And we think they mean it this time, HUD issued Mortgagee Letter (ML) 2009-15, “Using First-Time Homebuyer Tax Credits for the Down payment” on May 11, 2009 only to pull it from their site the same day. Needless to say there was much rumor and speculation about the “whys” and “what-fors” but they have now re-issued the Mortgagee Letter and here’s the skinny…

This is not really a new concept. At least 10 states have already enacted some form of “Tax Credit Advance” legislation. They offer secondary financing and/or short-term loans to get the $8,000 tax credit provided in the American Recovery and Reinvestment Act of 2009 to the homebuyer BEFORE closing to use as down-payment and/or to cover closing costs.

What’s new is FHA is playing catch up by finally defining:

• WHO can offer secondary financing or purchase the tax credit; and
• HOW the loans work.

A little scary since the horse has been out of the barn for awhile, but okay.

FHA has determined that there are two ways to assist homebuyers who are eligible for the tax credit:

1. Secondary Financing OR
2. Purchase of the Tax Credit

WHO is eligible to offer the assistance:

• Federal, state and local government agencies
• Non-Profit Instrumentalities of government
• FHA-approved non-profits
• FHA approved mortgagees

HOW Secondary Finance works:

• NO cash back to borrower.
• Loan amount can’t exceed total needed for down-payment, closing costs and prepaids
• Secondary financing may be “soft” (silent) OR require monthly repayment.
• If payments are required, they must be included in ratios.
• If payments are deferred , the deferment must be at least 36 months in order to exclude the payment from qualifying ratios.
• If the tax credit advance loan has a short term for repayment and the borrower fails to repay by the designated deadline, principal and interest payments begin automatically or the loan converts to a “soft” second.
• No balloon payments before 10 years.

HOW the Purchase of the Tax Credit Works:

• Proceeds of the sale of the tax credit may not exceed the anticipated tax credit due.
• Borrower must sign certification that tax credit is not subject to offset of other debt.
• Copy of form IRS 5405 must be retained in the case binder.
• Costs associated with purchase cannot exceed 2.5% of anticipated credit.
• If the FHA approved mortgagee purchases the tax credit the proceeds cannot be used for the 3.5% required down-payment. Only for closing costs, additional down-payment, or buy-down of interest rate.
• HERE’S THE KICKER: The same rule stated above applies if the tax credit is purchased by the SELLER or any entity that financially benefits from the transaction.

HEREIN LIES THE CAN OF WORMS!!! (and the huge difference from the original Mortgagee Letter that was issued.)

FHA is quietly admitting that this is an asset for sale and not just the “approved” entities can purchase an asset. Almost anybody can purchase the asset. They also ‘get’ that they’ve opened a Pandora’s Box because they go on to explain how there will be special monitoring information that has to be entered into FHA Connection including:

• Name and EIN of the party who purchased the tax credit
• Amount of anticipated tax credit
• Amount the homebuyer paid in fees

They also threaten:

• Non-FHA approved entities who charge excessive fees will be referred to the Federal Trade Commission and State Attorney General office.

Keep your eyes and ears open to opportunities that might be coming if your local governments or FHA approved non-profits get involved. Use this Mortgagee Letter to know the difference between an acceptable option for your borrowers and a scam that won’t make it through underwriting.

No questions asked, there will be some convoluted dealings as everyone turns and twists this “purchase of the tax credit” option to make it result in more closings. And probably by trying to push the envelope on the rules. Because of this, I am sure there more about this from FHA over the coming months.

This is ‘hot-off the press’ so I wanted to pass along the information I have. As I learn more about this and information is disseminated from our lenders, I will be sure to pass it along to you!

Kelvin Woodfin

LEGACY MORTGAGE GROUP

www.kelvinwoodfin.com

This entry was posted on Thursday, June 4th, 2009 at 1:26 pm and is filed under Mortgage. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.