Home builders and Realtors cheered in Washington last week when HUD Secretary Shaun Donovan announced that FHA will allow lenders and government agencies to “monetize” the $8,000 federal homebuyer tax credit, providing purchasers with downpayment cash upfront, available at closing, rather than waiting for the IRS to mail them a tax credit check.
Speaking at the mid-year conference of the National Association of Realtors, Donovan said HUD supports “bridge loan” programs designed to help first-time buyers come up with needed cash.
Under the bridge loan concept, an FHA-approved private lender, a state or local housing agency, or an FHA-approved nonprofit organization could advance as much as $8,000 for downpayment and closing costs -- in anticipation of receipt of the $8,000 credit months or weeks down the road.
Sanctioning bridge loans could improve the effectiveness of the federal credit program significantly, said Joe Robson, president of the National Association of Home Builders.
Bill Riley, incoming president of the Washington State Realtors Association, estimates that half of all would-be first-time buyers lack the downpayment resources needed to complete a purchase, and therefore aren't making use of the credit.
Donovan said technical instructions to lenders for the bridge loan program would be provided by FHA shortly.
In the meantime, 10 state housing finance agencies already run credit monetization programs on their own. They include the states of Missouri, Colorado, Delaware, New Jersey, Tennessee, Idaho, Ohio, Pennsylvania, New Mexico and Washington.
Most of the programs provide second liens with no interest charges for a period of months, with the expectation they'll be paid off immediately after the homebuyers receive their IRS credit checks.
In some cases the liens turn into second mortgages with 10 year terms and floating interest rates if the buyers choose not to repay the advance with the tax credit check.
In the wake of Donovan's announcement, major mortgage lenders are likely to gear up their own programs, bringing bridge loans for first time buyers to all 50 states, not just the ten that pioneered the idea.
However, anyone who wants to take advantage of all this needs to move fast. Under the federal tax credit rules set by Congress, purchasers must close no later than November 30 to be eligible. They must not have owned a principal residence at any time during the three years preceding their purchase. Buyers can claim the 2009 credit against their 2008 federal tax returns - they just need to file an amendment - or can wait and file next April.
For a detailed Q&A on the credit program, go to www.federalhousingtaxcredit.com.