Monetization of the First Time Home Buyer Credit

The American Recovery and Reinvestment Act of 2009 offers homebuyers a tax credit of up to $8,000 for purchasing their first home.

In May 2009 FHA ruled that state Housing Finance Agencies and certain non-profits can "monetize" up to the full amount of the tax credit (depending on the amount of the mortgage). This means that the lenders will purchase the tax credit from the home buyer in advance and so the home buyer can immediately apply the funds toward their down payments and closing/other upfront costs.

Currently, borrowers applying for an FHA-insured mortgage are required to make a minimum 3.5 percent down payment on the purchase of their home.

With this ruling the Home buyers using FHA-approved lenders can apply the tax credit to their down payment in excess of 3.5 percent of appraised value or their closing costs, which can help achieve a lower interest rate. But they cannot monetize tax credit to meet the required 3.5 percent minimum down payment.

Some of the things one should be aware of before using this credit-

1. The credit can be only used for some upfront cost or down payment in excess of 3.5%. The tax credit can only be monetized and used towards these costs. It will not be refunded to you as cash back.

2. Note that the monetization of the tax credit will be through short-term bridge loans secured against the repayment of the first time homebuyer tax credit and hence there will be a cost associated with such loan so consumers have to be aware of potential abuse and be cautious in selecting the mortgage institution.

3. These programs will place a second lien on the house as collateral to secure the repayment of the loan in most cases.