| May, 2009
Eligible purchasers who apply for mortgages insured by the agency may soon be able to get bridge loans or cash advances -- up to $8,000 -- that they can use for the down payment or closing costs.
The $8,000 federal tax credit for first-time home buyers is about to morph into a ready-cash down payment source, thanks to a new federal policy change.
Buyers eligible for the credit who apply for mortgages insured by the Federal Housing Administration may soon be able to get bridge loans or cash advances -- up to $8,000 -- that they can use for the down payment, closing costs or other loan expenses pending receipt of their tax credit check from the Internal Revenue Service.
Housing and Urban Development Secretary Shaun Donovan announced the FHA change May 12 in a speech to the National Assn. of Realtors. The idea, he said, is to "monetize" -- turn into immediately spendable cash -- a tax credit that often is not received until months after the settlement date.
As many as half of all would-be first-time buyers do not have enough cash on hand for a down payment and closing costs, according to building and real estate industry estimates. By advancing these consumers as much as $8,000 at closing, many more would be able to afford the purchase.
Officials at the National Assn. of Home Builders say the bridge loan feature could double the total number of home purchases stimulated by the 2009 tax credit program to more than 300,000, depending on how many private lenders and state housing agencies participate.
Under guidance drafted by the FHA, all lenders approved to do business with the agency will be authorized to provide bridge loans at closing -- secured solely by the tax credit that the borrower anticipates receiving from the IRS. State and local government agencies and nonprofit organizations approved by the FHA will be allowed to offer either bridge loans or second mortgages secured by the house.
Although the $8,000 tax credit carries the name "first-time home buyer," eligibility extends to anyone who hasn't owned a principal residence during the last three years. The credit amount from the IRS is the lesser of 10% of the purchase price of the dwelling or $8,000.
Donovan's announcement came as a small but growing number of states have begun bridge loan programs on their own to help stimulate home purchases. California has even created its own state-funded tax credit program -- a 10% credit payable to the buyer over three years -- but has limited it to newly built houses.
Bob Rivinius, president and chief executive of the California Building Industry Assn., said the new FHA credit monetization program "should provide a great combination" with the California credit. Some first-time buyers using FHA loans could even qualify for what he called "a trifecta": They could claim the 10% state credit, file for the $8,000 federal tax credit, then turn the federal credit into instant cash for use on a down payment or for closing costs.
Rivinius said funding for the state tax credit was being depleted fast, but legislation pending in Sacramento would add $200 million -- and that "should allow buyers to receive credits" through the end of the year.
The federal $8,000 credit only covers purchases closed by Nov. 30. Unless Congress extends the credit, it will disappear Dec. 1.
The new bridge loans and cash advance features of the federal credit may not be available immediately through private lenders, mortgage industry leaders say. Among the key questions yet to be answered: Where will non-depository mortgage companies get the $8,000 in advance money to provide upfront to buyers? Although most major banks offer second mortgage programs, the FHA guidelines stipulate that the tax credit advances cannot be secured by a lien on the property but only by the tax credit to be received by the buyer.
Many mortgage companies, which do not have banking deposits to tap, will need a few weeks to prepare documentation for what will essentially be secured personal loans. Plus they'll need to locate a source of funds for their advances.
In the meantime, however, would-be buyers who believe they are eligible for the federal credit shouldn't sit around. They should shift into high gear shopping for a house -- the Cinderella date of Nov. 30 is looming -- even if they'll need a bridge loan or cash advance to complete the deal.
The odds are good that by the time they're ready to get a mortgage and go to closing, at least some local FHA-approved lenders will be actively in the market with bridge loans.
Source : Latimes.com
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