Creative Way to Tap Home Buyer Tax Credit

The extension of the tax credit gives buyers, sellers and industry professionals a bit more time to stabilze the housing market.

MORTGAGE, EXPERT, MICHIGAN, BIRMINGHAM, BLOOMFIELD, DETROIT, ROCHESTER, ROYAL OAK, TROY

The First Time Home Buyer (FTHB) Tax Credit has been extended with new provisions for those that already own a home. So, I guess we need to start calling it the Home Buyer Tax Credit (HBTC).  If you have any questions on qualifying for the tax credit, be sure to read one of my earlier posts.

Combined with bargain basement house prices, this could be the best opportunity to buy a home in many of our lifetimes.

The challenge is, there are many that would like to buy a home, but don't have a down payment to do so. 

I still get calls from prospects that want to know how to use the Home Buyer Tax Credit for the down payment on the purchase of a home.  In Michigan, there's no way to get the credit at the closing table to use for the down payment.  So, buyers have to get the down payment in other ways and then AFTER closing, file for the tax credit with the IRS.

Now, let's look at some ideas to get around the issue of the down payment so a greater number of people can take advantage of the tax credit for buying a home.  By the way, I'm going to make you wait until the end of this post to go over a very CREATIVE (but 100% legal) way to buy a home using the HBTC.

First off, let's dispel some rumors & myths about zero-down programs.  There are really only two mortgage programs left that require no down payment:

• VA Guaranteed Loans - these are from the Veteran's Administration and you must have served in one of the nation's branches of the military to be eligible.  The VA mortgage program is a great way to finance a home if you're a veteran.


• Rural Housing Development Authority Loans (RDA) - these loans are for properties in rural areas only, but are another great way to finance a home.

 The lowest down payment available to most home buyers is the department of Housing Urban Development's FHA program.  FHA requires only a 3.5% down payment, so we're going to focus on meeting that requirement to buy a home. 

Where can a potential home buyer find the down payment funds for an FHA mortgage?

• GIFT - FHA allows the down payment, and all funds to buy a home, to be from any blood relative or someone that has a vested interest in the buyer's well-being.  "Vested interest" is a pretty vague statement, so check with a lender to confirm someone you may have in mind that's not a blood relative.  What's interesting about gift funds is that there's really nothing to stop a relative from borrowing the gift funds from a credit card or getting a loan.  Again, check with a mortgage expert before acting on this, because lenders can have different interpretations of this.


• BONUS - An employer can choose to give a valued employee a bonus and that bonus can then be used for the down payment.  A bonus can also be given sooner than normal so that a buyer can purchase a home.


• RETIREMENT PLAN LOAN - most 401(k), 403(b), IRA, etc retirement programs, allow a loan to be taken out for the purpose of buying a home.  A loan is often a better way to go then taking a hardship withdraw that incurs a tax penalty.


• GRANT - there are many organizations that will give a home buyer a grant to buy a home.  Check with friends & family for the availability of these programs.


• LOAN AGAINST AN ASSET - just as one can use a loan from a retirement asset for a down payment, so can you also use the proceeds from a loan against any asset you own.  Just make sure the asset's ownership & value is documented and that you don't get the loan from a relative or interested party.


• - SALE OF ASSET - you can sell a motorcycle, boat, car or just about anything and use the funds for a down payment.  Just make sure the asset's ownership & value is documented, you'll also need a bill of sale and a copy of the check from the buyer of the asset.


• LIFE INSURANCE POLICY - many life insurance policies allow for borrowing against their built up cash value and these funds can be used for a down payment.  There are also organizations out there that will buy your policy off you, but you'll want to check with an attorney or financial planner before any such sale.


• HOME EQUITY LINES OF CREDIT - if you currently own a home and are looking to buy your next one, you can tap into the equity in your current home for the down payment on the next one.  Just be sure to check with a mortgage expert before acting on this to be sure you meet all qualification requirements for the new mortgage.

Ok, so that's the traditional sources to come up with a down payment for a home purchase, using FHA financing.  Just be sure the seller has owned the property for a minimum of 90 days, as this is an FHA requirement with zero flexibility.

Now let's discuss a very creative way to use the Home Buyer Tax Credit to buy a home. 

Ever heard of a land contract?  It's a contract between a buyer and a seller to buy the seller's property - basically, the seller acts as their own bank and more or less gives the buyer a loan.

Well guess what, land contracts qualify for the HBTC!  That allows for a very interesting way to buy a home with little money out of pocket.  An example will be worth a thousand words:

• Seller has a house that they're having a hard time selling as they can't compete with foreclosure sale prices.  So, the seller offers up land contract terms to potential buyers.


• An interested buyer makes a land contract offer on the property. 


• After agreeing on a price, interest rate & monthly payment, the seller takes whatever down payment the buyer has (could be very small), has the buyer pre-approved by a trusted mortgage expert (very important) and executes the land contract transaction. 


• A clause in the land contract gives the buyer only 90 days to come up with an additional $8,000 deposit.  This money will come from the Home Buyer Tax Credit.  If the buyer files for it right away, that's all the time it should take to receive it. 


• Once the Home Buyer Tax Credit monies are received by the seller, the buyer can then apply for a mortgage to pay off the land contract.


• With FHA financing, the seller can even give a credit for up to 6% of the sales price towards the buyer's closing costs, prepaids & escrows.


• Buyer effectively can purchase the property with almost zero out of pocket!

Was that idea worth waiting until the end of this post to read?  Maybe. 

There'll be a lot of people and industry professionals that will write this land contract concept off as too tough to deal with.  Well, we're in a tough market and the more ideas the better. 

Is this a perfect solution?  No, but show me a better one.  Some of the issues with this land contract concept:

• The buyer doesn't get the tax credit because of an outstanding tax lien.


•  The buyer gets the tax credit, but doesn't deliver it to the seller.


• The only interested buyer could have credit issues.


• The seller has a mortgage on their property with a Due-on-Sale clause.


• The seller could be upside down in their home and need a short sale.


• The seller could stop making their mortgage payments and let the property go to foreclosure, leaving the buyer in the lurch.

I have solutions for all the above issues.  Anyone interested though, will have to contact me to discuss.

There are issues that no one has any control over:

• Buyer could lose their job after land contract closing and not be able to qualify for the mortgage.


• Lender won't approve the short sale needed to make the deal work.


• Property values continue to drop and property won't appraise for needed amount.


• The world ends on 12-21-2012.

No real estate transaction is a sure thing anymore.  We all just do the best we can. 

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In addition to real estate lending, consulting and investing, Drew Sygit writes & speaks about the mortgage & real estate industries.  He holds mortgage industry designations CMPS, CMC, CRMS, CMLO, CALO, has an MBA and is an approved industry instructor.  He's presented, spoken and/or written for HUD, Financial Planning Association, Financial Planners Association of Michigan, Michigan Association of CPA's, Institute of Continuing Legal Education, Oakland Real Estate Investors Association, North Oakland County Board of Realtors and numerous industry publications.  For speaking engagements and questions he can be reached at dsygit@TheLendingEdge.com.  He also publishes his own blog:  http://drewsmortgagenews.blogspot.com.