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Earning the Tax Credit As Fast As They Can

Posted May 20, 2009 by Realty.com Staff

States are reportedly hasting the delivery of the $8,000 tax credit to the hands of homeowners.

Spend. That’s one way to fight the global credit crisis. Apparently, some states can’t wait to help their residents from taking hold of the $8,000 tax credit. For example, Washington State Treasurer James McIntire introduced the Tax Credit Advance Loan Program for First Time Home Buyers. The state will allot $25 million which would be deposited into an FDIC-insured bank. Since it will be provided as a bridge-loan program, the bank would provide revolving lines of credit to the Washington State Housing Finance Commission (WSHFC).

On the other hand, Missouri allows first time buyers to take a second lien upon receiving the tax credit. They can pay the loan until the first half of next year. If they fail to do so, the second lien becomes payable in 10 years with a fixed interest rate that is one-half of a percentage point higher than the mortgage rate of the first loan.

What then are the pros and cons of these plans?

If proven successful, it can allow millions of buyers to take advantage of the low mortgage rates in the market. Also, their purchases of bargain-priced homes can be made easier with the $8,000 that can be added to their closing cash. That’s much better than waiting for it on their federal tax returns.

But bridge-loan programs usually come with a disadvantage too. Traditional types offer very high interest rates but since these tax-credit programs were designed to make homeownership affordable, the additional rates will not be as high as traditional bridge loans. But still, the danger falls when tax credit recipients fail to pay back and each state program suffers from unexpected losses that are larger than the backstop fund allocated for loss mitigation.

Those who receive the tax credit should make sure that they have stable employment and enough savings to meet their obligations.

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