Free Money: Can the $8,000 Home Buyer Tax Credit Be Used as a Down Payment on an FHA Loan?
By Gina PogolMortgage Credit Problems Columnist
Ellis Asks: Hi Gina, I'm a first-time home buyer who used to have really bad credit but think I might be able to get an FHA loan. I have heard that some people are buying homes using their $8,000 tax credit for a down payment instead of getting it when they file their taxes. Will an FHA or bad credit lender let me do this?
Gina Says: First, the bad news. While HUD has no problem with you working with agencies (right now about ten states have programs in place) who will advance you the $8,000 that you can apply towards your down payment and closing costs, you still have to come up with FHA's required 3.5% down payment. That's right, there is no "zero down" financing to be obtained by using this credit. But they'll let you make a bigger down payment. Yippee. In most cases it would make sense (assuming that you can qualify for an FHA loan) to get the sellers to pay your closing costs (it makes no difference to them if they pay 5% for your costs or take a 5% price reduction). Then file those taxes and put that $8,000 in a nice safe emergency fund. Unless history fails to repeat itself ever, you're gonna need it.
If you can find a bad credit lender or qualify for conventional financing, I did find a couple who came up with a rather, um, creative way to use the credit as a down payment. They took their tax documents to a tax preparation firm, received a refund advance loan (which is not a cheap way to borrow), put the money in their savings account and let it sit for a couple of months (of course paying interest on the money the whole time). Then they had seasoned funds that they could show in their account, which could then be used as a down payment or for closing costs.
But that feels kind of icky. And if you can't manage to save even 3.5% for your down payment, maybe you should rethink home ownership. It takes discipline to save, it takes discipline to plan for emergencies (and we all have them), and it takes discipline to make a mortgage payment on time every month. If you're not at that point yet, start now. It gets easier with practice. Then you can have your home and your $8,000 credit too.
About the Author
Gina Pogol has over a decade of mortgage lending experience, in addition to practice as a paralegal for a bankruptcy attorney, and as a business credit consultant for Experian. She is also certified to underwrite Fannie Mae loans. She earned her BS in Financial Management from the University of Nevada.
All information provided “as is” for informational purposes only, and is not financial advice. MortgageCreditProblems.com, its affiliates, and any of the independent providers of information on this site shall have no liability for any informational errors or incompleteness, or for any actions taken in reliance on information contained herein.
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