An Explanation of FHA Mortgagee Letter on Tax Credit Monetization (Quoted from NAHB with my edits)
On Friday, May 29, HUD issued Mortgagee Letter 2009-15, which outlines the requirements that must be met in order to monetize the first-time homebuyer tax credit. The tax credit can be monetized in two ways:
• Government agencies and instrumentalities of government are allowed to make tax credit advances secured by second liens.
• FHA-approved mortgagees (lenders) and FHA-approved nonprofit organizations, as well as government agencies may purchase the anticipated tax credit from a homebuyer.
Following is an excellent FAQ from the NAHB (National Association of Home Builders) site regarding the tax credit monetization. #7 of the FAQ pertains to the most talked about topic of using the tax credit for down payment.
FAQ on Monetization
1. What exactly does “monetizing” the tax credit mean?
The term “monetization” is defined as the act of converting something into money. In the context of the first time home buyer tax credit, monetization means to treat the payment of the credit as if it was cash and allow its use as a payment for certain closing and downpayment expenses.
2. What is a “bridge” loan?
A bridge loan is a type of loan that is intended to be outstanding for a very short time period, often only a few days or weeks. Bridge loans are use to provide funds in situations where the borrower is expected to receive funds, such as the payment of this tax credit, within a very short time.
3. What is a state housing finance agency?
A state housing finance agency, often referred to as an “HFA,” is an organization that provides funding for a variety of loan and grant activities related to for-sale and rental housing. HFAs are also typically responsible to distribute grant funds from federal agencies, such as the U.S. Department of Housing and Urban Development (HUD).
4. How do I find out if my state housing finance agency is providing this service?
The best way to locate information about your state’s HFA is via the Internet. The National Council of State Housing Agencies (NCSHA) maintains a directory of state HFAs at: http://www.ncsha.org/section.cfm/4/39/187
5. What kinds of lenders are doing this? How can I find a list of lenders who are providing these short-term loans?
Many state housing finance agencies are either running or sponsoring programs that will use a tax credit for a downpayment. These programs often place a second lien on the home as collateral to secure the eventual repayment of the tax credit funds. Some state HFAs lend directly to home buyers while other HFAs work through networks of state-approved lenders.
In addition to state agencies, FHA-approved lenders may be offering to purchase a first time home buyer’s tax credit in conjunction with an FHA-insured mortgage loan.
Interested buyers should check with area lenders, home builders, or real estate agents for the names of participating lenders.
The Federal Housing Administration (FHA) also has an online tool to find FHA-approved lenders: http://www.fhaoutreach.gov/FHALookup/
6. What types of loans qualify?
Any lender could offer a program that would permit a first-time home buyer to apply the tax credit to funds needed for a loan that is obtained in conjunction with a home purchase. At this time, however, only the Federal Housing Administration (FHA) has issued guidance regarding the monetization of the first-time home buyer tax credit in conjunction with FHA-insured mortgage loans.
7. Can this short-term loan be applied to the minimum 3.5% downpayment required by my FHA loan or is it only available above and beyond the initial downpayment required?
If an FHA-approved lender or state housing finance agency is purchasing a tax credit and therefore making a short-term loan that is secured only by the repayment of the first-time home buyer tax credit, these funds cannot be applied to a downpayment in lieu of the home buyer’s funds. A home buyer still has to provide the 3.5 percent downpayment from his or her own funds. The money from the short-term loan can be used to pay closing costs and prepaid expenses, such as escrows for taxes, insurance, and community association assessments. These funds could also be used to make a larger downpayment or to “buy down” the interest rate on the mortgage loan.
However, many HFAs are offering tax credit loan programs that offer home buyers a short-term loan backed by the anticipated tax credit and secured by a second lien, which in general will be paid off after the homebuyer receives their income tax credit from the IRS. The proceeds of these loans may be used to satisfy the 3.5 percent downpayment requirement for FHA-insured loans. The National Council of State Housing Agencies (NCSHA) maintains a list of such tax credit loans programs at: http://www.ncsha.org/section.cfm/3/34/2920.
8. Who should I contact at my state housing finance agency to urge them to participate in this program if they don’t already do so? What should I say?
The best way to locate information about your state’s HFA is via the Internet. The National Council of State Housing Agencies (NCSHA) maintains a directory of state HFAs at: http://www.ncsha.org/section.cfm/4/39/187
Most state HFA web sites include phone numbers and email addresses by which they can be contacted.
9. Is this an interest-free loan or are there fees associated with this type of short-term loan?
If a governmental agency, such as a state housing finance agency, or an FHA-approved lender purchase a first-time home buyer tax credit, they are allowed to charge no more than 2.5 percent of amount of the credit.
10. How can I tell if the short-term loan on the tax credit is being offered by a reputable company?
If the organization is a unit of state government, it is safe to say that it is reputable. Otherwise, a home buyer may want to check with their local Better Business Bureau or through a state or local government’s department of consumer affairs.
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