The Federal Housing Administration (FHA) last week announced they were in support of  a program that would allow approved lenders, nonprofits, and state and local governments to fund short term loans that could be used as down payments to be repaid once the borrower received the tax credit. Congress approved the tax credit in February’s stimulus bill, which provides up to $8,000 for first-time home buyers on a new or existing home, through December 1 of this year.

The proposed new program was announced last week by HUD secretary Shaun Donovan, although details have not yet been spelled out. At the National Association of Realtors conference last week, Donovan told attendees that “we want to enable FHA consumers to access the tax credit funds when they close on their home loans so that the cash can be used as a down payment. So FHA will permit trusted FHA-approved lenders and HUD-approved nonprofits, as well as state and local governmental entities to “monetize” the tax credit through short-term bridge loans.”

The policy, if it does indeed come to fruition,  is expected to help boost the housing market by allowing first-time buyers to essentially get into a home with an FHA loan for little to no money down, by using the federal credit at settlement as part of their closing funds rather than waiting months for a refund on a tax return.

But there are some concerns by housing analysts that the program could be risky. “Although it remains to be seen how the program is actually implemented, the plan resembles former seller-funded down payment assistance programs,” writes housing analyst Ivy Zelman in a research note Wednesday. “We remain concerned that the lenient underwriting standards, low down-payment requirements and now the ability of FHA borrowers to purchase a home without putting any of their own equity into the purchase is creating a tremendous risk for the program and taxpayers in the future.”

At the current time, there is speculation regarding whether the program will actually become active at all. Involvement with the IRS and other government powers that be must be addressed before anything becomes official. For those of you who do qualify for the first time home buyer tax credit, and can find a way to obtain the funds up-front for the downpayment and associated transaction costs, the financial incentive is well worth the effort.

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