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FHA No Down Payment Mortgages – Not Gonna Happen

Updated on September 16, 2009

Not long ago the Department of Housing and Urban Development was proposing a plan that would allow for first time home buyers to use the (up to) $8,000 tax credit as the down payment on their mortgage loan. The idea was that rather than making people wait for their tax filings to reap the rewards of jumping into today’s housing market, they would make it even easier for people to do so by not making them need any up-front money to get the loan. Seems like a good incentive, doesn’t it? But wait… isn’t that where a lot of this mortgage mess came from in the first place; people getting into homes with no ‘skin in the game’, so to speak?

Look, if someone with almost anything less than horrible credit can pretty much just sit down, sign some papers, and become ‘home owners’, how vested are they in keeping that home long term? I mean, if they lose their job (still more likely than we like to admit in today’s economy) and they can’t make the payments, walking away is no skin off their nose. Now we have more foreclosures and more homes coming back on the market… seems kind of counter-productive, don’t you think?

Fortunately, it seems that HUD saw the error in that proposal and they have come out with something new. I think this makes a lot more sense and will be more palatable to everyone.

With the new proposal, the borrower needs to come in with at least 3.5% down payment on the mortgage. Granted, that can come from a gift. Regardless, there is still some personal investment in the property this way. From there though, the lender can essentially advance the value of the tax credit to reduce the overall mortgage costs in a number of different ways. For example, the money can be used to pay for closing costs, it can be added to the down payment to reduce the overall loan amount, or it can be used to buy down the interest rate by paying for points. The first option reduces the amount of cash a borrower needs to bring to the closing table today, while the second two options help reduce the monthly cost of the home mortgage to the borrower.

I have to say that all in all, not only does this make a lot more sense (as compared to the original plan which seemed more like an on-coming train wreck than anything else), but I think this is a very good plan. It is still a tremendous opportunity for any first time buyer to get some significant help (I would call $8,000 a pretty significant gift) getting into a home. Let’s just hope that this incentive is strong enough to get a lot of people who are probably on the fence right now to get off of it and take some action.

Rates are still low, housing affordability today is among the best it has ever been, plus you get an extra $8,000 from the government. How cool is that?

Oh, and did I mention that you can feel good about helping to participate in the housing and economic recovery? Every first time buyer that takes advantage of this program is taking one more house out of the overflowing inventory of homes on the market.

The thing is, as inventories go down, the ‘prime buyer’s market’ will become less and less prime. There will no longer be an abundance of homes with people desperate to get out, so prices will begin to normalize. While this is good overall, and what we are hoping for, it is something to take note of by all your first time buyer fence-sitters. If you wait too long, you might not get the same kind of pricing as you see today. Also, it is looking like rates are starting to climb a bit. They’re still very low by historical standards, but they don’t seem to be getting any lower (in fact they’ve climbed quite a bit in the past week, as of this writing).

So what are you waiting for? The FHA first time home buyers government gift is still there for you. You just need to show that you’re not looking for a complete freebie; that you’re willing to put in at least 3.5% of your own money. Really, to become a home owner, is that too much to ask?

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