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2009 Tax Credit and FHA Loan Down Payments Update
In May, 2009 new rules were issued covering the 2009 First Time Homebuyer's Tax Credit and down payments on FHA loans. In the first press release about the program, the Department of Housing and Urban Development appeared to allow home buyers interested in FHA mortgages to use a short-term "bridge loan" against their 2009 First Time Homebuyer's Tax Credit.
FHA borrowers were told they could use the loan as a down payment on their homes, but legal issues prevent banks from issuing down payment assistance on FHA mortgages. Since the initial May announcement, the rules have been revised so that such bridge loans are used within federal guidelines.
Here's a simple breakdown of the issue:
The 2009 First Time Homebuyer's Tax Credit lets people purchase their first primary residence with a tax break up to $8000.
The tax break can only be claimed for 2009 home purchases.
The tax break money is paid after the purchaser files an income tax return for 2009.
The first set of FHA rules released to the public appeared to let banks offer bridge loans to borrowers, letting them use the amount of the tax break as a down payment on an FHA home loan.
There are federal laws which prevent banks from offering down payment assistance.
The bridge loans could be interpreted as down payment assistance even though the loan is simply to cover the amount of an income tax refund.
Under federal law, only certain charitable organizations and other approved institutions are allowed to provide down payment assistance on FHA loans.
Additional guidance was issued by the FHA to revise and correct the policy. Under the new guidelines FHA home loan applicants can still apply for bridge loans, but the loans cannot be used to meet the FHA's minimum 3.5% down payment. The money can be applied to other expenses or be paid in addition to the required down payment.
Putting an additional $8000 down on your FHA mortgage beyond the required 3.5% is a sound investment. FHA loan applicants are also allowed to use the bridge loans to pay for closing costs, up front interest payments or other expenses related to closing the deal on an FHA home loan.
In spite of the initial confusion, FHA rules are clear now--bridge loans are permitted, but the FHA's required down payment must still come from the borrower. The Department of Housing and Urban Development's official site states FHA guidelines are designed to allow people interested in an FHA mortgage to cut their up front costs while requiring the borrower to have a personal investment in the property bought with an FHA home loan.
For more information on how to apply for a bridge loan towards your expected 2009 First Time Homebuyer's Tax Credit, ask your FHA-approved lender to explain the process.
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