One particular aspect of the national mortgage bill signed by President Bush last week is being touted as helpful for first-time home buyers (or those who haven’t owned for the last three years): a tax credit that’s really a zero-interest loan. Such buyers could receive as much as $7,500, an advance that’s intended to provide an extra incentive to those contemplating a leap into the housing market. It’s available to those who bought as of April and before July 1, 2009.

The National Association of Realtors put together a Q&A to explain how it all works. One caveat: The information is accurate as of July 30 and any questions should be taken to a tax adviser.

Here’s an excerpt of the association’s Q&A:

How does a tax credit work?
Tax credits are special provisions that reduce income tax lability on a dollar for dollar basis. Credits are claimed on an individual’s income tax return. In this case, Congress has created a tax credit for first-time home buyers.

Is there an income restriction?
Yes. The income restriction is based on the tax filing status the purchaser claims when filing his/her income tax return. Individuals whose Form 1040 filing status is single (or head of household) are eligible for the credit if their income is no more than $75,000. Individuals who file a joint return may have income of no more than $150,000.

Is the amount of the credit tied to the price of the home?
Yes. The credit is for 10 percent of the cost of the home, up to a maximum credit of $7,500. If a home costs $65,000, the allowable credit would be $6,500. If a home cost $120,000, the allowable credit would be $7,500. The amount of the credit is the same for all taxpayers, married or single.

Why do some news reports call this an interest-free loan?
Unlike most other tax credits, this tax incentive must be paid back. All eligible purchasers who claim the credit will be required to repay it over 15 years. The statute specifies that the repayment amount will be 6.67 percent of the credit amount each year. Thus, a buyer who qualifies for the full $7,500 credit will repay $502.50 each year. There will be no interest charge on outstanding balances.

How do I apply for the credit?
There is no pre-purcahse authorization, application or similar approval process. Eligible purcahses will simply claim the credit on the appropriate IRS Form 1040 tax return and/or on any special forms the IRS might devise. In many, if not most cases, the IRS will be on notice that the purchase has occurred because the settlement officer at the time of purchase is required to report the transaction.

So I can’t use the credit amount as part of my downpayment?
Presently, there is no mechanism available for claiming the credit any earlier than the 2008 tax return that will be filed in 2009. Congress tried to devise a mechanism that would allow pre-funding for the credit, but found that prefunding would require combursome processes that would, in effect, bring the IRS into the purchase and settlement phase of the transaction.

When do I make the payment?
The mechanics are not specified. Repayments for credits claimed on 2008 tax returns will go into effect for the 2010 tax year. As a practical matter, then, repayments of credits taken in 2008 will not actually start until 2010 returns are filed in 2011. Repayments for credits claimed on 2009 returns will go into effect for the 2011 tax year and be reflected on 2011 returns filed in 2012.

What if I sell my house before the 15-year repayment period is complete?
When the person who used the credit sells the home, any amount of tax credit that has not been repaid will be due in the year of sale. For example, if an individual still owed $4,000 in repayments and realized $25,000 of proceeds from the sale, the $25,000 of seller proceeds would be reduced to $21,000 and $4,000 will be remitted to the IRS. Again, the mechanics are unknown.

What if there’s very little gain (or even a loss) on the sale and the proceeds won’t cover the repayment amount?
If the gain on the sale is less than the amount that must be repaid, part of the liability is forgiven. For example, if the individual still owed $4,000 but the gain on the sale was only $3,500, then the seller would not be required to repay the IRS the $500 shortfall. If there was no gain or even a loss, then the remaining $4,000 would not be repaid.

The National Association of Realtors also has a chart you can find here that breaks down the basic elements of the tax credit.

A popular lending option for low- and moderate-income home buyers soon will go away.

Private down payment assistance, which allowed the seller to contribute up to 6 percent toward the buyer’s purchase, was banned as of Oct. 1 under the national mortgage bill signed this week by President Bush. Such down payments were used for loans insured by the Federal Housing Administration.

But it turns out the FHA, along with the Internal Revenue Service, had long criticized the down payment programs because of their relative high failure rate and for supposedly inflating the price of the home to cover the seller’s contribution to the down payment.

Doing away with the programs eliminates one of the few remaining ways borrowers still could get into a home with little or no money down, said David Erickson, president of the Washington Association of Mortgage Brokers.

“There are instances where it works and where it’s done wrong and that shouldn’t be tolerated,” he said.

No-money-down options still available, he said, include loans made through the Department of Veterans Affairs and a USDA program for rural properties. The zero-down mortgage might make a limited comeback once the market settles down, he said.

“If it comes back, it will be extraordinarily restrictive,” he said.

Mortgages in recent years that required little money from the borrower shoulder much of the blame for today’s housing and credit market slowdown.

