MHI Housing Alert

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MHI Housing Alert - May 12, 2009

This Federal Housing Administration announced today that it would permit its lenders to allow homebuyers to apply the $8000 first-time homebuyer tax credit to their down payment through the use of secondary financing which can be obtained from a government agency (see HUD-4155.1 REV-5, paragraphs 1-13 A and B) or an FHA-approved nonprofit (a list of FHA approved non-profits can be found at: http://www.hud.gov/offices/hsg/sfh/np/np_hoc.cfm).

Previously, the credit could only be accessed at the time the homebuyer completed their tax return. FHA now permits homebuyers who finance their purchase with an FHA loan to access the credit at closing through the use of a short-term loan or “secondary financing”.

The secondary financing works as follows:

- 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 needed for the downpayment, closing costs and prepaid expenses.

- The tax credit advance must provide that if the borrower does not repay the amount borrowed by the designated deadline, that principal and interest payments begin automatically.

- If payments on the tax credit advance are required, they must be included in qualifying the borrower and, when combined with the first mortgage, cannot exceed the borrower’s reasonable ability to pay.

- If payments on the tax credit are deferred, the deferment must be for a minimum of 36 months in order for the payment to not be included in the qualifying ratios.

- The tax credit advance second mortgage must not provide for a balloon payment before ten years.

- The amount that may be borrowed in this manner may not exceed the anticipated tax credit due the homebuyer based on the computations of form IRS 5405.

- Fees and charges for the tax credit advance loan are not to exceed a nominal amount necessary for preparing and administering the loan.

The tax credit is available to first-time homebuyers, including those who purchase manufactured homes. For more information, contact Tom Beers at tbeers@mfghome.org or contact FHA directly at 1-800-CALL-FHA (1-800-225-5342).

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