I’ve tried writing an opening sentence that explains the heart of this post, and the shortest I could make it was more than 50 words, which is hella long. So let me try another tact.

• The American Recovery and Reinvestment Act of 2009 allows residents (first-time homebuyers) the purchase a home before December 1st a tax-credit of $8,000.
• The Washington State Legislature recently approved a measure that allowed eligible residents to use the promise of this credit to secure a loan from the state government so that those funds could be used on the down-payment of home, thus enabling people that have not saved the minimum 3.5% down the opportunity to (1) become a homeowner and (2) take advantage of the $8,000 tax credit while it’s available.
• Said measure sat in political purgatory as it seemed that the legislature (and other state legislatures that had approved the measure) may have overstepped their bounds – so the Department of Housing and Urban Development (HUD) has been meeting to decide if they were going to allow homebuyers that hadn’t saved the minimum down payment requirement to use state funds as a short-term loan for the down payment.

So the HUD has ruled: the tax credit can be used to close on a house, just not in any way that will actually help. As quoted from REALTOR Magazine:

FHA-approved lenders received the go-ahead to develop bridge-loan products that enable first-time buyers to use the benefits of the federal tax credit upfront, according to eagerly awaited guidance from the U.S. Department of Housing and Urban Development on so-called home buyer tax credit loans that was released today. Under the guidance, FHA-approved lenders can develop bridge loans that home buyers can use to help cover their closing costs, buy down their interest rate, or put down more than the minimum 3.5 percent. The loans can’t be used to cover the minimum 3.5 percent, senior HUD officials told reporters on a conference call Friday morning.

Let me try to explain simply why this doesn’t make sense. There are people that would like to buy a home right now for three main reasons:

1. Buying low: home values are down 25-50% throughout the country, so home ownership is more affordable.
2. Rates are low: interest rates have hit a historic bottom this year, which increases everyone’s buying power.
3. Free money: the $8,000 tax credit is a significant perk for those that make the leap into home ownership.

There are many requirements that have to be met before anyone can buy a home, but perhaps none more rigid than the down payment requirement. The only true “zero down” loans that I’m aware of in our current lending environment are VA and USDA loans. VA loans are only eligible to veterans of our military, and USDA loans are only available on homes within the boundary lines of certain rural areas. This makes FHA loans the most popular girl at the dance, requiring only 3.5% down (which is still half a percent higher than requirements before 2009).

I’ve said before that we have a perfect storm brewing in real estate, mostly for the 3 reasons I posted above: homes are more affordable, rates are down, and the $8,000 tax credit. Now that the word is getting out, demand is increasing, and as always, people in the real estate industry are trying to find ways to convert that demand into sales. Here’s the rub: the promise of a tax credit ends in five months, and if a buyer wants to buy a $300,000 home, they need to come up with $10,500 in order to make the minimum down payment. In an effort to make the dream of home ownership available to those that don’t have these savings, the Washington State legislature proposed lending up to $8,000 to homebuyers that were eligible for the tax credit. When the tax credit was received by the buyer after their home purchase, the loan would be repaid.

So the Department of Housing and Urban Development (HUD) was asked to rule on whether or not the tax credit could be used to secure the very home purchase that was a requirement for receiving the credit in the first place. Last week the HUD ruled that the loan programs could be offered to loan homebuyers who were eligible for the tax credit up to $8,000, to be repaid by said tax credit AS LONG AS those funds WERE NOT used toward the minimum requirement of a down payment of a home. The funds could be used for closing costs, or for any down payment on a home greater than the minimum requirement, but if a buyer needed to use the $8,000 toward their 3.5% down – then no, that could not be done.

I don’t necessarily disagree with the HUD’s ruling, I just don’t like the way they did it. We were effectively asking: “Dear HUD, can we put said cart before said horse?”, and they ruled no, the cart needs to stay behind the horse. But saying that a program could be developed allowing for buyers to use the $8,000 toward closing costs is a little like a credit card company offering a balance transfer to a customer with a zero balance. Buyer’s closing costs can be financed into the purchase of a home – negotiated with the seller to reduce their proceeds and rolled into the amount of the loan. The HUD didn’t need to offer to set up a program that will be difficult to setup and maintain (and more than likely won’t happen at all) to offer a solution to a problem we don’t have.

So, as a resident of Washington State, can you use the $ 8000 tax credit as down payment for a home? No. This effectively kills the measure approved by the Washington State legislature. If you want to buy a home in perhaps the best buying cycle we’ve seen in 30 years,  you’ll have to do it the old-fashioned way: save.