But Nicole Rosen, a mortgage broker in Roy, said this week that the soon-to-be-banned down payment assistance helped prospective buyers as housing prices outpaced their ability to save. Rather than taking options away from borrowers, she said resources should be used to better educate them.

“I think it’s going to be absolutely devastating to the industry as a whole. FHA’s own estimate is that down payment assistance comprises about 40 percent of their transactions,” she said. “If the seller is willing to give you equity in the house, I don’t see why we’re closing the door on that.”

Sellers who participated in the down payment programs made a donation to an organization, such as The Nehemiah Corporation of America, that would then give it to the buyer.

A statement from Scott Syphax, CEO of The Nehemiah Corp., on Wednesday said the organization would fight to get the down payment assistance program reinstated.

“We hope that Congress and President Bush wake up with a clear conscious tomorrow, knowing that millions of Americans will awake to a law that leaves them with zero alternatives for attaining homeownership,” the statement said.

From a lender’s point of view, Rich Bennion, executive vice president of Seattle-based HomeStreet Bank, said money contributed by a borrower tends to make a better loan than one without.

“On another hand, I’m an advocate for home ownership and I’m an advocate for tools to aid the buying and selling of homes, so part of me feels like I hate to see this go away. But I think there are other avenues to address situations where people need a down payment,” he said.

He pointed to mortgage assistance through the Washington State Housing Finance Commission and gifts, such as money from a parent, that the FHA allows a borrower to use as part of a downpayment.

A new state law intended to protect homeowners from mortgage fraud has local real estate agents and brokers saying they may no longer be able to help sellers at risk of foreclosure.

The law, called the “distressed property law,” went into effect today and prohibits a practice known as equity skimming – a kind of fraud that masquerades as assisting a homeowner unable to make mortgage payments but instead takes what equity there is and leaves the homeowner in even worse financial shape.

Distressed homeowners, according to the legislation, are those in various stages of losing a home, from foreclosure to contemplating not making a mortgage or property tax payment. And a professional who discusses such a property with its owner could be considered “a distressed home consultant,” which includes real estate agents and brokers.

Not only must such a consultant act in the best interest of the homeowner – a potential conflict if an agent is representing a buyer – but the consultant also has a fiduciary duty that carries a fine of up to $100,000.

To cover their bases, real estate companies have worked up additional paperwork for home sellers to determine whether or not they are distressed. Some are recommending that active listing agreements signed before today be resigned.

The law likely will chill buyer’s interest in foreclosures, which in the past have drawn bargain hunters, said Chris Nye, president of MLS4owners.com. The University Place company sent 500 emails to its sellers informing them of the new law and the additional paperwork and asking if any of them are distressed.

Similar laws in other states have exempted real estate agents, said Nye, who wonders why such an exclusion didn’t make it into this law.

“I know in talking to a lot of agents and brokers, they want to know how it happened,” he said.

Phil Harlan, Washington Realtors’ immediate past legislative steering chairman, said today that the trade group was aware of the legislation, which was requested by the Attorney General’s office. Harlan said he could not explain why agents and brokers are not exempt but said the law was passed with some unintended consequences.

The association has trained more than 1,500 real estate brokers on the law.

“It’s unfortunate it affected the normal real estate transaction,” Harlan said. “We’re going to have input with the Attorney General as much as we can to make the necessary adjustments to of course keep whole the integrity of the bill, to make sure the consumer is protected, and to get some of these conflicts with the regular real estate transaction resolved.”

Kristin Alexander, spokeswoman for the Attorney General's office, said changes in the law will be requested in the next session to address agent and broker concerns.

"We’ll be meeting with Realtors in July to work on a draft," she said.

Windermere agent Andrew Welch said limits imposed by the law will mean homeowners who could sell and avoid foreclosure won’t get the help they need as agents avoid the liability now tied to a potentially distressed property.

“Just writing an offer on a house that’s going to be foreclosed on can be seen as not acting in the best interest of a distressed homeowner. It’s a messed up law,” he said.

If state Sen. Brian Weinstein, D-Mercer Island, gets his way, Washingtonians will get added protections by mid-2008 when buying a home. He’s pushing a Homeowner Bill of Rights that was approved today by the Senate (30-19) and heads to the House for a likely vote in April.

The building industry, however, opposes such legislation. “It’s one more thing that will raise the price of housing,” Mike Crowley, executive vice president of the Master Builders Association of Pierce County, said Thursday afternoon.

Weinstein says he wants to protect homeowners who have little to no recourse when a builder sells them a substandard product. “This bill gives the purchaser of a new home a warranty by law,” he said.

If approved by the Senate and signed by the governor, the new law would take effect in July 2008, Weinstein said.

Said Crowley: “We would be happy to sit down with a group of people over the next year and address concerns and see if there’s a way we can work together.”

You can find more info on the bill here.