With the passing of HR 3221, Down Payment Assistance Programs will no longer be allowed with FHA mortgages as of October 1, 2008. DPA’s such as Nehemiah, have been popular for helping home buyers come up with their down payment. FHA allows Sellers to pay for closing costs and prepaids as long as the buyer has met their minimum required investment (which has also changed with the passing of HR 3221–another post will follow on this subject). With DPAs, the seller contributes funds to the DPA (like Nehemiah) which is a "charity" (they collect a small fee from the seller which is used for charitable causes). The DPA then contributes the funds towards the down payment for the buyer.
Section 2113 of HR 3221 states that down payments for FHA insured mortgages may not come from "the seller or any other person or entity that financially benefits from the transaction" or "any third party or entity that is reimbursed directly or indirectly". This applies for new loan applications on or after October 1, 2008.
Family members can still contribute towards the down payment on FHA insured mortgages. In fact, Section 2113 of HR 3221 allows family members to loan up to "100% of the appraised value of the property plus any initial service charges, appraisal, inspection and other fees in connection with the mortgage". The borrower must qualify for both mortgage payments (the first mortgage-FHA insured at 96.5% of the appraised value and the second mortgage from the Bank of Mom and Dad for the remainder). This may make family members more comfortable with helping out with down payments as it will not be treated as a gift and the loan is documented, terms would be clear and recorded as well as secured against the property as collateral. (Hopefully the Bank of Mom and Dad never have to foreclose).
What does this mean to you?
If you’re considering buying a home with minimum down payment, your family can gift or finance the 3.5% required investment of the buyer for FHA insured financing. However, if you’re family not in the position to do so or if you don’t want to ask the Bank of Mom and Dad, then you have limited time to take advantage of the Down Payment Assistance Programs.
If you’re hoping to use a down payment assistance program to purchase your next home, you have just over a month to do so. Meet as soon as possible with a qualified Mortgage Professional who can help you become preapproved with an FHA insured mortgage (NOTE: not all lenders are approved to do FHA loans). You must be credit approved prior to October 1, 2008 (and the closer we approach that date, the busier FHA approved lenders will be trying to beat the deadline).
Of course, DPAs are going down kicking and screaming to stay alive. At this point, the countdown to the demise of DPAs is clicking away.
Update: 9:30 am August 11, 2008. I’ve just received notice from one of the banks that we work with are no longer allowing DPAs. This serves as a good reminder that lenders may have their guidelines that overlay government requirements.
Related posts on HR 3221: