Is the $8,000 homebuyer tax credit a bad bailout?
Posted
Jun 15 2009, 01:12 PM
by
Karen Datko
Rating:
The rules have changed for the $8,000 first-time homebuyer tax credit contained in the federal government's massive economic stimulus plan.
Qualifying homebuyers can now use the anticipated credit to secure a loan to help pay closing costs and enhance their down payment, then pay it off after they file their 2009 (or amended 2008) tax return. How handy is that? In fact, in some states, people can leverage the tax credit to buy a home without using one dime of their own money for a down payment.
Wow. That seems great. Rather than having to save for a house, you can use this bailout from the government to close the deal even before the tax credit is deposited in your checking account. The rule changes "should really help stimulate home sales!" "FFB" at Free From Broke predicted.
But haven't we learned that buying a home without saving first is a bad idea?
Not in the minds of housing industry folks. In fact, they love this so much that U.S. Sen. Johnny Isakson, R-Ga., has introduced a bill to increase the homebuyer tax credit to $15,000 and make it available to anyone who buys a house, said Luke Mullins of U.S. News & World Report. Luke also wrote:
But Isakson's bill faces an uphill battle in Congress. With the public growing increasingly frustrated with federal bailouts and massive government spending, lawmakers won't be eager to sign off on a second handout for homebuyers. Isakson says his bill would cost about $32 billion over one year.
Before you think you don't qualify to use the current $8,000 first-time homebuyer tax credit, remember that "first-time" means you haven't owned a home in the last three years.
Here are some of the other requirements (you can find FAQs here):
- The tax credit amounts to $8,000 or 10% of the home's purchase price -- whichever is less.
- In order to get that short-term loan in advance of the credit, your mortgage must be backed by the Federal Housing Administration.
- The FHA requires a minimum down payment of 3.5% that must come from the homebuyer's own funds. However, a number of state housing agencies will approve a second mortgage that can be used to cover that modest down payment requirement as well as closing costs. That loan must be repaid once the homebuyer receives the tax credit. Thus you can close the deal without spending your own money.
- You must close on the house this year, but before Dec. 1.
- You'll have to pay the tax credit back if you sell the house within three years.
- There are income limits -- generally $75,000 for a single person and $150,000 for a married couple who file a joint return.
Is this a good idea? We'll see. We can't help thinking how making homeownership way too easy -- including no money down -- helped get us into this economic mess. However, if people actually have to demonstrate they have the wherewithal to afford a home in the long run, that would alleviate some of our concerns.
Todd Harrison at our sister blog Top Stocks expressed alarm: "If this sounds eerily similar to the type of lending practices that got us into this mess, well, it should."
Many who work in the real estate business don't share that concern. "I know some of you are for this fact, that buyers should have skin in the game," wrote Jeff Belonger at the real estate blog ActiveRain. "But keep in mind, this was not the true demise to our foreclosure mess." Many others who commented see the FHA's 3.5% personal-funds rule as an unnecessary obstruction to homeownership.
Another aspect of the new rules bothers Kay Bell at Don't Mess With Taxes, who writes:
This tax break keeps morphing more than the shape-shifting aliens in the X-Files, and that can only lead to confusion, frustration and the perception of special tax treatment for certain taxpayers. There's already enough of that in connection with our tax laws.
Related reading:
Subprime lending is back with a vengeance
A tax break that's worth the hassle
A ‘crazy complex' credit for homebuyers
