A congresswoman and the White House are separately pursuing innovative potential solutions to two of the biggest impediments that stand in the way of most first-time home buyers: lack of cash for down payments and closing costs, and sub-par credit scores that virtually guarantee unaffordably high interest rates and mortgage fees.
Here is a quick update on two of the most intriguing ideas under consideration: On Capitol Hill, Sen. Debbie Stabenow (D-Mich.) is drafting legislation that would perform financial alchemy by converting federal income tax credits into cash for down payments and closing fees -- spendable either by first-time home buyers or by their mortgage lenders.
Stabenow's bill, scheduled for introduction in mid-March, would work like this: To qualify, first-time buyers would need to have moderate household incomes -- no more than what would qualify for the 27 percent federal income tax bracket. Married buyers could qualify for up to $6,000 in federal tax credits, single buyers for up to $3,000.
What exactly is a tax credit? Think of it as a net dollar-for-dollar subtraction off the bottom line of your federal tax return. If you owed $8,000 in federal taxes for a given year and you were handed a $6,000 tax credit, that would cut your net taxes to just $2,000. If you had already paid the $8,000 in withholding over the course of the year, you would get a refund check for $6,000 from the Treasury.
Tax credits are far more valuable than tax deductions. When you deduct $1,000 in mortgage interest, your net tax reduction varies with your tax bracket. In the 27 percent bracket, a $1,000 deduction is worth $270 at the bottom line. But a $1,000 tax credit saves you a full $1,000.
Stabenow's bill would seek to turn tax credits into immediately spendable down-payment and closing-cost cash. To do so, it would give qualified first-time buyers the option of either handing over their credit to their lenders or using it later to reduce their own personal income taxes.
For example, if a husband and wife qualified for the $6,000 maximum, they could transfer their credit to the lender at settlement as part of their down payment or closing expenses -- just as if it were cash. The lender could then use it to offset its own corporate tax liabilities.
Alternatively, if the couple had saved or borrowed enough for the down payment and closing, they could keep the credit and use it to reduce their federal income tax during their first year of homeownership.
Either way, Stabenow says, the proposed home-buyer tax credit would be far more liquid than any other federal credit.
"With a normal tax credit," she says, "home buyers have to wait until tax time before they see the money. That is not a lot of help for a working family that can't save enough to cover the down payment and closing costs but could otherwise afford the monthly payment."
Key operational details of Stabenow's plan, such as certification of eligibility for first-time buyers and creation of a system that would allow lenders to accept tax credit transfers, have not yet been worked out, according to aides. Stabenow expects bipartisan co-sponsorship of the bill when it is introduced in March, including the backing of at least one Republican on the tax-writing Senate Finance Committee.
A second innovative program under development for would-be home buyers: creation of a new, federally insured "subprime" mortgage program for consumers with troubled credit and high debt ratios who might otherwise end up in the grasp of ultra-high-cost "predatory" lenders.
The new loan would be insured by the Federal Housing Administration and would seek to offer a better deal than generally available in the private marketplace. The idea was proposed for the first time last month in President Bush's fiscal 2004 budget. The administration expects it would be a significant new force in the market that includes people with troubled credit and first-time buyers.
Who would qualify for the loans? First and foremost, people with relatively low credit scores, some of which may be artificially depressed as the result of erroneous information or minimal prior use of traditional credit. Recent immigrants, members of certain minority groups and young households frequently find themselves in these situations.
Second target: people with heavier consumer debt-to-income ratios than are acceptable under standard FHA underwriting rules. The new subprime program would search for diamonds in the rough among borrowers with low credit scores and high ratios, folks who look riskier than they truly are. It would offer low down payments but slightly higher interest rates than regular FHA loans. But the new program would also feature a "good performance" discount: After two years of on-time monthly payments, the monthly FHA insurance charge would be reduced, effectively lowering the rate.
Kenneth R. Harney's e-mail address is email@example.com.