It has amazed me how many people (mainly Realtors and lenders) are already out there proclaiming that you can now go back to the days of the “No money down” loans with FHA and you can do it right now. Well, that’s not quite the whole story. Let me explain:
What I know:
- I know that FHA is now allowing a borrower who qualifies for the $8000 tax credit to use that tax credit as the downpayment for purchasing the house.
- I know that they can’t get any cash back – if they need $7000, they can only get $7000.
- Government agencies and non-profits can do second liens against the house for the downpayment.
- The payments on that second lien need to be counted into qualifying rations. In other words, if you are going to borrow the $8000 so you can use it for your down payment, you need to be able to pay that amount back. Gee, there’s a novel concept.
- FHA approved mortgagees can do a “bridge loan” against the tax credit.
What I don’t know:
- I don’t know whether any FHA approved non-profits are going to be willing to do second liens in situations like that.
- I don’t know whether any FHA mortgagees (such as my bank) are going to be willing to do a bridge loan against a tax credit. Typically banks don’t like to do unsecured loans and I’m not sure how you can secure a loan against a tax credit.
- I don’t know what fees and rates will be charged for such a bridge loan.
Personal feelings:
- In today’s volatile market, if you aren’t able to come up with 3.5% for a downpayment on a house, maybe you should continue to rent for a while.
- The “tightest” 12 to 18 months that a home buyer typically has is their first 12 to 18 months when they are getting used to the house payment. Do we really want to add the cost of having to pay back a bridge loan on top of that?
So I guess my recommendation is essentially this:
- Take a deep breath.
- Wait to give the financial institutions the time to sort this all out.
- Once we know how the details of how that would work, then we can start promoting it as a done deal. Right now, FHA is saying, “We’ll allow it.” But I haven’t heard of anyone who has yet said, “We’ll write the loan.” Until we have that, it’s going to be hard to know whether this is really a good idea or not.
As a friend of mine likes to say after giving his opinion…..
“That, and $3.50, will get you a cup of coffee.”
Tom Vanderwell
P.S. The details of what I’ve put in here came from HUD Mortgagee Letter 2009-15.
Benjamin Ficker says:
I know that they can’t get any cash back – if they need $7000, they can only get $7000.
I may be reading this the wrong way, but would they get the remainder of the credit back? They need $5000 for the down payment, would they be able to still get the other $3000 grand in tax credit (assuming the purchase price qualified)?
May 13, 2009 — 3:14 pm
Tom Vanderwell says:
Benjamin,
Nope, you are reading it right and the answer to that is “I think so but I’m not sure.”
Tom
May 13, 2009 — 3:23 pm
Jeff Brown says:
If businesses will take tax refunds as partial/full payment for goods/services rendered, why would banks not be able to find a way to feel comfortable?
If the bank’s tax counsel looks at a tax return and sees the borrow qualifies for the tax credit, where’s the risk? That seems to be a fairly solid arrangement to me.
May 13, 2009 — 4:20 pm
Brian Brady says:
“But I haven’t heard of anyone who has yet said, “We’ll write the loan.””
If I were running H&R Block, I’d have a TRAL (Tax Refund Anticipation Loans) offered and on the website tonight. TRAL would be well collateralized and credit card interest could be charged. In addition to that loan profits, I’d offer it only to 2010 tax customers (I’d build the tax preparation fee into the loan) and pre-sell next year’s preparations. While I was at it, I’d offer mortgage payment insurance as an optional product.
This is a great opportunity for any financial services firm to make guaranteed money
May 13, 2009 — 6:02 pm
Tom Vanderwell says:
Jeff,
I’m not saying that it’s not a “good” loan. I’m just saying that the only part of a bank that’s used to doing those kind of loans is the commercial side. The lending mechanism isn’t in place yet, but people are promoting it as a done deal. It isn’t a done deal yet…..
Tom
May 13, 2009 — 6:03 pm
Missy Caulk says:
Tom, I have had emails from NAR and MAR both today touting this, if we can’t trust our trade associations well…not only emails from them but my company.
May 13, 2009 — 6:06 pm
Tom Vanderwell says:
Missy,
I don’t doubt in the least that they are touting it. I’m just saying that we really don’t know what it’s going to look like yet and until we do, we’re getting people excited over something that isn’t quite finished yet.
