FHA Seeks to Allow Tax Credit for Mortgage Down Payment

First-time homebuyers may soon be able to apply an $8,000 tax credit to their mortgage down payment, under a plan being advanced by the Federal Housing Administration (FHA).

The program would allow first-time homebuyers to receive a short-term loan based on the anticipated tax credit, which they could apply to their down payment as equity in the home. They would repay the loan when the actual tax credit is received the following year. The program would be available on FHA-sponsored loans.

Addressing a meeting of the National Association of Realtors in Washington, DC, Department of Housing and Urban Development (HUD) Secretary Shaun Donovan said the program would help more consumers purchase a home.

"We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a down payment," he said.

Similar to state second mortgage programs

The program is similar to efforts already in place in a number of states around the nation, which generally structure the advance as a second mortgage that can be repaid once the tax credit is received. At least 10 states around the nation have homebuyer programs tied to some kind of advance on the tax credit, including Colorado, Delaware, Idaho, Missouri, New Jersey, New Mexico ,Ohio, Pennsylvania Tennessee and Washington.

The initiative would help spur the housing market, but has been criticized in some quarters for being similar to the "no-down-payment" mortgage plans that many blamed for fueling the growth of the housing bubble and leading to its eventual collapse. Given that the FHA requires a minimum down payment of 3.5 percent of the purchase price, the $8,000 credit could theoretically allow someone to purchase a $228,000 without putting up any of their own money.

Criticized as similar to zero-down mortgages

"Although it remains to be seen how the program is actually implemented, the plan resembles former seller-funded down payment assistance programs," wrote housing analyst Ivy Zelman , according to a report by the Wall Street Journal. "We remain concerned that the lenient underwriting standards, low down-payment requirements and now the ability of FHA borrowers to purchase a home without putting any of their own equity into the purchase is creating a tremendous risk for the program and taxpayers in the future."

Secretary Donovan expressed optimism about the direction of the housing market, and said the Obama administration will continue to take steps to stabilize it.

"I do think we have some early signs that the market overall is stabilizing," said Donovan. "Since January we've seen both home sales moving up and down around a relatively stable number and we are seeing the first signs that the rapid decline in home prices is starting to abate."