Down Payment Assistance Programs Days are Numbered

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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:

First Time Home Buyer Tax Credit

Comments

  1. You’re presenting this change in law as “taking away” something from first time home buyers. If you don’t mention the reason for the change it gives readers the impression that there’s no trade off involved.

    Sure, fewer people will qualify without seller paid down payment assistance, but fewer people will be foreclosed on as well.

    The whole reason these programs were discontinued is because the default rates on the loans are more than twice as high as on loans where the down payment gift came from a family member.

    With that bit of information, it’s easy to see that discontinuing seller down payment assistance will actually increase the success of first time homebuyers over all – even if it means people will have to buckle down, work hard and save up their 3.5% on their own.

  2. Mike2, the law IS taking away DPA. Honestly, I’m fine with that–I’ve never been a fan of DPAs…I much prefer HR 3221’s legislation allowing family members to loan to down payment assuming the borrower can qualify for both mortgages (FHA first and family 2nd at 3% of the LTV approx). At least then, you know they have family to back them up IF they wind up needing help.

  3. Some of the myths surrounding DPAs are continually being stated as truths. I hope to enlighten the masses with the actual truth in regards to the DPA numbers that are being touted by HUD. As the GAO (General Accountability Office) contends, HUD’s information is unreliable at best. Think back over the last 6 years. How many FHA loans were done? How many loans were done with DPA? The answer…not many. During those years the conforming lenders provided new loans programs in the form of 80/20 SIVA financing that fueled the foreclosure rates once the market went bust. Most of those buyer/refinancers were placed into short term 2 year and 3 year fixed notes, or neg-am products. Now that they are underwater it is easier for them to walk away. DPA was not a factor.

    Loans that are funded with DPA provide the buyers with a 3% equity postion in their properties. This helps to offset the loss of value and increases the chances of staying in the property.

    HUD states that they default rates are currently at 28%. Do not let them confuse you with their terms: Delinquency is when you are late on your payment, but are not in default of your loan. Default is when you miss a monthly payment and you default on the terms of your loan. Foreclosure is when payments have not been made for some time and the lender is in the process of repossessing/auctioning off the home through the legal process outlined in their loan documents. Claims mean that the insurance carrier has paid a claim on the loss to the lender.

    Considering the current economic landscape with the increased gas prices and the rising costs of goods and services, not to mention the high unemployment rate, the delinquency rates are higher than what would occur during a stabilized economy.

    I am familiar with Nehemiah and their statistics. With over 300,000 families that they have assisted with DPA, only 6 percent were in default. That is a 94% success rate!

    I do agree that the industry needs regualtions in place for DPA. Unfortunately HUD has never wanted to work out a solution to benefit both parties. They wanted to provide a 100% product on their own, so we would not have to rely on DPA. But they never did. If you go to Ameridreams web site you will see a video of HUD being grilled, and acknowledging that they should have worked out a solution a long time ago. By HUD supporting this law HR3221, they did not realize that no gift means no gift opportunity for them too. Remember the $100 down HUD homes. Gone as of 10/1/08…

    I hope that the new bill HR6694 provides an opportunity to the large number of buyers that dont have the Bank of MOM and DAD to lean on.

    DPA is 40% of all FHA loans today. Can the economy absorb an initial loss of $50 Billion in the first month alone? Where will the 10,000 professionals in our industry go when they are let go/laid off/or cant make a pay check due to the decline in business? Most of the Realtors and mortgage pros I know are self employed. Unemployment is unavailable to them.

    Once DPA is gone, it will never come back… Then who will be next to blame? Brokers? Think about the what this means to you.

  4. Jovan, DPAs allowed Sellers to funnel money through a “charity” to pay for the buyer’s minimum down payment. FHA does not allow sellers to pay for the down payment. DPA’s are no different than the switcher-oo we see on the hat-trick for the M’s games (if any one in Seattle still watches the M’s).

    IMO it’s much better to have buyers lean on family rather than the seller if they’re shy of a 3-3.5% down payment. Why?

    1) if the buyer runs into financial difficulty, at least we know they have family to possibly help.

    2) DPAs (in the past) have been treated with the seller jacking up the sales price to cover the amount closing costs they had to contribute to participate. Who pays for the inflated sales price? The buyer.

  5. Rhonda,

    What you are saying is that since the “family of the borrower” provided the downpayment that they would also bail out the borrower in times of trouble. I do not argee at all. Most of the time the family is draining their resources and dont have additional funds for additional assistance down the road.

    Your second part of your comment concerns me greatly that you are stating that sellers (and their agents) are conspiring to increase the sales price over the initial listed price to compensate for the gift of the downpayment. You are very well aware that that is not in the best interest of any party to be part of a dishonest transaction. Have you been involved in any of these types of transactions?

    I can only assume that this also occurs when the seller is asked for a gift of closing costs, even if DPA is not involved in the transaction. So we cant place blame on DPA’s. We have to place blame on the parties involved in the transaction.

    A good analogy would be to say that if there was a murder in your area, then we should ban all firearms, instead of just prosecuting the responsible party.

  6. Jovan, I witnessed DPA reps promoting/teaching agents to bump up the sales price to cover the closing costs.

    And I’m not blaming DPA’s for the mortgage meltdown. I would rather see a borrower do a Flex 100 (when it was available) than FHA DPA if the DPA included jacking up the sales price of the home–WHICH DID HAPPEN…at least in my neck of the woods (King, Pierce and Snohomish counties).

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