Just a few days ago the Federal Housing Administration (FHA) issued a policy change concerning a home buyer’s down payment. Previously the FHA had required 1st time home buyers to have a down payment prior to obtaining an FHA loan. For many 1st time home buyers, having that much cash in hand was difficult, especially in these economic times. The FHA’s new policy now allows 1st time home buyers to borrow their down payment.


In the past year FHA loans have become the number one loan product used by 1st time home buyers in a home purchase.  FHA loan funds are available, require a low down payment, and have very competitive interest rates. The FHA’s recent announcement should help the many home buyers who have the desire to buy a home and could qualify for a FHA loan, yet did not have the down payment funds required to participate in these loans. They can now borrow the down payment.


So how does this policy change affect prospective homebuyers and home sellers? With any home purchase loan, a buyer has had to fund two distinct expenses. The first expense was the “Closing Cost”, a catch-all category of expenses where all the home purchase and loan acquisition expenses are lumped into one “Closing Cost” expense.  “Closing Cost” expenses generally equal 2 to 4 percent of the loan amount.  A mortgage broker or banker assembles these expenses for their buyer on a document called the “Good Faith Estimate”.  In a prior market, a buyer typically would have paid these expenses “out of pocket” at the close of escrow.


Yet the great thing about “Closing Cost” expenses is that they don’t have to be paid by the buyer. So in this market a seller can help sell their home by offering to contribute funds toward the buyer’s “Closing Cost” expenses from the seller’s proceeds at the close of escrow. This concept has been used with great success by numerous home buyers and sellers in our area.


The second expense for buyers is the down payment. Earlier this year the Federal Government came out with an stimulus plan to help assure the down payment to where a first time home buyer in 2009 can receive up to an $8,000 tax credit in their 2010 tax return. A great concept, yet it doesn’t help a home buyer today who is unable to fund for a down payment expense but could otherwise qualify for a FHA home loan. This tax credit initiative is set to expire 12/01/2009.


To help out the home buyer with a good job and great credit but little cash participate in this stimulus package, some municipalities began offering down payment “bridge loans” to 1st time homebuyers. These bridge loans gave the home buyer an ability to borrow their down payment against their 2010 tax return and make the home purchase. Homes sold benefiting both buyer and seller and the community benefited by turning vacant homes into active neighborhoods.


Apparently the FHA loan folks thought the idea of a loan against an eventual tax return was a secure loan. On May 29th, the FHA circulated a policy letter that now will allow a home buyer to borrow their down payment from an institutional lender and still participate in a FHA loan. The foundation for this down payment loan appears to be the $8,000 tax credit the home buyer will receive with their 2010 tax return and their ability to pay the loan back promptly.


How does this new policy apply to the Eureka area where the average sales price last month was $275,000? Under FHA rules, for a $275,000 purchase price a Buyer’s closing cost expense could be $5,500 to $11,000. As discussed previously we have seller’s agreeing to pay part or all of this expense at the close of escrow.  The buyer’s down payment expense would be $9,625. Under this new FHA policy, a buyer can now “borrow” the down payment today and can still apply for a $8,000 tax credit in 2010 against that down payment.

(To round out the discussion of tax credits, there is an additional $10,000 tax credit for those home buyers purchasing newly constructed homes).


This is not a “free money, stated income” loan like we experienced a few years ago. Borrowers must qualify under the FHA’s funding guidelines. Yet with over half of all Eureka home sales attributed to 1st time homebuyers, this new program should help many more home buyers achieve the dream of home ownership in a time where home prices are very competitive and interest rates are at historical lows. On behalf of the many home sellers and prospective home buyers, and our community, I’m so very thankful for this new FHA policy. The rewards are great for those who see and use the opportunity.


Dean Kessler is the Broker/Owner of RMK Realty, Inc and Seller Specialist for The Kessler Real Estate Team. He holds the Realtor®, Accredited Buyers Representative (ABR), Certified Distressed Property Expert (CDPE), and Certified Residential Specialist (CRS) designations. He can be reached at

All statistics courtesy Humboldt Multiple Listing Service.