HUD takes step to “Monetize” $8,000 First Time Home Buyers Federal Tax Credit

The Federal Department of Housing and Urban Development has indicated that the Federal Housing Administration will allow homebuyers utilizing FHA insured loans to obtain short term bridge loans in the amount of their expected Federal Tax Credit of up to $8,000 for first time home buyers. These loans are an attempt to “monetize” the federal tax credits so that first time home buyers have the funds immediately to utilize to purchase a home. The funds, however, can not be used to meet the minimum 3.5% down payment requirement of the FHA, but may be used to fund closing costs or to make a larger down payment.

The borrower must use FHA approved lendeers or State and Local governemntal agencies and non-profit organizations for the loans. Loans made by private FHA approved lenders may only be secured by the tax credit itself, while loans made by State and local agencies and non-profit organizations may be secured by second mortgages.

The main advantage of these bridge loans would be to provide funds to pay for buyer funded closing costs such as loan points, property tax pro rations, etc. Although the new bridge loans may be used to make a larger down payment, it would not make sense to use a bridge loan to do so, as the FHA approved mortgage interest on the larger loan amount would be tax deductible, while the interest on the bridge loan would not be if it is not secured by the property. You could always use the tax credit refund to pay down the FHA mortgage at a later date when the credit was received.

It is not yet clear what, if any, private lenders may agree to participate in this program. It will take several weeks for this program to become generally available. The $8,000 first time home buyers tax credit expires November 31, 2009 unless extended by Congress.

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