The American Recovery and Reinvestment Act of 2009 provided a tax credit in an effort to energize the battered housing markets by rewarding first time homebuyers with a tax credit of up to $8,000 if they purchase a home between the beginning of the year and December 1st, 2009. The actual amount of the tax credit available depends on the purchase price of the home. While previous versions of this tax credit required repayment of the credit, effectively making it an interest-free loan, the 2009 version amounts to “free money” for individual taxpayers making $75,000 or less, and joint filers making up to $150,000. Since the introduction of the Federal tax credit earlier this year, many potential beneficiaries have struggled with how to use the proceeds of the tax credit to purchase a home. The singular challenge that has prevented this stimulus from having a greater effect has been the “chicken and egg” effect. Many first time home buyers need the tax credit proceeds for down payment purposes in order to qualify for mortgage loan financing under today’s tightened credit standards, but the credit is only available once a home has been purchased.
Some states took a proactive approach to this challenge by providing “bridge loans”, or advances on the value of the tax credit, to home buyers. Now, we can add the State of Texas to the list of participating states. On July 7th, the Texas Department of Housing and Community Affairs (TDHCA) announced the release of $7.5 million in funding for two new loan programs intended to provide an advance of the federal home buyer tax incentive.
A large part of this funding ($5 million) goes to fund the 90-Day Down Payment Assistance Program (DPAP) which will offer 90-day interest-free loans to qualified purchasers in amounts up to 5% of the home purchase price, with a cap of $7,000. This program should benefit most first time home buyers as the FHA loans most often utilized by these borrowers require a buyer contribution of 3.5% of purchase price. Once the home is purchased, the borrower can file an amended 2008 Federal Tax Return to claim the tax credit. Loans not repaid within the 90-day period will be restructured for principal and interest payments over two years at a 10% interest rate. You should check with your mortgage lender to see if they have access to this program.
Another program introduced by the State was the Mortgage Assistance Program, which provides loans up to 5% of purchase price with a $6,000 limit. These loans have a 120-day interest-free period. This program is only available in conjunction with the Texas First Time Homebuyer or Texas Mortgage Credit Certificate (MCC) programs already in place and sponsored by TDHCA. Both of these programs have lower income limitations than the Federal tax credit, so will likely appeal to a smaller number of first time home buyers .
Both of these programs require the homebuyer to complete a homeownership class and pay a $250 fee in addition to their traditional closing costs. Lastly, potential borrowers should know that the definition of first time home buyer is somewhat liberal and includes anyone who has not owned a principal residence for the past three years prior to the purchase of the subject property.
This program makes purchasing a home far more appealing, as it is always good when you can access free money that helps you build immediate equity in your home. Keep in mind, these programs make no exceptions for poor credit, so be sure to know your credit score when you apply for a mortgage. Nevertheless, with mortgage rates near historic lows, home affordability near historic highs, and a ,imited time in which to tap some of these incentives, home bueyrs should not wait to act.
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