FHA Allows $8,000 Credit to be Used for Purchase

First-time homebuyers will be able to immediately apply an $8,000 tax credit toward the purchase of a new home, the secretary of the U.S. Department of Housing and Urban Development (HUD) announced today.

HUD Secretary Shaun Donovan said the action will help stabilize the nation's housing market by stimulating home sales across the country move. The rule, which takes effect immediately, will allow homeowners to apply the credit towards the purchase of an FHA-insured home.

"We believe this is a real win for everyone," said Donovan. "Today, the Obama Administration is taking another important step toward accelerating the recovery of the nation's housing market. Families will now be able to apply their anticipated tax credit toward their home purchase right away.

"At the same time we are putting safeguards in place to ensure that consumers will be protected from unscrupulous lenders. 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."

Today's announcement formalizes a step the Obama Administration had indicated it was preparing to take in order to help boost the housing market. Previously, first-time homebuyers had to wait until filing their 2009 tax returns early next year to receive the $8,000 credit, which was established by the American Recovery and Reinvestment Act of 2009, passed earlier this year.

Homebuyers will still be required to come up with the FHA minimum 3.5 percent down payment from other sources, but will be able to use the $8,000 credit toward closing costs or to boost their total down payment to reduce their monthly payments and/or obtain a better interest rate.

The National Association of Home Builders estimates the tax credit will stimulate 160,000 U.S. home sales, 101,000 by first-time buyers and another 59,000 by existing homeowners who will be able to make another purchase because a first-time homeowner bought their current home.

The new rule allows state Housing Finance Agencies and certain non-profits to "monetize" u to the full amount of the tax credit so that first-time buyers can apply it immediately to their purchases. Certain other restrictions apply, including that the borrower have no unpaid student loans or other obligations that could be offset against the credit.