It has amazed me how many people (mainly Realtors and lenders) are already out there proclaiming that you can now go back to the days of the “No money down” loans with FHA and you can do it right now. Well, that’s not quite the whole story. Let me explain:
What I know:
- I know that FHA is now allowing a borrower who qualifies for the $8000 tax credit to use that tax credit as the downpayment for purchasing the house.
- I know that they can’t get any cash back - if they need $7000, they can only get $7000.
- Government agencies and non-profits can do second liens against the house for the downpayment.
- The payments on that second lien need to be counted into qualifying rations. In other words, if you are going to borrow the $8000 so you can use it for your down payment, you need to be able to pay that amount back. Gee, there’s a novel concept.
- FHA approved mortgagees can do a “bridge loan” against the tax credit.
What I don’t know:
- I don’t know whether any FHA approved non-profits are going to be willing to do second liens in situations like that.
- I don’t know whether any FHA mortgagees (such as my bank) are going to be willing to do a bridge loan against a tax credit. Typically banks don’t like to do unsecured loans and I’m not sure how you can secure a loan against a tax credit.
- I don’t know what fees and rates will be charged for such a bridge loan.
Personal feelings:
- In today’s volatile market, if you aren’t able to come up with 3.5% for a downpayment on a house, maybe you should continue to rent for a while.
- The “tightest” 12 to 18 months that a home buyer typically has is their first 12 to 18 months when they are getting used to the house payment. Do we really want to add the cost of having to pay back a bridge loan on top of that?
So I guess my recommendation is essentially this:
- Take a deep breath.
- Wait to give the financial institutions the time to sort this all out.
- Once we know how the details of how that would work, then we can start promoting it as a done deal. Right now, FHA is saying, “We’ll allow it.” But I haven’t heard of anyone who has yet said, “We’ll write the loan.” Until we have that, it’s going to be hard to know whether this is really a good idea or not.
As a friend of mine likes to say after giving his opinion…..
“That, and $3.50, will get you a cup of coffee.”
Tom Vanderwell
P.S. The details of what I’ve put in here came from HUD Mortgagee Letter 2009-15.
Last 5 posts in $8000 Tax Credit
- $8000 Tax Credit is Extended through April 30, 2010...and it's been Expanded! - November 6th, 2009
- The Tax Credit Landslide: Homebuyer Credit Extended through June 2010 - November 6th, 2009
- So, How's the Mortgage Market Today? - October 29th, 2009
- Don't want to wait for your $8000 tax credit? No problem. - October 29th, 2009
- Mortgage Rates and the Tax Credit - October 28th, 2009
- Stumble it!
- Categories: $8000 Tax Credit, FHA Loans, Mortgage Types
Comments
7 Comments so far
Matt Carter
The Memphis Area Home Builders Association says its the first to obtain approval from HUD to offer down-payment bridge loans with the tax credit pledged as collateral. They will charge $500 “service fee.” See Memphis Daily News….
http://memphisdailynews.com/editorial/Article.aspx?id=42421
Tony Sena
“I know that FHA is now allowing a borrower who qualifies for the $8000 tax credit to use that tax credit as the down payment for purchasing the house.”
I have seen Loan Officers advertising the opposite of your statement. They are indicating that you can use the tax credit as your down payment?
Trena
Sooo can the $8000 tax credit be used for DPA or not?
Bruce Megowan
The FHA will not allow the tax credit to be used as part of the 3.5% down payment. The tax credit can only be secured by a bridge loan secured by the tax credit itself, and not as a second mortgage. Be careful what you publish if you do not have the corrent information.
Matt Carter
Bruce — there was some uncertainty about how this would actually work between the time it was announced by the Secretary of Housing on May 12 and issuance of the FHA letter to mortgagees on May 29 spelling out the rules in detail.
The bottom line is that the tax credit can be “monetized” and applied to the down payment or to cover closing costs on an FHA-backed loan — but the money can’t be used to meet the FHA’s 3.5 percent minimum down-payment requirement.
See Mortgagee Letter 2009-15.
However, there are state housing finance agencies that offer soft seconds — including some programs that take the borrower’s anticipated tax credit into account as part of the underwriting process — that CAN be applied to FHA’s minimum down payment requirements.
In other words, you can’t use money obtained solely on your expectation that you will be getting this tax credit to FHA’s 3.5 percent minimum down payment requirement. But you can use it to make an additional down payment and for closing costs.
And your eligibility for the tax credit may help you obtain a soft second loan from a state HFA that you can use to meet FHA’s 3.4 percent down payment requirement.
Here are some states that offer first-time homebuyer tax credit loan programs.
http://www.ncsha.org/section.cfm/3/34/2920
Stan
I’m actually buying my first house this year and I went to get preapproved at my bank yesterday. I asked about the FHA using-tax-credit-as-a-down-payment thing and the lender said that they were thinking about it, but haven’t actually passed it yet. I then asked about the missouri state version of the same thing, and his reply was the same, even though I’ve seen on several websites that both are already in effect.
Amanda
Great advice, well it seems that the $8,000 is not quite the big benefit that it may have appeared to be. I will however be waiting to see what the outcome is going to be, as said in an earlier comment, perhaps if this all works other countries will follow the lead. Lets just wait and see!
Amanda