The First Time Home Buyer Tax Credit and Your Down Payment

I was working on a post about a coalition of real estate-related groups in Florida pushing the state to allow home buyers to apply the new $8,000 first time home buyer tax credit towards their down payment when I discovered that another state has already enacted a measure to do so.

[See First-Time Home Buyer Tax Credit: 6 Things to Know] 

Since January 14, Missouri has had a program on the books that enables home buyers to put the tax credit towards their down payment and closing costs. Here's how the Missouri plan works:

The federal first-time homebuyer tax credit was created by Congress this summer to encourage new homebuyers to purchase homes and thereby stimulate housing markets. However, the federal tax credit has been largely ineffective. One of the primary reasons the federal credit hasn’t worked is that the homebuyer doesn’t receive the money until he receives his federal income tax refund – which may be several months after the home is purchased.

With over 30 years experience funding mortgages for first-time homebuyers, [Missouri Housing Development Commission, ] knows that the biggest barrier faced by first-time homebuyers is acquiring money for downpayment and closing costs. As a result, MHDC created a program that allows homebuyers to receive the value of the tax credit at the time of closing.

How the Federal First-Time Homebuyer Tax Credit Works:

• First-time homebuyers receive a tax credit worth 10% of their home purchase, up to $8,000. The credit is claimed on the homebuyer’s federal tax return. The credit is refundable, which means that the homebuyer receives a refund for the amount of the credit minus any federal tax liability.

How the MHDC Tax Credit Advance Loan Program Works:

• MHDC makes a second mortgage to the homebuyer at the time of closing worth up to 6% of the home purchase price or a maximum of $6,750, which is used to cover downpayment and closing costs. The tax credit advance loan is paired with MHDC financing for the first mortgage in the form of a safe, 30-year, fixed-rate mortgage. The homebuyer then files for the federal tax credit and uses the credit refund to pay off the MHDC tax credit advance loan. If the tax credit advance loan is paid off by the designated deadline, the homeowner pays no interest other than a modest servicing fee. If the tax credit advance loan is not paid by the deadline, principal and interest payments to repay the loan over 10 years begin automatically.

With folks in Florida already making noise, I'm sure we'll see other states looking to devise similar programs enabling new home buyers to apply the tax credit to down payments.