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.
By Kenneth R. Harney
May 24, 2009
Reporting from Washington - 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.
kenharney@earthlink.net
Distributed by the Washington Post
Writers Group.
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