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Thanks to the American Recovery and Reinvestment Act signed into law on February 17, 2009, all first time homebuyers are entitled to a tax credit of 10% of the purchase price of their new home up to $8,000. (See: FIRST-TIME HOMEBUYER TAX CREDIT)

This tax credit makes purchasing a first home more affordable to many people. However, there are still many more people that could qualify for a mortgage except for the fact that they lack the down payment. With the elimination of Down Payment Assistance Programs (See: Save Down Payment Assistance Programs!) there are a large number of would-be buyers who are still unable to buy.

On May 29, 2009, the Department of Housing and Urban Development (HUD) has provided guidance to FHA-Approved Lenders and FHA-Approved Non-Profit Organizations (as well as state, county and local governmental agencies) as to ways they can assist these home buyers who are eligible for the tax credit obtain funds for the down payment and/or closing costs and prepaid items.

Secondary Financing

FHA allows eligible governmental agencies and instrumentalities of government (Typically state housing agencies) to advance the tax credit to the home buyer in exchange for a second lien (2nd Mortgage) on the house being purchased based upon the following guidelines:

• The amount of the tax credit that is advanced cannot result in the home buyer getting cash back.


• The second lien may not exceed the amount of the down payment, closing costs and any prepaid expenses directly incurred by the home buyer.


• The second lien must be a soft second or require monthly payments. If monthly payments are required, they must be included in the home buyers housing expense ratio.


• In order for the payment on the second lien not to be added into the home buyers housing expense ratio, they must be deferred for at least 36 months.


• There may not be a balloon payment due before at least 10 years.


• If the second lien is for a short period of time and the home buyer defaults and does not satisfy the lien by the required due date, principal and interest payments will automatically begin or the lien will convert to a silent second.

Purchase of Tax Credit

FHA-approved lenders and non-profit organizations may purchase the tax credit anticipated by the home buyer. The home buyer may then use the proceeds of the sale of the anticipated tax credit for down payment, closing costs and pre-paid expenses only after the initial 3.5% down payment is met by the home buyers own funds. The purchase of the tax credit is subject to the following conditions:

• The proceeds of the sale of the tax credit may not exceed the amount of the anticipated tax credit. Home buyers can calculate the amount of their tax credit by completing IRS Form 5405.


• The borrowers must certify that the amount of the tax credit will not be offset by due to other indebtedness such as unpaid federally-insured student loans or back taxes owed to the IRS. The lender must perform their due diligence to ensure that there is no indebtedness that will affect the tax credit.


• FHA-approved Lenders and Non-Profits can charge a maximum of 2.5% of the anticipated tax credit to cover the costs and expenses of the purchase of the tax credits.


• The proceeds from the sale of the tax credits cannot be used to satisfy the minimum required down payment for an FHA loan. It can, however, be used toward the down payment in excess of the first 3.5%.

It is not yet clear how many FHA-Approved Lenders will participate with the purchase of the tax credits. There are already several state housing agencies that are providing the secondary financing to help the borrowers with the down payment.

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