The WeBuyTucsonHomes Blog

One week after allowing the new $8,000 tax credit to be used in helping with a down payment for first time home buyers, Federal officials reversed course and declared the tax credit could not be monetized.  The Arizona Republic reports

Federal officials on Monday reversed an earlier decision to allow first-time home buyers to use an $8,000 tax credit to borrow the down payment on a home.

A week earlier, U.S. Department of Housing and Urban Development Secretary Shaun Donovan had told the National Association of Home Builders that HUD would let banks and local governments offer short-term “bridge loans” to cover the down payment for first-time buyers eligible for the tax credit. The loans would have been available to applicants for federally insured mortgages such as Federal Housing Administration loans.

Lenders, home builders and real- estate agents had reacted favorably to the bridge-loan proposal, saying it would open up the housing market to more first-time buyers.

However, not everyone was in favor of using the tax credit as collateral on a down-payment loan.

“That tax credit should be savings, not debt,” said Patricia Garcia-Duarte, executive director of Neighborhood Housing Services in Phoenix.

Garcia-Duarte said the proposal too closely resembled a now-illegal practice known as seller-funded down-payment assistance, which allowed a home’s seller to “gift” the down payment to a specific buyer through a non-profit organization.

Phoenix loan originator Dean Wegner was among the housing-industry professionals who had expressed enthusiasm about the bridge-loan plan.

Wegner said the program would have boosted local home sales, but he added that the bridge loans likely would have come with a high interest rate.

The loans also could have created income-tax issues, according to the IRS officials who shot down HUD’s plan.

Still, Wegner remains optimistic that the government will seek other means to circumvent the FHA’s required 3.5 percent down payment.

“They will probably come out with a zero-down FHA loan starting January 1, once the $8,000 goes away,” he said.

The government should not allow this tax credit to be monetized in the form of a loan. From above - “the credit was to be monetized via a short term loan from the local banks and governments;” offering short term loans with the promise of repayment coming from next years tax return sounds like many of the “Pay Day Loan” centers business plans.  Banks are already struggling with loans that homeowners and consumers can not repay, allowing this credit to be monetized would only allow new homeowners to struggle with more debt with exhorbinant interest rates.  One can only imagine the surprise when expecting large tax returns(read vacations) for the next few years only to have it swiped away by the bank or local government as repayment for a loan.

Edit: The AZ republic has posted a note stating the credit can still be applied directly toward home purchase costs when using an FHA-insured mortgage. However the person will still have to come up with a 3.5% down payment.