Subscribe to this BlogReturn of the no-down payment loan
You may recall that part of the Economic Recovery and Reinvestment Act passed back in February includes a nice fat tax incentive for first-time homebuyers. The new law provides a maximum $8,000 refundable tax credit for first-time homebuyers with modified adjusted gross income of $75,000 ($150,000 for married couples filing a joint return). The hope was that the credit would push potential first time buyers already enticed by lower home prices and record-low mortgage rates to take the real estate plunge.
Well, apparently that’s not working as well as expected, or as fast as expected.
So HUD has upped the ante. Last week HUD announced that the $8,000 credit can now be used for a down payment and closing costs on an FHA-insured loan. The tweak to the program is that instead of waiting for the $8,000 credit when you file your 2009 tax return in 2010 (which doesn’t do you any good coming up with the down payment today) you can now change your tax withholding ASAP to get the $8,000 in your pocket, and FHA lenders have the green light to let you apply that money to the down payment and closing costs.
“The biggest obstacle for first-time buyers is coming up with a down payment,” said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla,” in the official NAHB back slap lauding the change in policy. “We commend [HUD] Secretary Donovan for acting decisively to enable buyers to access the tax credit at the time of closing. This will help to stimulate home sales, stabilize housing and get the economy back on track.”
Hmm. I could have sworn that one of the takeaways from the great real estate wash out was that maybe, just maybe, no down payment loans aren’t such a great idea. That in fact, requiring potential buyers to have a little skin in the game is one of a few important factors in assessing the financial viability of the purchase. It gives the home buyer a vested interest in protecting an investment, that is, paying the mortgage. But with this new twist, homebuyers are essentially able to use $8,000 of taxpayer skin to finance a purchase.
Now to be sure, FHA loans have never carried big down payments; it can be as little as 3.5%, plus the cost of the FHA insurance. But bringing 3.5% to the table is still more motivation to be fiscally responsible than bringing nothing. Yet now thanks to more taxpayer largesse, a first time buyer can take out a $200,000 FHA-backed mortgage, use the tax credit to cover the 3.5% down payment ($7,000) and have another $1,000 for closing costs.
– Carla Fried
I'm sorry Ross. The tax credit does not create equity; it is a second mortgage on the property. The things are called Home Equity loans now, they used to be called what they were: Second Mortgages.
Keep your word, honor your mortgage…right! If only banks played by the same standards. I got two months behind on my mortgage payments due to medical problems. I tried to work things out with Citibank, they refused, and when the representative on the phone told my wife and I we had thirty days to pay up or they would send someone to change the locks on our house, we moved in three weeks rather than take a chance of being locked out of our home. Legally, what the representative said was against the law. Citbank sold the loan to another servicer and now THEY want to make nice. Citibank got bailed out, but the cavalry didn't arrive for us. We now rent and I'll quit mowing the grass at my former home next week when the home LEGALLY goes into foreclosure. I hope they choke on it.
I say Double the Tax Credit Offer to All Homebuyers, and see the Housing Market take a leap forward which will spur the economy!
We have this in Australia. Called First Home Owners Grant. It just got boosted by $7K (to $14K). That has pushed up lower end house prices by more than $7K (possibly as much as $35K because the buyers can use it as extra deposit to borrow more), so all it has done is transferred government + home buyer debt to home sellers.
In the end it doesn't help new home buyers, it helps those selling cheaper homes (including development companies).
1) In many states, people are only legally required to pay back the amount the house is worth. The lender shares the risk of the house's market value falling below the amount of the mortgage. That's the way it ought to be everywhere. It would make lenders a lot more responsible.
2) I think this is a complete misunderstanding of the problem. The problem wasn't that people put no money down, it was that they had little if any equity. That 8,000 tax credit used as a down payment creates homeowner equity. It doesn't matter whether it came out of mom and dad, the taxpayers or their bank account once the house is purchased.
I agree. I'm not surprised that the incentive program didn't entice as many buyers as expected – 15% to 20% is a lot of money to come up with (especially on the East Coast, it can easily be over $40,000). Plus, people are still afraid of layoffs, so I'm sure even people financially ready to buy are hesitant. But it's still early in the year and kids aren't aout of school yet. Most home sales occur in the summer, so maybe the market will pick up.
No Money, No Income, No Risk loans were a large part of the issue as someone who has seen this first hand working for mortgage firms and underwriting loans I would hope we stay away from the no money down loans. If you cant afford a down payment or two-three months reserves after closing (Yes I think Banks should verify that client has 2-3 months minimum payments in a bank account at closing – EVEN if its a requirement at bank that is doing the mortgage) and only way to get to this money is too show you are unemployed, or have housing repair that needs to be done. If you can afford reserves what happens when hot water heater breaks? no water or no mortgage payment? Just a thought
That's great to hear. We are in this mess because of the no down payment loan and now we are going right back to it. I don't think we are ever going to learn. Economy is not turning as fast as we would like it so lets go and make it worse. Good long term or should I say short term strategy.
Here we go again. How many of those people will be enticed to buy houses they can't afford because they don't have the savings. I certainly would not lend $200,000 to any family that can't come up with $8,000 from savings.
Thanks for the post. Well said.
Of course, it does say something that people cannot be expected to honor the legally binding contracts they enter into when they sign a mortgage agreement. Having skin in the game should not be the motivation to do what's right. Doing what's right should be the motivation. Pay your mortgage. Honor your word. You are responsible for the consequences of your actions.
I think that it is a great way to help first time home buyers buy there first home. If you are honest with yourself and loan officer and only buy a home with a morgage payment that you can comfortably afford instead of what you are approved for, I don't see why this would cause a problem. Thanks to the 8,000 I can use for a down payment my husband and I are buying our first home. We will be able to make our payments and if we didn't have the 8,000 it would just take us longer to get the down payment, which isn't good for jump starting our economy.