$8,000 homebuyer credit: What you should know

A change to the tax-credit program for first-time homebuyers means that money is more readily available when it's needed. Find out if it can help you.

As the historic housing plunge rumbles on, Uncle Sam is offering a fresh incentive to get first-time homebuyers off the sidelines. U.S. Housing and Urban Development Secretary Shaun Donovan unveiled a policy change in late May that would provide homebuyers with quicker access to a recently enacted first-time homebuyer tax credit. Buyers would be free to put the funds toward closing costs and a portion of their down payment. The federal government hopes that the measure will stimulate housing demand, something desperately needed to help mop up the glut of unsold inventory.

Here are five things you need to know about the policy change:

1. Less waiting: President Barack Obama's $787 billion economic stimulus plan — which was signed into law in mid-February — included a tax credit worth up to $8,000 for qualified first-time homebuyers. These buyers, however, couldn't get their hands on the cash until after tax season. The new HUD initiative would enable these borrowers to obtain short-term loans allowing them to tap the tax credit before going to closing. "Families will now be able to apply their anticipated tax credit toward their home purchase right away," Donovan said in a news release. "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."

2. Initial 3.5 percent: The measure, however, comes with several key limitations. First, it applies only to Federal Housing Administration mortgages. More importantly, the short-term loans can't be used to pay for the minimum 3.5 percent down payment that FHA loans require. Instead, the loan can be used for closing costs and to finance the portion of the down payment that exceeds the 3.5 percent threshold. The administration opted to have borrowers come up with the initial 3.5 percent themselves to ensure that buyers have "some skin in the game," which may reduce the likelihood of default, says Howard Glaser, a mortgage industry consultant and a former HUD official. In so doing, federal officials had to strike a delicate balance. "On the one hand, you want to make sure that homes are affordable to first-time homebuyers, but you don't want to set the bar so low that people who can't afford homes are buying homes," Glaser says.

3. Closing costs: Despite these limitations, the benefits of the program should not be overlooked, says Guy Cecala, publisher of the trade publication Inside Mortgage Finance. "The down payment is probably the biggest chunk of change you have got to pay (when purchasing a home), but it is not the only thing," Cecala says. "Even with a typical FHA loan, there are probably $3,000 to $4,000 in closing costs, title, insurance and (additional fees)." By chipping in toward such costs, the program "could just grease the wheels for a couple more people to get into FHA," says Keith Gumbinger of HSH.com. At the same time, borrowers who use the short-term loan to increase the size of their down payment could obtain a lower mortgage rate.

4. Impact? Cecala doesn't believe the new measure is a game changer for the battered real-estate market. "I think it will be helpful to a first-time homebuyer," he says. "Is it going to generate a lot more housing activity? No." Cecala argues that would-be buyers remain on the fence largely out of a concern that a home will lose value after the purchase. Such concerns will continue with or without the policy change.

Glaser, however, is more optimistic. "This is the missing piece," he says. "Home prices are coming down significantly in some markets, interest rates at historic lows, and now, by addressing cash on the table at closing, I think that borrowers who wouldn't have otherwise been in the market are going to feel more confident about investing in a home."

5. State efforts: The details of the HUD initiative come after several states have enacted similar programs. Missouri, for example, has had a program in place since January that enables homebuyers to put the tax credit toward closing costs or their down payment.

****This article was written by Luke Mullins for U.S. News & World Report.

How to get the best mortgage rates in the country? Buy new

As mortgage rates fall to near historic lows, some homebuilders are offering even lower interest rates in an effort to lure buyers during the slow spring selling season.

The latest sales promotion: Lennar Corp. is offering a fixed 3.625% rate over the life of a 30-year fixed rate mortgage. The deal is besting average rates that have fallen below 5% nationwide, but it comes as other builders are reporting mixed results from similar incentives.

Hovnanian Enterprises Inc.'s recent offer of a 3.99% rate sparked "underwhelming" interest from homebuyers, says Dan Klinger, president of the builder's mortgage operation. "It wasn't like we needed crowd control," Klinger says.

Earlier this year, luxury builder Toll Brothers Inc. was offering a 3.99% interest rate in many of its developments nationwide, but today that rate is no longer available nationally. Toll executives said that the promotion boosted traffic to its Web site, but the low rate alone hasn't been enough to break weak consumer confidence that is still weighing on the market.

