Loan Modification

FHA Deals With No Money Down To Be Rare

By Peter G. Miller

A lot has been made of the $8,000 tax credit and how it can be combined with FHA financing to buy a home with nothing down.

If you would dearly like such an arrangement to be widely available, that just isn’t the case today and won’t be the case tomorrow.

To understand why, you have to look at several realities.

First, the FHA is insistent that homebuyers purchase with 3.5 percent down, money which must come from either their own pocket or in the form of a gift.

Second, you can only use the tax credit for a downpayment when the money is advanced to you by a state housing agency or an approved nonprofit. Otherwise the tax credit will go into your bank account sometime after your purchase.

So to buy with FHA financing and no money down several things have to happen. You have to be able to get a “bridge” loan from an approved third-party — that state housing agency or approved nonprofit — AND you can’t borrow more than $228,571.42.

10 States

As this is written we have 50 states and 40 of them have not jumped forward to offer bridge financing. The ten states which have said their financing agencies will provide bridge loans for first-time buyers who use FHA financing include Colorado, Delaware, Idaho, Kentucky, Missouri, New Jersey, New Mexico, Ohio, Pennsylvania and Tennessee. For specifics, speak with lenders.

Okay, so why haven’t more states offered to help purchasers? Let’s logic this out: To provide a bridge loan a lender first has to have money. What is it that state housing agencies sorely lack? You guessed it, extra cash that can be advanced to lucky borrowers. The same is true for nonprofits, organizations not noted for a surplus of capital.

Cash & Risk

As to the loan limitation — that $228,571.42 — it’s easy to figure out — 3.5 percent of that amount is $8,000. In no case is the tax credit more than $8,000 so can’t get a deal with no money down if you need a bigger loan. In most jurisdictions you can’t get FHA financing in any event because state agencies will not provide the cash.

Despite the hoopla and hurrahs from the housing industry, I’m not sure that FHA loans with no money down are a good idea. Less down equals more risk, something the mortgage industry has discovered during the past few years. More risk also means more claims against the FHA reserve fund, something it doesn’t need. Lastly, is a little down too much to ask? Isn’t it just prudent to require borrowers to have something in the game other than the lender’s money and the FHA insurance? Especially today when interest rates for mortgage loans are at the low end of the scale?

Full post as published by FHA Mortgage Guide on June 15, 2009 (boomark / email).