First-time buyer tax credit can now be used as a down payment

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The National Association of Realtors reports that"Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, (on May 12) said that the Federal Housing Administration is going to permit its lenders to allow home buyers to use the $8,000 tax credit as a down payment."

Here's what this means: With an FHA loan, a first-time home buyer can purchase a property with as little as 3.5% down -- but really considerably less because closing costs can be rolled into the purchase price or gifted to the buyer by the seller. Using the $8,000 tax credit for a down payment would allow a first-time buyer with reasonably decent credit (FHA loans have much lower credit score requirements than conventional mortgages) and proof of income to purchase a $228,000 home with no out of pocket expenditure.

Is that really a good idea? I don't think so. Remember that writing mortgages where the buyer had no skin in the game at the time of the sale is maybe not the main factor in the overheating of the real estate market, but it's certainly in the top five (low interest rates, shoddy underwriting standards, mortgage fraud, dishonest mortgage brokers and no skin in the game were, in no particular order, probably the top five problems).

For prospective first-time home buyers though, this is good news. FHA lenders will be able to monetize the tax credit through short-term bridge loans. That is, they'll lend you the money for the down payment and then you pay it back when you receive the tax credit.

Whether it will help plant the seeds for another wave of foreclosures remains to be seen.
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