring for is a change to allow buyers to take a loan against the $8000 tax credit and apply it towards the down payment. (Note: It is still tax fraud to try to access the actual credit before closing). This change has been expected for a few weeks. In fact, the National Association of Realtors (NAR) broke a story about it a few weeks ago. Of course, the story turned out to be both premature and incorrect.
Today was the day though. The BIG NEWS the market has been waiting on. HUD announced portions of the $8000 tax credit could be monetized and applied towards closing costs. Hooray! Right?
The Devil is in the Details
Before you call your landlord and tell him where to stick it, let's look at the fine print.
- This is true for FHA loans - No big deal. This tends to be the best solution for first time home buyers with little to no cash anyway.
- This money CANNOT be applied towards the 3.5% down payment requirement. You still have to come up with this money.
- See # 2 -- It bears repeating.
- You access the $8000 tax credit via a loan. The LOAN will most likely have interest and fees associated. While the FHA promises to monitor these fees / rates closely, be sure to shop around if you are interested in this program.
Read the full HUD Announcement
OOPS!
So, the change doesn't really solve the problem mentioned above. Buyers still have to ante up a fairly significant stake to get into the game.
The modification does provide options though. You can use the money to buy down a rate, to negotiate a lower price from the seller (you no longer have to ask for closing costs), or to make a larger down payment. Of course, you always have the option of not taking a 2nd loan and getting the full refund after you buy your new home. Having choices is always better than not. Your lender should be able to help you how to best use this money when you purchase your Louisville home.
Summary
In the Louisville area, this will help some people, but other programs will help more. The $4500 Down Payment assistance programaddresses the primary problem. RHF offers 100% loans in most areas of Spencer County, Shelby County, and Bullitt County including Shepherdsville and Mt Washington. Of course, FHA still allows buyers to use gift money from parents, employers and other government organizations.
When you are ready to buy a home in Louisville or the surrounding areas, please call me (502) 921-3989 and I'll help you find a knowledgeable lender who can give you professional advice.
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Erik Hitzelberger is a licensed REALTOR with RE/MAX Alliance in Louisville. If you need a Louisville Real Estate agent please email me or call 502.921.3989.
I specialize in the following areas of the Metro Louisville Area: Prospect, Middletown, Jeffersontown (J-Town), Fern Creek, Okolona, Shepherdsville, Mt Washington, Hillview, Brooks and Pewee Valley. Click the following links to learn more about Louisville and Bullitt County Real Estate or to Search for Louisville Homes
Erik, when I bought my first home, back in the days of dinosaurs, the idea of a 95%LTV was just getting started in the area I was living at the time. It was for first time home buyers and for primary residences only.
In subsequent years, lenders all over the country loosened standards more and more, than began tightening them in 2006 / 2007.
95% LTV on $100,000, requires only $5,000 down. You've noted 96.5% LTV. That's only $3,500 per $100,000 purchase price. For a serious home buyer, how hard is that?
Andrew - I've done downpayments of 3,0, and 3.5% on the 3 homes I lived in. As someone just starting out, I didn't have much savings and scrapping it up was a challenge. (Since then, I have simply chosen to invest in other places rather than putting more than the minimum down). However, buying that first home was one of the best decisions I made both financially and in life.
I have mixed feelings about your question. Yes, if someone is serious, they should be able to save money over time and come up with the $3500 or so. However, the time constraint is a problem right now because of the incentives, interest rates, etc. Saving $500 / month for 7 months, would mean they miss the $8000 credit and quite possibly have a higher rate. My other problem is I don't really consider 3.5% a significant vested interest. If someone is willing to walk away, destroy their credit, etc 3.5% won't stop them.
I'd prefer to use better initial screening and education as tools to decide who is qualified or not.
Erik - I like the program, it is a good compromise right now, and, if DPA is available it makes it even more enticing.
Mike - I think the $8000 tax credit is great. It encourages people to act in their own best interests. Many first-time home buyers don't understand the benefits of owning a home or just how good the current market conditions are. However, everyone understands cash. Once they get into the home, the rest will come.
Nice recap of the tax credit Erik! Excellent job keeping up with the latest changes which will ultimately help answer any questions from your potential clients.
Thanks John. As you well know, regulations, rates, guidelines, etc seem to change everyday. It is important for buyers and sellers to have the most up to date info.
Nice job of explaining this. I have a buyer right now trying to figure out some of his options, I am going to have him read your blog. Thanks.
Stacey - There certainly is a lot for buyers to think about now. I'm sure you will guide him to the right resources.
Erik, some good points. I guess I wasn't thinking about the time frame for the 1st time homebuyer's credit.
I think for the motivated buyer, for whom a house represents something significant, it doesn't matter if they put 1% or 50% down, the attitude remains the same. There is little or no thought about the credit score, etc. if money gets tight.
You'd probably be able to discover that in the screening process.