Short-term bridge loans are now available from a variety of lenders
so that buyers can tap the benefits of the $8,000 Federal Housing Tax
Credit for First-Time Home Buyers upfront. If your clients are eligible
for the tax credit, these bridge loans will enable them to use the
money for their down payment and closing costs with the credit as
collateral. Consumers will have to pay the money back after they’ve
filed their tax return and received a refund.
There are essentially four sources for this type of financing, and their terms can vary considerably.
1. State HFA Bridge Loans
As of early June 2009, 10 state Housing Finance
Agencies offered tax-credit bridge loans, and more were planning to do
so. The easiest way to learn whether one is offered in your state is to
get your HFA’s phone number through a Housing Finance Agency list maintained by the National Council of State Housing Agencies (NCSHA). NCSHA also maintains a list of HFAs
that already offer the bridge loans. The HFAs with loan programs
already in place are Colorado, Delaware, Idaho, Kentucky, Missouri, New
Jersey, New Mexico, Ohio, Pennsylvania, and Tennessee.
If your state HFA offers the loans, you should be able
to get more information about them on the agency’s Web site. Look for
“tax credit advance loan” or some variant of that, or else look for
information on the HFA’s regular mortgage program, which should include
info on the tax-credit advance loan somewhere. Although each state HFA
loan differs, here are some typical characteristics:
- You’ll need to make a minimum downpayment from your own funds, probably around $1,000.
- You’ll have to go through local lenders approved by the HFA to actually originate the loan, since HFAs are not originators.
- In some cases, the loans are interest-free; check with the state HFA to find out.
- The HFAs have set aside a limited amount of funds for the loans, so they tend to be made on a first-come, first-served basis.
- You’ll be expected to use HFA-backed financing for the mortgage on
your home purchase. This financing typically comes with a below-market
interest rate and usually requires borrowers to meet eligibility
criteria. These criteria will vary greatly, but they often require
borrowers to be first-timer buyers and meet income-eligibility
requirements. For the bridge loans, there’s a good chance the criteria
will be similar to what’s required for the tax credit.
Since the bridge loans are made in tandem with your HFA’s financing
products, you apply for the loans when you apply with the HFA-approved
lender for your mortgage financing. You should be able to find a list
of approved lenders on the HFA’s Web site.
2. Local Government or Nonprofit Loans
If your state HFA doesn’t offer the loans, you can ask an HFA staff
person to direct you to local nonprofits or state or local government
agencies that do. If that person can’t help you, a good place to start
a search is with a national nonprofit group called NeighborWorks, which
maintains a list of more than 200 local affiliates
that provide housing assistance. The loan programs for each of these
affiliates differ, so you or your client will need to check with them
on their underwriting standards and loan terms—and even on whether they
make bridge loans repayable with the tax credit.
3. Local HFAs
Another source, if your state HFA can’t help you, might be the National Association of Local Housing Finance Agencies.
Local HFAs are much like state HFAs but with jurisdictions limited to
their locality. To learn whether there’s a local HFA in your area, call
NALHFA at 202/367-1197.
4. FHA-approved Lenders
If you’re unable to identify a state or local HFA or other governmental
agency or nonprofit to assist you, you can tap bridge-loan assistance
if you work with a lender approved by the U.S. Department of Housing
and Urban Development to originate FHA-backed loans. HUD maintains a database of FHA lenders on its Web site that’s searchable by a number of criteria including city, state, county, and service area.
In a difference with the assistance provided by state and local
agencies or nonprofits, the bridge loans provided by private,
for-profit FHA-approved lenders must be structured in the form of a
personal loan or line of credit collateralized by the tax credit. The
bridge loan can’t be structured as a second mortgage.
Also, although FHA allows you to use the bridge loan to cover your
closing costs or to buy down your interest rate, you can use it for the
down payment only after you’ve covered the 3.5 percent minimum that’s
required on any FHA loan. Thus, you’ll have to come up with the 3.5
percent minimum down payment yourself or else tap another source of
assistance for it. That can include gifts from family. Seller-funded
down-payment programs are not permitted. HUD provides complete details
in a May 29 Mortgagee Letter on “Using First-Time Homebuyer Tax Credits” (2009-15) that went to its approved lenders. Since it’s the HUD-approved lender and not FHA itself that’s making
the bridge loan, actual loan terms will vary. At a minimum, though, the
bridge loan must meet certain restrictions, most of them imposed to
weed out fraud or ensure borrowers aren’t getting in over their heads.
These include:
- Loans can’t result in cash back to the borrower.
- The amount can’t exceed what’s needed for the downpayment, closing costs, and prepaid expenses.
- If there’s a monthly repayment, it must be included within the
qualifying ratios and, when combined with the first mortgage, can’t
exceed the borrower’s reasonable ability to pay.
- Payments must be deferred for at least 36 months to not be included in the qualifying ratios.
- There can be no balloon payment required before 10 years.
Start with the Deepest Assistance First
Since state HFA bridge loans are typically allowed for as much of the
downpayment as possible (up to the credit limit of $8,000), your
client’s best bet is to start with the state HFA. If it doesn’t have a
program in place, learn what you can from it about other state or local
programs, including nonprofits. If these sources don’t pan out, your
buyer can work with an FHA-approved lender. However, since HUD requires
borrowers to put down a minimum of 3.5 percent, they can access
bridge-loan assistance only for other upfront expenses such as closing
costs, an interest-rate buy-down, or a portion of the downpayment above
3.5 percent.
By Robert Freedman
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June 2009, REALTOR® magazine
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