First-Time Home Buyer Tax Credit + Down Payment = Confusion

We have previously written about the $8,000 tax credit for first-time home buyers. It's a nice little incentive for anyone who plans to buy a house within the coverage date (before December 1, 2009).

But lately, there has been a lot of confusion about the tax credit being used as a down payment at closing. It started as a comment from a HUD official, and then it blew up all over the real estate blogs. Now it has a lot of folks scratching their heads. Can the first-time home buyer tax credit be used up front, in the form of down payment assistance? As of right now, the answer is no. Here's a brief history of where all the confusion came from.

• This program was first introduced back in 2008, as a $7,500 tax credit for home buyers. At first, it wasn't a true "credit" because you had to pay it back over a 15-year period. So it was more like a 15-year interest-free loan.
• In 2009, a new version of the tax credit was introduced. This one had two new benefits for first-time home buyers. First, the amount had been increased to $8,000. Secondly, the payback requirement was removed, so you no longer have to pay it back. Yay!
• In May 2009, Shaun Donovan (secretary of HUD) spoke to a group of real estate professionals about the tax credit. He said they were thinking about changing it yet again to grant the credit up front, so first-time buyers could put it toward their down payments at closing -- at least on FHA home loans.
  
• Mr. Donovan's comments were somewhat unofficial in nature, but that didn't stop them from spreading all over the Internet. Thousands of real estate agents (who failed to do the proper research) started blabbing about this on their blogs, and now half the country thinks it's a reality.
• But as of right now (May 22, 2009), the first-time home buyer tax credit cannot be put toward a down payment, because you receive it when filing your next tax return -- after you have purchased the home.
  

The question now is, can the HUD / FHA officials put the genie back into the bottle at this point. Or will there be such a demand for this to happen that it actually does happen? Time will tell. And we will tell you all about it when the time comes.

I hope this answers any questions you had about the tax credit being used for down payments by first-time buyers. We will keep a close eye on this and let you know if anything changes. Have a great weekend!

-Brandon

How Does Escrow Work When Buying a Home?

Reader Question: "Can you tell me how the escrow process works when I buy a home? I have a rough idea, but not to the point of being comfortable with the process. Thanks."

The escrow process begins when you have a fully ratified contract (signed and agreed upon) with the seller. At this point, the documents and funds associated with your purchase will be transferred to a neutral third party. This person or entity is often referred to as the escrow agent, and they should be identified in your purchase agreement.

So when you hear a home buyer say, "We are in escrow right now," it means their purchase offer has been accepted by the seller and the house is now under contract. It also means that a third-party is holding whatever deposit money they've paid, as well as the signed purchase agreement.

Either the buyer or the seller can choose the escrow agent, legally speaking. But in most cases, the home buyer's mortgage company will use their preferred company. You will have to pay for this person's / company's services, and these fees will be part of your closing costs.

The escrow process ends when you actually close on the home, during the closing / settlement procedure. This is when all funds are transferred accordingly, when all documents are signed, and when you get the keys to your new home.

I hope this answers your question, and I encourage you to do some more research across our website. You'll find hundreds of articles and tutorials covering every aspect of the home buying process. Here are some articles related to your escrow question. This is a good place to continue your reading.

Related articles:
What Happens After the Offer is Made?
The Real Estate Closing Process Explained