Friday, May 29, 2009

Bridge Loans Using $8,000 Homebuyer Tax Credit

Yesterday the FHA released new guidelines designed to further stimulate the struggling housing market.

The FHA (Federal Housing Administration, an arm of the federal Housing & Urban Development department) is now allowing ‘bridge loans.’

What’s A Bridge Loan?

Just like a physical bridge, bridge loan financing gets you from here to there.

Bridge loans are short term financing. In this case, the mortgage company loans the buyer additional money to cover the costs of home buying that are above and beyond the purchase price. In exchange, the buyer turns over his/her federal income tax credit money to the lender.

What Does the New Bridge Loan Cover?

The new FHA guidelines allow first time homebuyers to use bridge loans to cover the following costs:

  • additional cash down payment

  • mortgage interest rate buydown costs

Use Bridge Loan as Down Payment?

Most buyers can’t use bridge loan money as their required 3.50% cash down payment. However, buyers financing through state Housing Finance Agencies and certain non-profits will be able to use the tax credit for their down payments.

Why Is This Good?

The second two bulleted items above can both be great for a buyer. The bigger your down payment, the smaller your monthly mortgage payment. It almost goes without saying that lower interest rates mean lower payments.

Could This Be Bad?

Could be. A bridge loan by another name is often called a Payday Loan and Arizonans learned just how unpopular those are in the past election. The interest rates on short term loans can be sky-high. In addition there is a lot of data that shows mortgage default rates increase as cash down payments decrease. Finally, I haven't seen anything that addresses this situation: buyer borrows $4,000 on a bridge loan to cover closing costs, but is eligible for an $8,000 tax credit. Is the lender required to return the extra, unused $4,000? Presumably lenders will create their own regulations, but I'd advise buyers to read the fine print extra carefully if considering a bridge loan under these circumstances.

More Info for First Time Homebuyers