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May 29, 2009

U.S. Department of Housing News Release and FHA Mortgagee Letter 2009-15

FHA-approved lenders received the go-ahead from HUD/FHA to develop bridge-loan products that enable first-time buyers to use the benefits of the federal homebuyer tax credit to help cover closing costs, buy down the interest rate, or put down more than the minimum 3.5 percent.  The American Recovery and Reinvestment Act of 2009 (Recovery Act) provides for as much as an $8000 tax credit to qualified first-time homebuyers.

However, there are certain conditions on the use of the tax credit in this manner:

•  The tax credit advance, when combined with the FHA-insured first mortgage may not result in cash back to the borrower.
 
•  The second lien may not exceed the total amount needed for the down payment, closing costs, and prepaid expenses.

•  Secondary financing may be “soft” (silent) or require a monthly repayment. 

•  If payments are required, they must be included within the qualifying ratios and, when combined with the first mortgage, cannot exceed the borrower’s reasonable ability to pay. 
 
•  Payments must be deferred for at least 36 months to not be included in the qualifying ratios.

•  If the tax credit advance loan has a short term for repayment, it must also provide that if the borrower fails to repay by the designated deadline, principal and interest payments begin automatically or the loan converts to a “soft” second.

•  The secondary financing may not require a balloon payment before ten years. 

For a copy of the HUD Announcement, click here.

For a copy of the FHA Mortgagee Letter 2009-15, click here.

For a summary of the tax credit from NAR, click here.