FHA Adds Down-Payment Options to Housing Credit

First-time home buyers can now use a federal tax credit worth up to $8,000 to help cover a down payment and other upfront costs if they are taking out a loan backed by the Federal Housing Administration.

The $8,000 tax credit was made available months ago as part of the Obama administration's effort to motivate would-be buyers and jump-start the housing market.

But home buyers cannot claim the tax credit until they close on their homes, and then they must wait for weeks, possibly months, after filing their tax returns to receive the money.

To help buyers who need the cash upfront, FHA is allowing private lenders, state housing agencies and some nonprofit groups to offer loans secured by the tax credit.

The Department of Housing and Urban Development, which includes FHA, estimates that this tax credit advance will enable tens of thousands of families to buy homes.

"What we're doing today will not only help these families to purchase their first home but will present an enormous benefit for communities struggling to deal with an oversupply of housing," said HUD Secretary Shaun Donovan, who unveiled the details yesterday at a National Association of Home Builders conference in Washington.

The tax credit is available only for purchases made this year before Dec. 1. Eligibility is limited to people who have not owned a home in the previous three years. Those buyers may be able to collect up to $8,000, depending on their incomes.

Under HUD's plan, buyers cannot use the tax credit advance to pay the 3.5 percent down payment FHA mortgages require if they get the advance from a private lender. They can use it to add to that down payment or help defray closing costs.

It is unclear how many private lenders will participate in the program.

But buyers who turn to housing agencies can put the tax credit advance toward the 3.5 percent down payment as well as other purchasing costs, HUD officials said. Currently, Colorado, Delaware, Idaho, Kentucky, Missouri, New Jersey, New Mexico, Ohio, Pennsylvania and Tennessee have similar programs.

Although buyers can only qualify for a tax credit once they close on a house, they can determine in advance how large a credit they will receive by providing tax documents to their lenders or local housing agencies, a senior HUD official said in a background briefing with reporters.