How to Use the Tax Credit to Help with Down Payment or Closing Costs

As a first-time buyer you can apply the $8,000 tax credit toward a down payment or closing costs. But hurry. The tax credit will expire soon.

You don't have to wait until next year's tax season to use the federal tax credit you'll get for buying your first home this year. You can apply the up to $8,000 credit now toward closing costs or your down payment. But time is of the essence. Although there's talk of an extension, the tax credit is set to expire Nov. 30 this year.

A Recap

The American Recovery and Reinvestment Act of 2009 created the tax credit for first-time home buyers to help stabilize the housing market and spur sales. In late May, U.S. Housing and Urban Development announced rules letting home buyers apply the tax credit toward the purchase costs of an FHA-insured home, either to boost the down payment or to pay for closing costs.

Here's what you need to know:

• Applies Only to FHA Loans

Your loan has to be an FHA loan through an FHA-approved lender to apply the tax credit toward your down payment or closing costs. FHA loans are insured by the federal government, and let borrowers buy a home with a down payment as small as 3.5 percent, versus the minimum 10%-20% today's banks usually require. FHA loans now make up about a quarter of the home loan market. There are no income limits, but there are borrowing limits, depending on where you live.

• You Still Need Money for the Down Payment

The tax credit can't make up the entire down payment. You have to come up with at least 3.5 percent of the appraised value of the home. Then you can apply the tax credit to boost the down payment and buy down the interest rate. Enter the loan amount and interest rate into a monthly mortgage calculator or compare two loans with different loan amounts or interest rates with a mortgage loan comparison calculator to see how increasing the down payment would impact your monthly mortgage payments.

• Additional Down Payment Help in Some States

Some state housing finance agencies are providing additional assistance through bridge loans, which on top of the tax credit can supply the entire 3.5 percent down payment. Check with your state's housing finance agency to see if this available where you live.

• Closing Cost Help

The price of the home is only part of what you'll pay. Closing costs can add up to thousands. You can apply the tax credit to pay for these and bring down the total cost of the loan, which will lower how much you will pay each month.

Act quickly. Your purchase must be closed no later than November 30th to take advantage of the tax credit. Even if Congress extends the deadline it's a good idea to get started now so you have plenty of time.



Posted By :
Barbara Marquand is a freelance writer who writes frequently on mortgage and personal finance topics.

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