Just last week, the Secretary of HUD announced new federal guidelines for FHA home loans which allow First-Time Homebuyers (FTH) to monetize their $8,000 Obama Tax Credit upfront, for use toward their down payment or closing costs, rather than only after close of escrow.  How will this work? No one really knows yet – federal lending guideline changes usually take a month or so to manifest into concrete checklists and phone numbers you can call to take advantage of them. But it looks like state Housing Finance Agencies and HUD-approved nonprofit organizations will be involved, and will provide the upfront funds to borrowers (for a small fee, of course), which they’ll be reimbursed at tax time next year.

However, the author of the article, noted that she has not heard anyone actually suggest that the upfront monetization of the FHA tax credit won’t be effective at stimulating home sales. On the flip-side, the National Association of Home Buyers’ projections show that about 160,000 homes will be sold as a direct result of this new incentive. But there are folks who don’t like it, and their arguments tend to focus on the worry that no-skin-in-the-game borrowers are the sort of problem homeowner who created the market madness by just walking away when their homes devalued. The pestimistic crowd says that that we might be returning to the bad old days of 100 % financing.

FHA loan overview:
This is a new era of mortgage lending than the stated income days of old (old =2005). It wasn’t no-skin-in-the-game borrowers who walked away and created the foreclosure crisis, it was no-skin-in-the-game borrowers who couldn’t afford their escalating mortgage payments who were the problem children of the real estate market. The upfront monetization of the $8,000 tax credit will only be available for FHA loans, which require full documentation of income, impose strict and low debt-to-income ratios and are characterized by low, 30-year fixed interest rates and payments. This is not a return to the subprime era, when you only needed to be human and alive to get a loan (notwithstanding those few times we saw the deceased and the canine get mortgages).

On careful reading of the few details we do have on this program, it’s clear that it does not, in fact, reduce the amount of down payment funds that need to be deposited by the buyer to get an FHA loan. The $8,000 credit cannot, under current law, be used to meet the minimum 3.5% down payment requirement (although gifts from relatives can). The upfront $8,000 is available for home-buyers to use as extra down payment money (to buy more or lower monthly payments), to pay discount points (reducing their interest rates) or to defray closing costs.  That’s it.

This FHA loan program changes the time frame in which First-Time Homebuyers who close escrow by December 1, 2009 will be able to benefit from their tax credit. Frankly, I’d imagine this will mean lots more folks will put the funds into their homes and into making their loans more affordable.