The Federal Housing Tax Credit: How it works and how to make it work for people with disabilities

The American Recovery and Reinvestment Act of 2009 authorizes a (refundable) tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.  A refundable tax credit means that the potential eight thousand dollars can be claimed in excess of any federal income tax liability.

The credit is available to buyers who have not owned a principal residence during the three-year period prior to the purchase, and earn less than $75,000; or $150,000 for married taxpayers filing a joint return.
The credit phases out with income above these levels, and are limited to the lesser of 10% of the purchase price, or $8,000. For more information about the credit and a list of frequently asked questions, visit www.federalhousingtaxcredit.com/2009/faq.php.

A potential $8,000 dollar credit is great; however, this program does function as a kind of rebate for people who have managed to accumulate a down payment in the first place.  How can a homebuyer access the money allocable to the credit sooner than waiting to file their 2009 tax return?

One of the simplest ways is for the prospective homebuyer who qualifies for the credit to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the down payment.

Buyers can adjust their withholding amount through either their W-4 or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective homebuyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.

One strategy of particular interest for people with disabilities is the use of short-term loans to advance the value of the credit to potential homebuyers. Because the funds are advanced as a loan, and must be re-paid, such funds do not count as a countable resource for any federally means tested program.  Such credit advance loans serve as a useful strategy for people with disabilities seeking home ownership and a source for down payment funds. HUD has announced that it will allow FHA-approved lenders to issue such loans to advance the credit amount for use in purchasing the home. Read NAHB’s press release on the announcement.

In recent weeks, The Washington Post reports that at least 10 states have created innovative bridge-loan programs that advance credit-eligible purchasers the cash they need for their closings.  Generally, the advances take the form of second mortgages—with or without interest charges—that become due whenever purchasers receive their credits in the form of refunds from the IRS.

In Missouri, which was the first state to create such a program, buyers can get a no-cost "tax credit advance" of up to 6 percent of the home price. The advance is actually an interest-free second lien that is repayable no later than June 2010, once the buyers have received their $8,000 tax credit.

If buyers can't meet that deadline, the advance morphs into a traditional second mortgage with a 10-year payback term and a fixed interest rate one-half a percentage point higher than their first mortgage rate. The underlying first loans are all fixed-rate 30-year mortgages issued by private lenders participating with the tax-exempt bond programs of the Missouri Housing Development Commission.

Colorado kicked off a similar program, known as Jumpstart, on April 14. Delaware, New Jersey, Tennessee, Idaho, Washington state, Ohio, Pennsylvania, and New Mexico have come out with their own versions, some with modest interest charges on the second mortgage.

In Washington, where the state Housing Finance Commission already runs a tax credit bridge-loan program for buyers using its mortgages, state Treasurer James McIntire wants to make it much bigger. He has been pushing for creation of a public-private down payment program that could reach far more borrowers than is possible under the housing commission's current funding constraints.

McIntire has proposed depositing $25 million of state funds into interest-earning bank accounts. The bank would then provide revolving lines of credit to the state housing commission to greatly expand its down payment bridge-loan efforts. In a novel arrangement, the Washington Association of Realtors has pledged $400,000 as a backstop for McIntire's plan to cover any unexpected losses on the transactions. The state legislature has authorized the program in its new budget.

To determine if your State is participating in such a program, visit the National Council of State Housing Agencies (NCSHA) which has compiled a list of such programs.

The $8,000 credit can serve as quite the incentive to assist people with disabilities in accumulating a down payment to purchase their first home.  Similarly, Individual Development Accounts provide an excellent opportunity to gain the money management and homeowner skills necessary for home purchase.  Additionally, an IDA account can also provide the valuable dollar-for-dollar match as people with disabilities save money for their first down payment.  Remember, like the credit advance loans, funds saved in a federally funded IDA program are not counted in the asset calculation for any federally funded means tested program. Many resources are available for an individual with a disability wanting to purchase their first home. 

Do the research; take that step, and begin to change your own economic expectations!