Dear Liz: My daughter is trying to buy her first home with very little money available for a down payment, perhaps 3% of the total purchase price. What are your thoughts on the interest-free loan from the IRS for first-time home buyers? It seems too good to pass up. Is there a downside?
Answer: The IRS isn’t exactly handing out cash for down payments. What first-time home buyers can get after they buy a house is a tax credit worth up to $8,000. Before Congress passed the stimulus package, the tax credit was $7,500, and had to be back over time, which is why some referred to it as an â€œinterest-free loan.â€ Besides being slightly larger, the new version of the credit wonâ€™t have to be paid back.
With 3% down, your daughter may qualify for a Federal Housing Administration loan. She might want to discuss her situation with a housing counselor approved by the U.S. Department of Housing and Urban Development. She can find one at www.hud.gov.
But she also might consider waiting to build up her down payment and her cash reserves in general. Homeownership is expensive, and she should be reasonably sure she can afford all the costs before she dives in.