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 $8,000 first-time buyer tax credit as a down payment here.

May 29, 2009.