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A FHA tax credit for home buyers has just been announced.  This is truly great news for the real estate market.

U.S. Housing and Urban Development (HUD) Secretary Shaun Donovan announced yesterday, May 29th, that the Federal Housing Administration (FHA) will allow home buyers to apply the Obama Administration’s new $8,000 first-time home buyer tax credit on FHA mortgage loans. Previously the tax credit only applied to conventional mortgages. The only catch is that the tax credit cannot be used towards the minimum 3.5% down payment. But, this is still terrific and a great help for people who need to use a FHA insured mortgage loan.

Secretary Donavan said that the objective of this FHA tax credit is to help stabilize the housing market.  The hope is that this new FHA tax credit will stimulate more home sales across the US.  It should certainly do exactly that because it makes buying a home easier. With the ability to apply the tax credit to purchase costs, buying a home now becomes affordable for thousands of people and affordable enough to get thousands to jump off the fence and into a house.

FHA loans are extremely popular with first time home buyers because qualifying for a FHA mortgage is a lot easier than qualifying for a conventional loan. The ratios are easier and the down payment can be as little as 3.5% although I must tell you that I do not approve of buying a home with such a low down payment. What I tell my home buyers is to wait until you’ve saved up at least a 10% down payment.

Interest rates moved up and down this week.  We’re still in the 5-5.5% range for what most people really qualify for in a mortgage. Its been like this all year and projected to continue into the New Year.  As a result, rates are not a problem.

The reason the first time home buyer market is critical to the housing market is because this is where the housing domino chain begins – when a home buyer buys a house, he buys it from someone who often moves on to a bigger house and so on and so on. The entire chain of transactions begins with the first house that is sold and that’s your first time home buyer.

If you look at the real estate market the picture you see is a pyramid.  The the least expensive homes are the majority on the bottom and the fewest are the most expensive on the top.  Homes on the bottom are almost all first time home buyer purchases.  The real estate market would collapse without first time home buyer purchases.  As a result the new FHA tax credit is important for the strength and stability of real estate.

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