At a speech to the National Association of Home Builders (NAHB) this morning, U.S. Department of Housing and Urban Development (HUD) Secretary Shaun Donovan announced a new program that will allow first-time buyers eligible for the $8,000 first-time buyer tax credit to “monetize” the credit and apply it toward FHA loan costs.

HUD tried to allow first-time buyers to use the $8,000 toward the down payment – a program that received loud criticism from Realtors and others who believed that if first-time buyers didn’t have enough cash for a down payment, they shouldn’t be buying a house.

Today’s program attempts to silence that particular criticism by requiring first-time buyers to come to the table with the 3.5 percent down payment, but allows them to use al or part of their $8,000 to pay loan costs.

Of course, this begs the question of what kind of closing costs a first-time buyer must be paying for all of the $8,000 to get used in this manner. Even at 2 percent of a $100,000, that’s only $2,000. One wonders where the other $6,000 would be applied.

Given that FHA has repeatedly tried to cut off 3rd party providers of down payment assistance to first-time buyers, today is a step toward fixing a basic problem that first-time buyers (and other home buyers) have, particularly in today’s economic climate: not enough cash for a down payment, closing costs and required cash reserves.

Read Shaun Donovan’s statement here. Read the FHA Mortgagee Letter here. Read my previous blog about the initial program to use the ,000 first-time buyer tax credit as a down payment here.

May 29, 2009.