Bargain mortgage rates are the latest sales strategy from builders struggling to sell homes. Mounting unemployment continues dogging the sector, because people without jobs, or those afraid of losing one, are unlikely to purchase, no matter how low the rate.

Since the downturn began, builders have tried everything from free tropical vacations to subsidized closing costs in order to move inventory. They then cut costs and even offered layaway plans for down payments.


For homebuyers, the low mortgage rates from the builders represent significant savings. But be wary of the fine print: Lennar is offering the 30-year rate "on select homes," and the loan amount cannot exceed $417,000. The minimum credit score is 700, which is a relatively high score in the current environment. In addition, it could be hard for buyers to come up with the minimum 10% down payment that Lennar requires to qualify for the 3.625% rate.

The builders' low rates may help first-time homebuyers, "but it's not going to goose the trade-up market," says Thomas Lawler, a housing economist. "That's because most trade-up buyers use the equity from their previous home for a down payment, and that equity often doesn't exist anymore."

KB Home is one builder that isn't chasing buyers with low mortgage rates, for now. Instead, the Los Angeles-based builder is focusing on offering smaller houses that are competitively priced with foreclosed houses. The strategy seems to be helping KB, which reported last month that its sales improved more than some analysts expected.

While some builders acknowledge that price cuts are the most effective way to move inventory, such cuts could cause buyers who have already bought a house at a higher price to walk away from their deposits.

It can be costly for builders to offer the low rates because the companies typically pay mortgage investors cash upfront in exchange for the low interest-rate loans. Federal regulations limit how much the builders can contribute to buy down mortgage rates. Currently, if a homebuyer puts down 5% or less, the builder is limited to incentives worth 3% of the sales price, Klinger says. For down payments of 10%, the limit climbs to 6%.


*This article was written by Michael Corkery and Dawn Wotapka of The Wall Street Journal.

Pending home sales rebound in April due to first-time buyers

Les Christie CNNMoney.com staff writer
On Tuesday June 2, 2009, 11:02 am EDT

The number of home sales contracts signed in April continued to bounce back from record lows hit last winter, according to a widely watched industry report. This is the third consecutive month of gains.

The Pending Home Sales Index from the National Association of Realtors rose 6.7% in April after jumping 3.2% in March. That was far above the forecasts of experts surveyed by Briefing.com, who predicted a 0.5% increase. The index was 3.3% higher than 12 months earlier.

Pending home sales are a forward-looking indicator since many of the contracts don't result in completed deals for many weeks or months.

"Housing affordability conditions have been at historic highs, but now the $8,000 first-time buyer tax credit is beginning to impact the market," said Lawrence Yun, NAR's chief economist in a prepared statement. "Since first-time buyers must finalize their purchase by Nov. 30 to get the credit, we expect greater activity in the months ahead, and that should spark more sales by repeat buyers."

The credit allows many homebuyers who have not owned a home in the past three years to claim up to an $8,000 refund on their taxes. The result has been a flood of first-time homebuyers even into lukewarm markets like Indianapolis, according to Glenn Bill, an agent there for Century 21 Sheetz.

"Our first-time homebuyer market is exploding," he said. "That's one good thing to come out of the stimulus package."

Low prices

Also driving sales is falling home prices. The national median home price is down more than 30%, according to the S&P/Case-Shiller Home Price Index. That has drawn many bargain-hunting homebuyers back into the market.

Mortgage rates in April were also very favorable, averaging well under 5% for a 30-year, fixed-rate loan. However, rates have risen recently.

All those factors have raised NAR's index of affordability to near record highs. It went up to 174.8 in April from an upwardly revised 171.9 in March, its second highest monthly reading ever. This index measures the relationship between home prices, mortgage interest rates and family income.

Regionally, the biggest improvement in home sales came in the Northeast, where they shot up 32.6%. Sales ramped up 9.8% in the Midwest, inched up 1.8% in the West and cooled 0.2% in the South.

Also boosting sales, according to NAR president Charles McMillan, a Coldwell Banker broker in Dallas, is that some states and non-profit agencies are helping first-time homebuyers come up with down payments.

"Some states are offering bridge loans that allow first-time buyers to use the tax credit for down payment and closing costs, but there are many other local government and nonprofit programs available to buyers, depending on location," he said.

The Department of Housing and Urban Development announced last week an additional program that enables homebuyers to add the tax credit to their down payments on FHA mortgages at closing, which should also help to enhance affordability and give a push to home sales.