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After announcing a plan that would have allowed first time homebuyers to use a special tax credit to cover the 3.5% required down payment on an FHA-insured loan, the Dept. of Housing and Urban Development apparently had second thoughts.

Late last week HUD released a newly remodeled plan that does not allow the first-time homebuyer tax credit to be used for the down payment. Seems there was plenty of push back that allowing borrowers to land a mortgage without any “skin in the game” was not exactly a great idea. What’s amazing is that the proposal even got floated in the first place; the notion that taxpayer dollars would have been on the line for mortgages that required no down payment was a bit of a head spinner.

What HUD finally settled on was that lenders can essentially advance qualified home buyers the value of their tax credit today to reduce their mortgage costs, but only if the borrower can bring a minimum 3.5% down payment to the table. Approved uses of the tax credit include paying for closing costs, making a larger down payment (to thereby reduce the monthly mortgage cost) or buying down the interest rate by paying points. The real value of the new rule is that eligible homebuyers can now “use” their tax credit today, rather than having to wait to recoup the value of the credit when they file their 2009 federal tax return in early 2010.

Basically, if you meet the eligibility rules you can now get a maximum of $8,000 advanced to you to buy a home. Single homebuyers with income below $75,000 and married couples who file a joint return with income below $150,000 are eligible for the max tax credit. (A limited credit is available for individuals with income between $75,000-$95,000 and joint filers with income between $150,000 and $170,000; the credit completely phases out above those income levels.) Anyone who has not owned a primary residence for three years is considered a first-timer but to grab the tax credit you must close on an FHA-insured loan before December 1 of this year.

-- Carla Fried