Although the HUD guidance allows the bridge loans to be used in conjunction with FHA first mortgage financing, few lenders are expected to create bridge-loan products. There are a number of reasons for this. First, the loans must be structured as personal loans rather than as second mortgages or mortgage-backed lines of credit because of statutory restrictions. Second, the limited time-frame of the tax credit program–it’s set to expire before Dec. 1 of this year–leaves little time for lenders to set up and operate programs profitably.

Given these limitations, despite the announcement by HUD, the best opportunity for buyers to leverage the tax credit for up-front assistance is through programs set up by some state housing finance agencies. About a dozen state housing finance agencies (public bodies that are instrumentalities of state government) have developed their own tax credit bridge loan programs, so buyers in states whose HFAs offer such programs can monetize the tax credit upfront to cover all or part of their downpayment.

Information on the state HFAs that offer tax credit bridge loans is available at the Web site of the National Council of State Housing Agencies.

FHA Guidance has Limited Scope

Under the guidance from HUD, FHA-approved lenders can develop bridge loans that home buyers can use to help cover their closing costs, buy down their interest rate, or put down more than the minimum 3.5 percent. The bridge loans must be structured as personal loans.

The loans can’t be used to cover the minimum 3.5 percent, senior HUD officials told reporters on a conference call Friday morning.

Thus, buyers applying for FHA-backed financing with an FHA-approved lender that offers a bridge-loan program can get a bridge loan to bring down the upfront costs of buying a home significantly but would still have to come up with the minimum 3.5 percent downpayment.

The first-time homebuyer tax credit was enacted last year–and improved upon earlier this year–to help encourage households to enter the housing market while interest rates are low and affordability is high. The credit is worth up to $8,000 and is available to households that haven’t owned a home in at least three years. The credit does not have to be repaid, and is fully reimbursable, so households can get their credit returned to them in the form of a payment.

Learn more about the credit, including how to apply for it this year even if you’ve already filed your taxes, at REALTOR.org.

Source: Robert Freedman, REALTOR® Magazine Online