Potential first-time buyers have yet another reason to consider purchasing a home: The monetization of the tax credit. Here are four ways first-time homebuyers can get access to the $8,000 that can be used for upfront costs for homes purchased by December 1, 2009.
Short-term bridge loans are now available from a variety of lenders so that buyers can tap the benefits of the $8,000 Federal Housing Tax Credit for First-Time Home Buyers upfront. If buyers are eligible for the $8,000 tax credit, these bridge loans will enable them to use the money for their down payment and closing costs with the credit as collateral. Consumers will have to pay the money back after they’ve filed their tax return and received a refund.
There are essentially four sources for this type of financing, and their terms can vary considerably.
1. State HFA Bridge Loans
As of early June 2009, 10 state Housing Finance Agencies offered tax-credit bridge loans, and more were planning to do so. The easiest way to learn whether one is offered in your state is to get your HFA’s phone number through a Housing Finance Agency list maintained by the National Council of State Housing Agencies (NCSHA). NCSHA also maintains a list of HFAs that already offer the bridge loans.
Although each state HFA loan differs, here are some typical characteristics:
- Buyer will need to make a minimum downpayment from their own funds, probably around $1,000.
- Buyer will have to go through local lenders approved by the HFA to actually originate the loan, since HFAs are not originators.
- In some cases, the loans are interest-free; check with the state HFA to find out.
- The HFAs have set aside a limited amount of funds for the loans, so they tend to be made on a first-come, first-served basis.
- Buyers will be expected to use HFA-backed financing for the mortgage on their home purchase.
This financing typically comes with a below-market interest rate and usually requires borrowers to meet eligibility criteria. These criteria will vary greatly, but they often require borrowers to be first-timer buyers and meet income-eligibility requirements. For the bridge loans, there’s a good chance the criteria will be similar to what’s required for the tax credit.
Since the bridge loans are made in tandem with your HFA’s financing products, buyers apply for the loans when they apply with the HFA-approved lender for their mortgage financing. A list of approved lenders is on the HFA’s Web site.
2. Local Government or Nonprofit Loans
If state HFA where buyer resides doesn’t offer the loans, buyer can ask an HFA staff person to direct to local nonprofits or state or local government agencies that do. If that person can’t help, a good place to start a search is with a national nonprofit group called NeighborWorks, which maintains a list of more than 200 local affiliates that provide housing assistance. The loan programs for each of these affiliates differ, so buyers will need to check with them on their underwriting standards and loan terms—and even on whether they make bridge loans repayable with the tax credit.
3. Local HFAs
Another source, if state HFA where buyer resides can’t help, might be the National Association of Local Housing Finance Agencies. Local HFAs are much like state HFAs but with jurisdictions limited to their locality. To learn whether there’s a local HFA in your area, call NALHFA at 202/367-1197.
4. FHA-approved Lenders
If buyer is unable to identify a state or local HFA or other governmental agency or nonprofit, buyer can tap bridge-loan assistance if buyer can work with a lender approved by the U.S. Department of Housing and Urban Development to originate FHA-backed loans. HUD maintains a database of FHA lenders on its Web site that’s searchable by a number of criteria including city, state, county, and service area.
In a difference with the assistance provided by state and local agencies or nonprofits, the bridge loans provided by private, for-profit FHA-approved lenders must be structured in the form of a personal loan or line of credit collateralized by the tax credit. The bridge loan cannot be structured as a second mortgage.
Also, although FHA allows buyers to use the bridge loan to cover the closing costs or to buy down the interest rate, buyers can use it for the down payment only after they’ve covered the 3.5 percent minimum that’s required on any FHA loan. Thus, buyers must come up with the 3.5 percent minimum down payment themselves or else tap another source of assistance for it. That can include gifts from family. Seller-funded down-payment programs are not permitted.
Since it’s the HUD-approved lender and not FHA itself that’s making the bridge loan, actual loan terms will vary. At a minimum, though, the bridge loan must meet certain restrictions, most of them imposed to weed out fraud or ensure borrowers are not borrowing more than what they can afford. These include:
- Loans cannot result in cash back to the borrower.
- The amount can’t exceed what’s needed for the downpayment, closing costs, and prepaid expenses.
- If there’s a monthly repayment, it must be included within the qualifying ratios and, when combined with the first mortgage, can’t exceed the borrower’s reasonable ability to pay.
- Payments must be included in the qualifying ratios, unless they are deferred for at least 36 months.
- There can be no balloon payment required before 10 years.
- Financing fee cannot exceed 2.5% of the tax credit
To read about $8,000 tax credit and other tax credit related posts - For details see ARCHIVES, February 2009 and March 2009, and 2009 – Library of Posts.
NOTE: For details contact your lender
SOURCE: REALTOR Magazine, National Association of REALTORS
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