FHA — Yes (Sort Of) To No Money Down
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HUD has come out with new regulations which will allow borrowers to get FHA financing with no money down — but only in very limited circumstances.
On May 11th HUD said first-time buyers could use their $8,000 tax credit to fund their FHA downpayment. In effect, borrowers would get a short-term bridge loan that would be repaid when the money for the tax credit was received.
But, whoops, it turns out that such secondary loans are banned, taboo and not allowed. As a result HUD took down the May 11th almost immediately.
New Policy
Now HUD is back with a replacement letter that says first-time buyers CAN use their tax credit for an FHA down payment — but only when it comes from a state housing agency or approved nonprofit organization.
However, most FHA loans do not come from state housing agencies or nonprofit groups, they come from private lenders such as banks and savings-and-loan associations. When loans come from these sources it’s possible to get a secondary loan — but NOT for a down payment.
“Current law,” says HUD, “does not permit approved lenders to monetize the tax credit to meet the required 3.5 percent minimum down payment, but, under the terms of today’s announcement, lenders can now monetize the tax credit for use as additional down payment, or for other closing costs, which can help achieve a lower interest rate.”
FHA Loans With No Money Down
For some first-time buyers the new policy can be translated into home purchases with nothing down. Imagine that Smith gets funding from a state housing agency and buys a home for $228,500. The FHA-required down payment is 3.5 percent of the purchase price or $7,998 in this case.
What About All FHA Borrowers?
Why not allow first-time buyers — or all buyers — to get FHA financing with nothing down?
Risk. The FHA program is an insurance plan. Less down equals more risk and the FHA program has traditionally said that borrowers must come up with the down payment from only two sources: savings or a gift.
The down payment requirement makes sense but is not entirely fair. For instance, if my parents are rich and your parents aren’t, guess who can get a down payment gift — and who can’t?
Also, the FHA allows “seller contributions” for as much as 6 percent of the sale price, meaning that if an owner is sufficiently desperate he or she will pay all the buyer’s closing costs and extra dollars that can be used to increase the down payment. The effect of this policy is to lower the buyer’s cash costs at closing, money that can then be used for the down payment.
If you’re a first-time buyer, please speak with local brokers and lenders to see what’s available under the new HUD policy from state housing agencies and nonprofits.
For a look at program specifics, please go to the IRS page, First-Time Homebuyer Credit.
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