$8,000 Tax Credit Can be Used as a Down Payment…

15 May
May 15, 2009

WOW.

Housing and Urban Development (HUD) Secretary, Shaun Donovan, said on Tuesday that the Federal Housing Administration (FHA) will allow its lenders to facilitate the use of the $8,000 First-Time Homebuyers Credit as down-payment funds through short-term bridge loans. Doing so allows a first-time purchaser to access the tax credit funds at the closing table immediately. I have mixed feelings about this.

On one hand, it is a great way to open up avenues of home-ownership to many first-time purchasers who do not have a ton of liquid cash on hand. Prices are low, inventory is good (but dwindling), and interest rates are unbelievably low. If the only barrier to homeownership for an otherwise well qualified first-time purchaser is the lack of sufficient down-payment funds, this change in the rules on how the tax credit can be applied comes as great news, and should spur many buyers on the brink to get off the fence and purchase.

BUT…

This idea is somewhat counter-intuitive to me. We are in our current financial crisis due in large part to the over-zealousness of many lenders, lenders who gave loans and money to people who wanted to purchase homes that they were either not qualified for or homes that went well beyond their means. This immediate liquidizing of the $8,000 tax credit kind of looks like the same concept to me, just packaged a little bit differently.

Ultimately what this means is that the FHA is taking on another batch of tremendously RISKY mortgages, mortages that are given to buyers who have little or no liquid capital right smack in the middle of the most significant economic downturn of the last 30 years.

Great idea if the purchasers who use this program do not spend their tax credit money on other items AND save it for repaying the short-term bridge loan when it comes due… BUT (there’s that word again…) how many purchasers will actually do that?

At any rate, this is another great piece of news for first-time homebuyers, and yet another reason 2009 will go down in recent history as “THE YEAR OF THE FIRST-TIME BUYER.”

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