First-time homebuyers can use tax credit for down payment

It’s a good time to be a first-time homebuyer, thanks to attractive loan programs and a generous $8,000 income tax credit

Recently, the tax credit was loaded with new angles allowing first-time buyers all or part of the down payment, a stumbling block for about 50 percent of all first-time buyers.

As of May 29, the $8,000 federal tax credit can be used as “the down payment or closing costs” for buyers who apply for mortgages insured by the Federal Housing Administration before Dec. 1.

A first-time buyer, as defined by the Internal Revenue Service, is anyone who has not owned a principal residence for three years prior to the purchase. For married taxpayers, the law tests the home-ownership history of both the homebuyer and his or her spouse.

For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time homebuyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time homebuyer.

In addition, first-time homebuyers must purchase the property from a source unrelated to them. For example, they cannot purchase the house from a spouse, parent, grandparent or child, or acquire the property by gift or inheritance, and obtain the tax credit.

Tom Lasswell, senior loan adviser at Guild Mortgage in Lynn­wood, said all local lenders are sorting out how all the details will work, but that the impact of the news and the implementation of the program will be a huge boost to the regional housing picture.

According to Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, the idea to “monetize” the tax credits allows them to be immediately turned into cash, rather than waiting several months after the closing date of the transaction for the credits to be processed. The credit amount from the IRS is the lesser of 10 percent of the purchase price of the dwelling or $8,000.

There are income limits attached to the $8,000 first-time credit. A phase-out of the credit begins when the taxpayer’s modified adjusted gross income exceeds $75,000, or $150,000 if married and filing jointly. The credit is eliminated completely when the taxpayer’s income reaches $95,000, or $170,000 if married filing jointly. Taxes owed by or refunds due to the taxpayer are factored into the calculation.

Modified adjusted gross income, or MAGI, is defined by the IRS. To find it, a taxpayer must first determine adjusted gross income. That’s the total income for a year minus certain deductions (known as adjustments or above-the-line deductions). The adjusted gross includes all forms of income: wages, salaries, interest income, dividends and capital gains.

Donovan said some mortgage companies, which do not have banking deposits to tap, will need a few weeks to prepare documentation for what will essentially be secured personal loans. Plus they’ll need to locate a source of funds for their advances. Donovan advised that first-timers need not curtail their shopping because by the time they’re ready to get a mortgage and go to closing, more local FHA-approved lenders will be actively in the market.

“The biggest obstacle for first-time buyers is coming up with a down payment,” said Joe Robson, chairman of the National Association of Home Builders. “Enabling buyers to access the tax credit at the time of closing will help to stimulate home sales, stabilize housing and get the economy back on track.”

Next week: Other options involving the new $8,000 tax credit.

Tom Kelly’s book “Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com.