Jeremy's Blog

FHA has not yet republished the mortgagee letter on monetizing the tax credit for the downpayment. Since we are receiving numerous inquiries about the status of the letter, we are providing this update. We do expect it soon (possibly today) and do not expect significant changes.

We believe the reason for the delay is more administrative in origin than substantive. First, the Secretary did announce the policy at an NAR meeting last Tuesday. He wouldn't have made this statement if there was any doubt about the policy being implemented. Apparently since the tax credit was part of the stimulus bill, it required review by other Obama administration officials (possibly OMB). FHA staff inadvertently published the letter without obtaining the necessary concurrence and the Secretary was not aware of it (See bold below).

In his speech, Secretary Donovan outlined the main points of the program. He said:

"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. FHA will be publishing the details shortly."

We have also received inquiries about the proposed program.

1. Lender loan type

While a government entity or an approved nonprofit can provide a second mortgage, an approved lender can only provide a short-term loan that is secured by the anticipated tax credit. FHA is limited by law from permitting mortgage lenders from taking second mortgages on FHA loans for downpayment purposes.

2. Seller participation in the loan transaction

We have received inquiries about seller participation in these transactions. It is important to consider the law passed last year with regard to the termination of the seller funded downpayment assistance program. It prohibits sellers or any other interested third parties from providing funds necessary for the downpayment. We encourage you to discuss this matter with your attorneys. See the legislative language below.

C) Prohibited Sources (For Downpayment)

In no case shall the funds required by subparagraph (A) (i.e. cash investment) consist, in whole or in part, of funds provided by any of the following parties before, during or after closing of the property sale:

(i) The seller or any other person or entity that financially benefits from the transaction."

(ii) Any third party or entity that is reimbursed, directly or indirectly, by any of the parties described in clause (i)."

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