Federal cash for mortgage down payments

WASHINGTON — The Obama administration has now put out the official word: Starting soon, first-time homebuyers nationwide will be able to turn their $8,000 federal tax credits into cash for use at closing if they use Federal Housing Administration (FHA) mortgage financing.

But in its final guidelines to lenders and homebuyers issued May 29, the Department of Housing and Urban Development (HUD) clarified that purchasers obtaining FHA loans through private lenders will have to invest at least some of their own funds — whether from personal savings or gifts from relatives — in the form of a minimum 3.5 percent down payment.

In other words, you'll need equity in the house to participate. This won't be a zero-down plan, with one exception: If you obtain your FHA loan through one of the approximately 10 state housing agency "tax-credit monetization" programs (including Washington state), you'll be allowed to pay for your entire down payment with the help of a bridge loan provided by the agency.

Those bridge loans generally are low-interest or no-interest short-term second liens secured by the property, and convert into second mortgages if they are not paid off with the proceeds of the tax credit.

For FHA lender-supplied cash advances, you'll be able to use the $8,000 credit — or whatever size credit you qualify to receive — for settlement fees, escrow charges, higher down payments or to "buy down" your interest rate to cut monthly payments.

How will this all work in practical terms? How do you apply? Here's a quick guide:

To start, you'll need to qualify as a first-time purchaser under the generous definition permitted by Congress — that is, you cannot have owned a principal residence during the previous three years, and your household gross income cannot exceed $95,000 for single taxpayers or $170,000 for married couples filing jointly.

To get the process rolling, you'll have to write a contract on a house you can afford to buy and apply for a mortgage through an FHA-approved lender. That shouldn't be difficult, since there are more than 12,000 lenders with that designation.

Large banks or bank-affiliated mortgage lenders are more likely to be geared up for the program in the near future, according to industry experts.

Homebuilders, who have advocated credit-monetization programs for months, are likely to be major participants. But get moving on house shopping as soon as possible, since the tax-credit program requires all eligible purchases to be closed no later than Nov. 30.

Besides the usual mortgage-application information, the lender is likely to require some extra paperwork from you, based on FHA guidelines:

• A filled-out IRS Form 5405, which is your request to the federal government to send you a tax-credit check. You can file an amendment to your 2008 return and get the credit within a matter of weeks, or you can file for it on your 2009 taxes. Most buyers are expected to opt for the amended return route. Form 5405 is available for download at www.irs.gov.

• Proof that you have no outstanding civil judgments, liens, unpaid taxes or other obligations that could reduce or eliminate the tax credit you're seeking.

• Confirmation from your employer that you are not subject to wage garnishments, which could also affect the amount of the credit.

To compensate for providing tax-credit money in advance, your lender will be strictly limited on what it can charge. According to FHA guidelines, fees must be "reasonable" and "nominal" — generally no more than 2.5 percent of the expected tax credit.

For example, if you're in line to receive the full $8,000 credit, that would mean that the most you could be charged for the cash in advance typically would be $200.

A senior HUD official said the agency wants to keep these fees as low as feasible to avoid abuses or gouging, and will be monitoring transactions to make sure participating lenders are adhering to the guidelines.

Though many lenders are not yet up to speed on the new monetization program, at least some say they are enthusiastic about taking part. Scott Stern, CEO of Lenders One, a national cooperative of more than 125 mortgage firms and the ninth-highest-volume loan originator in the country, said "100 percent" of his member firms will offer the monetization once they digest the administrative details.

"We think it's a great thing to simulate the economy and get housing moving again," he said in an interview.

Kenneth R. Harney: kenharney@earthlink.net