I’m sure many of you have heard over the past few weeks, or maybe even saw some of the advertisements touting that FHA will now allow First-time Homebuyers to use the stimulus packages $8000 tax credit as a down payment for a home. As exciting as that may sound to a first-time homebuyer, it is not entirely true.
As you may remember, when the Bush administration came out with the original stimulus package, the amount was actually $7500 and in truth was not as much a tax credit, but a 15 year loan. With the Obama stimulus package the tax credit amount was raised to $8000 and did not have to be paid back. However, this money could not be used for the down payment mainly because the borrower would receive the tax credit after the close.
However, over the past weeks, HUD has come out with a new policy for FHA loans announcing that the stimulus tax credit can be used for down payment on an FHA loan. But can it? When you are approved for an FHA loan you are still required by current FHA guidelines to provide the 3.5% down payment as before. This still can be achieved by the same standard methods of either the borrower providing it in total, or from a relative or family member, Federal, State, and local government non-profit agencies, FHA approved non-profits or borrowing from your employer or 401 K. However, once you obtain the original 3.5% down-payment, you can then apply for the $8000 tax credit prior to close of escrow. All in all, what this means is you come up with the 3.5% down payment, then the $8000 tax credit can be used as an addition to your down payment. In essence, what this is normally classified as is a Bridge Loan. By definition, a Bridge Loan is a loan which enables buyers to get financing to make a down payment and pay closing costs on a new home. The question here is how many lenders or banks will be willing to secure a second loan against a tax credit?
As confusing as the above may be, there are additional items within the guidelines that many lenders are trying to sort through. When you combine the tax credit with the FHA first loan, cash back to the borrower is not allowed. The second lien may not exceed the total amount needed for the closing costs, down payment and prepaid expenses. In other words if your total costs are $6000, that’s all you can use out of the $8000. Secondary financing may be a silent or soft second. If payments are required, these must be included in the borrowers qualifying ratios, meaning your debt-to-income ratios will increase. I could go on and on. But you can see the confusion building. It may be a silent second, but then again maybe not. You could be asked for monthly payments, maybe not.
At this point, no one seems to know how this tax credit for FHA loans is going to be used, if it will be used at all. I already know of a few of the big retail banks who have decided not to participate at all. There are just too many legal consequences that could occur the way it is currently presented.
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