NAHB Answers How to Pay Upfront Costs
with $8k Tax Credit

NAHB is providing answers to frequently asked questions from prospective first-time home buyers who qualify for the $8,000 tax credit and are seeking information on how they can get a loan to help cover downpayment or closing costs.

The U.S. Department of Housing and Urban Development announced on May 29 that the Federal Housing Administration will allow state housing finance agencies to provide second mortgages “monetizing” the tax credit so that borrowers can use the funds for upfront costs for the purchase of homes with FHA-insured mortgage loans.

“This is great news for thousands of families who want to take advantage of today’s low interest rates, competitive prices, great selection and the federal tax credit that is only available until Nov. 30, but could not save enough money for a downpayment and closing costs,” said NAHB Chairman Joe Robson.

HUD announced that FHA-approved lenders can purchase the tax credit from the home buyer in advance, so that the home buyer can use the funds for closing costs or make a downpayment in addition to the 3.5% minimum. Home buyers who go directly to FHA-approved lenders still need to come up with the 3.5% minimum downpayment that is required for an FHA-insured loan.

Home builders in recent weeks and months have reported that the tax credit has helped bring more prospective first-time buyers into the marketplace. To spread the word, builders and home builders associations around the country have been providing consumers with information on the availability of the credit.

The new FHA monetization program is expected to result in an additional 40,000 home sales, many of which will be made to trade-up buyers who have been able to sell their existing home to a first-timer.

For NAHB’s FAQ PDF on monetization, click here. Builders can direct consumers to this information by sending them to The new PDF can be found by going to the “Frequently Asked Questions” section of this site and scrolling down to question 20.

Following is the new information that has been posted on the tax credit site:

  1. What exactly does “monetizing” the tax credit mean?

    The term “monetization” is defined as the act of converting something into money. In the context of the first-time home buyer tax credit, monetization means treating the payment of the credit as if it were cash and allowing its use as a payment for certain closing and downpayment expenses.

  2. What is a “bridge” loan?

    A bridge loan is a type of loan that is intended to be outstanding for a very short time period, often only a few days or weeks. Bridge loans are used to provide funds in situations where the borrower is expected to receive funds, such as the payment of this tax credit, within a very short time.

  3. What is a state housing finance agency?

    A state housing finance agency, often referred to as an “HFA,” is an organization that provides funding for a variety of loan and grant activities related to for-sale and rental housing. HFAs are also typically responsible for distributing grant funds from federal agencies, such as the U.S. Department of Housing and Urban Development (HUD).

  4. How do I find out if my state housing finance agency is providing this service?

    The best way to locate information about your state’s HFA is via the Internet. The National Council of State Housing Agencies (NCSHA) maintains a directory of state HFAs at:

    Most state HFA Web sites include phone numbers and e-mail addresses by which they can be contacted.

  5. What kinds of lenders are doing this? How can I find a list of lenders who are providing these short-term loans?

    Many state housing finance agencies are either running or sponsoring programs that will use a tax credit for a downpayment. These programs often place a second lien on the home as collateral to secure the eventual repayment of the tax credit funds. Some state HFAs lend directly to home buyers while other HFAs work through networks of state-approved lenders.

    In addition to state agencies, FHA-approved lenders may be offering to purchase a first-time home buyer’s tax credit in conjunction with an FHA-insured mortgage loan. Interested buyers should check with area lenders, home builders or real estate agents for the names of participating lenders.

    The Federal Housing Administration (FHA) also has an online tool to find FHA-approved lenders:

  6. What types of loans qualify?

    Any lender can offer a program that would permit a first-time home buyer to apply the tax credit to funds needed for a loan that is obtained in conjunction with a home purchase. At this time, however, only the FHA has issued guidance regarding the monetization of the first-time home buyer tax credit in conjunction with FHA-insured mortgage loans.

  7. Can this short-term loan be applied to the minimum 3.5% downpayment required by my FHA loan or is it only available above and beyond the initial downpayment required?

    If an FHA-approved lender or state housing finance agency is purchasing a tax credit and therefore making a short-term loan that is secured only by the repayment of the first-time home buyer tax credit, these funds cannot be applied to a downpayment in lieu of the home buyer’s funds. A home buyer still has to provide the 3.5% downpayment from his or her own funds. The money from the short-term loan can be used to pay closing costs and prepaid expenses, such as escrow for taxes, insurance and community association assessments. These funds can also be used to make a larger downpayment or to “buy down” the interest rate on the mortgage loan.

    However, many HFAs are offering tax credit loan programs that offer home buyers a short-term loan backed by the anticipated tax credit and secured by a second lien, which in general will be paid off after the home buyer receives their income tax credit from the IRS. The proceeds of these loans may be used to satisfy the 3.5% downpayment requirement for FHA-insured loans. The National Council of State Housing Agencies (NCSHA) maintains a list of such tax credit loans programs at:

  8. Is this an interest-free loan or are there fees associated with this type of short-term loan?

    If a governmental agency — such as a state housing finance agency or an FHA-approved lender — purchases a first-time home buyer tax credit, it is allowed to charge no more than 2.5% of the amount of the credit.

  9. How can I tell if the short-term loan on the tax credit is being offered by a reputable company?

    If the organization is a unit of state government, it is safe to say that it is reputable. Otherwise, a home buyer may want to check with their local Better Business Bureau or a state or local government’s department of consumer affairs.

[Source:, June 15, 2009]