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:
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additional cash down payment
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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
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The Arizona Mortgage Guru on “Do I Qualify for an FHA Loan?” (note this takes you away from The Phoenix Agents website)
Heather Barr is a Realtor. She's a chow hound, a gym rat, and the only political junkie in the USA who can actually keep her political views to herself. Instead, she focuses on educating her clients about the often-confusing world of residential real estate.
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could a qualified person get a 8000.00 tax credit to buy a 10000.00 house?
In short, no. You can’t get $8,000 for buying a $10,000 house. Why?
There’s no minimum purchase, but the tax credit is written as “10% of the purchase price, up to $8,000″. Thus, if you spent $10,000 on a home, you’d get 10% of that price - or $1,000 - as a tax credit.
One other point: there’s no such thing as a $10,000 home in metro Phoenix that one could actually live in. If it was priced at $10,000 it would not pass any kind of health and safety inspection, it would be condemned. See this post for an example of a Phoenix-area house listed for sale at $12,500 — http://thephoenixagents.com/the-highs-and-the-lows-3/
Thanks again for reading! We hope you come back often and post more comments.
You gave a nice description on bridge loans (using physical bridges for comparison). I know next to nothing about them but the way you introduced it into the topic made a lot of sense. Thanks a lot!
Hello:
I would not worry too much about your under-used FTHB tax credit ($4,000). The regulations will protect your client.
The part I don’t like about this offer, is it allows the party processing the loan to collect 2% of the amount loaned. I have asked many of my tax CPA friends the results they are seeing when their FTHBs are amending their 2008 tax returns, filing electronically and having the money direct deposited to their account. Two weeks. All positive responses. My problem is, you take that 2% fee, multiply it by 52 weeks, then divide it by the two weeks you wait to get your money back for free, and you end up at an annualized rate of about 52%. If the borrower has the money, or can receive a gift (which does not have to be repaid, but may be) to help out, I tell my clients to use their own money. Am I missing something?
Thanks for visiting our humble abode! I agree with you completely Bill! The thing that’s always worried me is how much processors of these loans will charge to make them. I can see it getting very unethical very easily. How about I make you a loan for your First Time Homebuyer (FTHB) Tax Credit, then you sign over your tax refund to my corporate bank account, and I pledge to give you the difference? Hmmm. Sounds good on the surface, but how long do you think it will take processors to figure out that some (many?) homebuyers won’t remember to check later in the month (year?) for their ‘refund’? The scenario you’ve described is scarier, because so few consumers understand the compounding powers of interest. Two percent sounds SO low, unless it isn’t, just as you’ve described.
Hello Xander,
I’m not aware of anyone doing these bridge loans at this time either. The FHA’s new rule allows “state Housing Finance Agencies and certain non-profits to ‘monetize’ up to the full amount of the tax credit…” (http://is.gd/Xltf). So far none of my preferred mortgage lenders know of anyone making these loans either. Perhaps a friend, family member or even your church would be willing to come to your aid? If I learn more, I will post here. Thanks for visiting our site; we sincerely wish you the best of luck in wrapping up the deal on your new home.
Heather, please contact me ASAP if you know of anyone in PHX actually processing these bridge loans.
It’s so important to me right now, TIA!
I had to pull out my original copy of the HUD Mortgagee Letter 2009-15 from May 11th (that was retracted) to believe that this wasn’t a mistake. But I saw the new one on the HUD site. Wow! And thanks for the update.
Let me just say that I imagined pay-day loan sharks in May… and know that they will be migrating in to exploit this bloody mess.
Yes the intent is genuine, but stating 2.5% in fees sets the standard and that they will be a “soft” or “silent” seconds creates a future time-bomb for the title insurance folks. The potential IRS issues also seem daunting because, I believe, most people using FHA loans do their own taxes.