In a significant boost to the housing market, HUD Secretary Shaun Donovan announced yesterday that first-time buyers using FHA loans would soon be allowed to “monetize” the $8,000 federal first-time buyer tax credit and use the funds for their downpayment.
“We, like you, believe that this new tax credit is not only a tremendous opportunity for first-time home buyers, but also an enormous benefit for communities struggling to deal with an oversupply of housing. … We all want to enable FHA consumers to access the tax credit funds when they close on their home loans so that the cash can be used as a downpayment. So FHA will permit trusted FHA-approved lenders and HUD-approved nonprofits, as well as state and local governmental entities to "monetize" the tax credit through short-term bridge loans. We think the policy is a real win for everyone, ensuring that borrowers can tap into the numerous organizations that are already part of the FHA network to receive this additional benefit,” Donovan told attendees at the National Association of Realtors (NAR) Real Estate Summit in Washington.
The details of the program still haven’t been announced, but the revised policy seems to offer two main benefits.
First, it clarifies HUD’s position regarding state finance agencies that had already established programs to help first-time buyers use the tax credit as part of their downpayment or additional equity in their home purchase. While a handful of states had already begun doing this, according to Rob Dietz, director of tax issues at the NAHB, others had been waiting for more information; Donovan’s remarks appear to give HUD’s blessing to the practice.
Second, the policy should bolster the housing market by allowing first-time buyers using FHA loans to stretch their dollar by using the federal credit at settlement as part of their closing funds, rather than waiting months for a refund on a tax return. “This allows them to solve the ‘chicken or the egg’ question [of which comes first]: the promised tax credit or the closing” that allows them to get the money, Dietz told BUILDER Tuesday, adding: “They have a right to this credit amount as a first-time buyer. It makes sense to turn this credit into their home equity.”
But two important questions remain unanswered: Will first-time home buyers be able to monetize the tax credit using any FHA-approved lender? Or will they need to be working with a state housing finance agency, which usually requires additional documentation and provides financial and homeownership counseling to those who qualify for their help?
“We will attempt to answer those questions once we’ve published our mortagee letter,” HUD spokesman Brian E. Sullivan told BUILDER Wednesday.
The answers are of considerable importance to builders.
Expanding the use of the tax credit “would be huge,” said David Drees, president of the Drees Company, a large private builder based in Kentucky. “The downpayment is still the biggest obstacle to buying a home for first-time buyers.”
If these buyers could monetize the tax credit, they would essentially receive a short-term bridge loan for the amount of the credit (which could vary based on their income and the home’s sales price). They could apply that money to their downpayment or as additional equity in their home. For buyers working with a state housing finance agency, the monetized tax credit often becomes a “soft” second mortgage, which they must pay back once they receive their tax refund. If buyers don’t pay it back quickly, Dietz explained, the bridge loan typically converts to a 10-year second mortgage, ensuring that the agency gets its money back no matter what.
“They're getting the money anyway,” Drees noted of the tax credit. “This just moves up the process.”
As advantageous as that sounds to sales-starved builders, though, the pending policy also raises unavoidable questions about whether “giving” buyers money for their downpayment via a short-term loan from an FHA lender or a state housing finance agency is really a good idea.
That’s what worries Jerry Wade, owner of Artistic Homes in Albuquerque, N.M., who wonders whether the new policy might allow borrowers who wouldn’t otherwise be able to amass a downpayment and qualify for a loan, buy a home. “That's what got us in this mess in the first place,” he said.
Dietz respectfully disagreed, pointing out the relatively small ($8,000) amount and universe (only first-time buyers) of the credit. “There’s no doubt that the purpose of the tax credit is to stimulate housing demand. We estimate new and existing home sales will increase by 160,000. But it’s not a tax credit that is in anyway large enough to reinflate the market—it’s just a useful and limited tool to smooth out the market,” he said. “As for causing sales to return to 2005 levels or push prices up, this tax credit is not capable of doing that.”
He also noted that different state housing finance agencies have different policies regarding the amount of their own equity that buyers must invest in a home when purchasing through such programs. It would be “unlikely” that monetizing the tax credit for FHA borrowers, who are required to contribute a 3.5% downpayment, would lead to a resurgence of “zero-down” loans, according to Dietz.
Alison Rice is senior editor, online, at BUILDER magazine. BUILDER senior editor John Caulfield also contributed reporting to this story from the BUILDER 100 Conference in Chicago.
Click here for the full text of Secretary Donovan’s remarks.
Click here for a list of state housing finance agencies that already have tax-credit monetization programs in effect.
Click here for more information in English and Spanish on the federal housing tax credit for first-time buyers.
Learn more about markets featured in this article: Chicago, IL.