Brian – I don’t doubt at all that there will be some companies who will be all over it and put it together. While personally, I have misgivings about it, it will happen. I’m just frustrated and concerned that people are jumping to false conclusions.
I spend way too much time combating false assumptions in today’s market already. We don’t need people getting excited until they know the full story.
Tom
May 13, 2009 — 7:49 pm
Mortgage Cicerone says:
Hold on batman…HUD pulled the ML and is rethinking the wether or not they will allow. Additionally, it’s not as easy as one thinks to calculate eligibility. What happens if a eligiblity variable occurs for an individual and makes them ineligible for tax credit that is unforseen? There are many other “X” factors involved that make it a logistical nightmare for lenders.
Brian – There are numerous compliance and regulatory issues in the structure suggested for the TRAL setup. Believe me, lawyers and regulators are pouring over details and shooting holes all over the proposal.
The issues lie deep and are frought with risk.
May 13, 2009 — 11:25 pm
Joe Loomer says:
I was under the impression this is already a fact on the ground in Arizona. I do not live or work in that state, but as I understand it, in AZ the loan is NOT paid back if the owner stays in the property for the required three years. My mortgage guy here told me he thought that was illegal (and why we don’t do it in GA) because they where lending money with no intention of collection.
A possible positive slant to all this is the almost immediate requalification of a VA buyer into an FHA buyer (who now avoids the funding fee).
May 14, 2009 — 2:58 am
helixtimestwo says:
So, not only is the Government going to guarantee your FHA mortgage, but now they will front you the $8k needed to get in a home. Anyone else think this is a baaad idea..?
From the WSJ –
– Last year banks issued $180 billion of new mortgages insured by the FHA, which means they carry a 100% taxpayer guarantee. Many of these have the same characteristics as subprime loans: low downpayment requirements, high-risk borrowers, and in many cases shady mortgage originators. FHA now insures nearly one of every three new mortgages, up from 2% in 2006.
According to Mortgage Bankers Association data, more than one in eight FHA loans is now delinquent — nearly triple the rate on conventional, nonsubprime loan portfolios. Another 7.5% of recent FHA loans are in “serious delinquency,” which means at least three months overdue. –
May 14, 2009 — 5:32 am
Barry Bevis says:
If I understand this they can get the cash now without refiling their taxes or waiting till next year.
This will be HUGE for the buyer looking at lower priced homes. We have a lot of properties on the market from 80k to 150K.
If they can use the 8K rebate for a down payment then all of them can get into a FHA 3.5% down plan with no cash out of pocket.
CRAZY!
May 14, 2009 — 6:29 am
Greg Swann says:
List price: $235,000.
Offer: $228,500 with a 3% seller contribution for costs, $1,000 in earnest.
Down-payment: $8,000 in a tax-credit loan.
Balance: FHA 96.5% loan.
The earnest deposit will come back off the table at the end to pay the movers.
What this means in Phoenix is that we’re back to 100% loans for more than half the market.
Might need 4% from the sellers to pre-pay the mortgage insurance. I predict we’re going to see a lot of homes selling at $228,500.
May 14, 2009 — 6:38 am
Russ says:
“Might need 4% from the sellers to pre-pay the mortgage insurance. I predict we’re going to see a lot of homes selling at $228,500.”
If so, I predict many future Arizona listings at mcbreo.com , the site for FHA foreclosures.
May 14, 2009 — 9:43 am
Cindy DiCianni says:
It’s buzz word all over Kansas City that the $8000 can be used as the down payment. We’re getting lots of calls from potential buyers wanting to get started looking. So if the offical word comes out, they’ll be ready to make a decision. It’s created curiousity from buyers!
May 15, 2009 — 6:41 am
Jeremy Drobeck says:
FYI, this Mortgagee letter has been recinded. As of right now this program is not avalible.
May 15, 2009 — 9:13 am
Janie Miller says:
I have had a lot of questions about this. Until we know for sure, I am suggesting buyers not base the decision to buy or not on this. It could take a while for the decision to be made one way or the other.
May 18, 2009 — 6:34 am