Well, that seems to be the big question these days.  When the $8000 First Time Home Buyer Tax Credit was first introduced as part of the American Recovery and Reinvestment Act of 2009 that was signed into law on February 17 of this year, the intent was to have the qualifying home buyer redeem the tax credit when they filed their income tax return following the home purchase.  For some home buyers this meant that they may not see the benefit for nearly a year following purchase (unless they filed an amended return).  While the prospect of receiving a credit of 10% of the purchase price of the home, up to $8000, was appealing, it did not really help those prospective home buyers who lacked enough funds for a down payment.

In the middle of May, the National Association of Realtors (NAR) announced that plans were in the works that would allow the tax credit to be applied toward down payment and other up front purchasing and closing costs.  Much excitement ensued but the details of how the process would work remained unclear.  Some theorized that lenders would provide a ‘bridge loan’ to the prospective buyer for the amount of the tax credit, and then be reimbursed with the proceeds of the credit.  Some lenders were uncomfortable with the risk of the reimbursement and the fact that the buyers did not have enough ’skin in the game’ which has been seen as a contributing cause to the current epidemic of foreclosures.  Within a week or so the offer to ‘monetize’ the tax credit was rescinded.  Many thought that was the end of the story.

On May 29 Shaun Donovan, the Secretary of the Department of Housing and Urban Development (HUD)announced that a process HAS been established for monetizing the tax credit for qualifying buyers.  In a nutshell, what appears to be happening is that buyers can apply their tax credit amount toward the up-front purchasing costs of an FHA-insured home.  Current law does not allow lenders to monetize the tax credit to meet the minimum 3.5% down that buyers are required to pay, but it can be used for additional down payment or to apply toward other purchasing or closing costs, or perhaps buy down the interest rate.  The revised rules allow buyers financing through state Finance Agencies and certain non-profits to use the credit up front for down payment assistance via secondary financing through the HFA or nonprofit.

“We believe this is a win for everyone” says Donovan.  “Today the Obama administration is taking another important step toward accelerating the recovery of the nation’s housing market.  Families will now be able to apply their anticipated tax credit toward their home purchase right away.  At the same time, we are putting safeguards in place to ensure that consumers will be protected from unscrupulous lenders.  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.”

To be sure, the real estate and lending arenas are in a state of flux and the rules can change at a moment’s notice.  Be sure to consult with a trusted mortgage professional to see how this benefit might apply to your situation, and to see if or how the lender is participating in the monetization of the first-time home buyer tax credit.