Federal Tax Credit Used as Down Payment

At last week’s NAR Mid-Year Conference in Washington, HUD Secretary Shaun Donovan, said that the Federal Housing Administration (FHA) is going to permit its lenders to allow home buyers to “monetize” the $8,000 tax credit for first-time home buyers, to be used as a down payment. In his remarks to Realtors, Secretary Donovan indicated that details of this plan will be released shortly. This is an excellent move that further aids first-time buyers in their pursuit to purchase real estate as many first timers simply have not saved enough money to afford the lender required down payments.

UPDATE 5/29/2009

Last week I reported that HUD Secretary Shaun Donovan told the NAR that the First-Time Homebuyers Tax Credit could be “monetized” and used as a down payment under forthcoming HUD guidelines. Since then, there have been a variety of news reports – some confirming and others denying that this would in fact happen. Some sources have claimed that the government was backing away from this proposal for a variety of reasons. In a May 21 news story, however, NAR reaffirmed the original plan:

“News reports that the federal government is backing away from its plan to permit eligible borrowers to monetize the first-time homebuyer tax credit are off the mark, a spokesperson for the U.S. Department of Housing and Urban Development says.

“The technical details are still being finalized and will soon be published in a mortgagee letter and posted on our Web site,” Lemar Wooley, a HUD spokesperson, told REALTOR magazine Wednesday afternoon.Under the guidance that’s under development, state agencies and other HUD-approved entities would be able to provide short-term bridge loans that households could use to help with their down payment. The loans would be repaid with the proceeds from the households’ federal tax credit.” (thank you to Micha for pointing out the change)

UPDATE 6/2/2009

Under the guidance, FHA-approved lenders can develop bridge loans that home buyers can use to help cover their closing costs, buy down their interest rate, or put down more than the minimum 3.5 percent.

The loans can’t be used to cover the minimum 3.5 percent, senior HUD officials told reporters on a conference call Friday morning.

Thus, buyers applying for FHA-backed financing with an FHA-approved lender that offers a bridge-loan program can get a bridge loan to bring down the upfront costs of buying a home significantly but would still have to come up with the minimum 3.5 percent downpayment.