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Add one more incentive to the up to $8,000 in tax credits the government is offering first-time home buyers (including those who haven’t owned a home in the last three years): Apply the funds toward your down payment, closing costs or to buy down your interest rate. But note, with this option comes some downsides.

Last week the FHA announced that it will permit lenders to give qualified buyers a short-term bridge loan, up to the amount of their tax credit, to use as down payment assistance.

A bridge loan with a home sale is a temporary loan that “bridges” the gap between the sales price of a new home and a home buyer’s new mortgage until other funds are obtained.

For the home buyer, essentially this means that you are selling, or promising, your tax credit to the lender in exchange for them loaning you the money up front to help cover your closing costs.

Upsides
This is all good news, as applying your tax credit toward your home purchase can help you:

• lower how much loan you need to take out, thus lowering your monthly payments
• cover your closing costs, which means this may provide you with just enough funds to help you qualify to buy a home.

Downsides

• Still need 3.5% down. You cannot use the tax credit loan to cover any part of the 3.5% minimum downpayment that FHA requires, so you will still need to come up with some funds on your own. (You can apply the tax credit loan toward an additional downpayment to, say, help you meet a 5% downpayment, or you can use it to cover other closing costs).
• Processing fees deducted. Remember, this option is a loan, and thus is subject to the lender’s fees, which could equal up to 2.5% of your anticipated tax credit. What this means is in the end you will be getting less money back on your tax credit. For example, if you qualify for the full $8,000, but used it toward closing costs, you’d only receive funds toward your purchase equal to $7,800 because $200 (2.5% of $8,000) is paid to cover your lender’s processing fees.So, if you don’t need to take out a bridge loan, don’t and save yourself the extra fees for extra cash in your pocket.

Your First Home: The Smart Way to Get It and Keep It

For more information on buying a home, see my book “Your First Home: The Smart Way to Get It and Keep It.

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