Down Payment Assistance Programs Outlawed

Down payment assistance programs like The American Dream Down Payment Assistance are all but outlawed for use with any government insured loan programs.

It’s about damn time!

I can hear you now, “What’s wrong with charities helping home buyers by giving down payment assistance?”

In a word, it’s a scam…that’s why!

In more than a word, because it could be the undoing of the government mortgage home loan programs like FHA which are typically the programs first time home buyers turn to. The paramount issue is to keep FHA solvent so in the long haul, first time home buyers will always have a lending source.

And lastly, these down payment assistance programs are supposedly issued by a “non-profit” charitable organization, but they are not…at least according to the IRS.

Before we get too deep, let me give you the back story on these supposed non-profit companies providing down payment assistance to home buyers. There is a long standing underwriting rule preventing the seller from giving any down payment assistance. The rule says down payment gifts can only come from family members, government agencies, or charities.

Why, you ask?

Simple. If the seller could give down payment assistance, they would raise the price of the home by the amount of down payment assistance offered.

Makes sense, right.

If allowed to do this, we’d be creating a sea of over-priced properties in the process. So for decades no seller down payment assistance was or is allowed.

Now about 6 years ago, comes along a few “non-profit” companies selling the idea they can legitimately give the buyer the 3% down payment needed when using an FHA loan for home purchasing. Since FHA allows the buyer to finance the FHA mortgage insurance premium and allows the seller to pay closing costs, this creates a no money needed buying scenario.

Not “no money down”…no money needed…none, zero, zilch.

Gee, that won’t create problems down the road, right?

So every home builder, real estate agent, and mortgage broker jumped on the band wagon in the last few years when transactions were hard to find and dug up a bunch of risky buyers with the promise of “down payment assistance” and “no money needed”.

Needless to say, they found a ton of them!

Now that we’ve had time to see what scraping the bottom of the barrel for borrowers has done to risk the solvency of the FHA loan portfolios, it’s not looking good.

According to a GAO study and a separate HUD study both found “that seller-funded down-payment assistance has led to underwriting problems and resulted in an increase in the effective cost of home ownership.”

The HUD Report said (and it is also the reason for the new Rule to eliminate these programs),

“Though the seller-funded [down payment assistance] providers deny that it is true, we found overwhelming evidence that the cost of the [ down payment assistance ] is added to the sales price, which then increases the allowable FHA loan amount and eliminates any borrower equity in the property.”

The HUD report also noted that the foreclosure percentage doubled on down payment assisted FHA loans over those not assisted.

Helping unprepared folks buy homes with no equity at close and laying the foundation for instant foreclosure…is that what charities are supposed to do?

But wait! Are these companies really charities?

Not according to this IRS report which found:

“The IRS is increasingly concerned with organizations that are taking advantage of homebuyers who need assistance for a down payment to realize the American dream of homeownership,” said IRS Commissioner Mark W. Everson. “So-called charities that manipulate the system do more than mislead honest homebuyers and ultimately jack up the cost of the home. They also damage the image of honest, legitimate charities.”

So with all the numbers in, HUD decided to pass a rule to prohibit the use of these programs with Federally insured mortgage programs…they tried once before and the lobbyist beat it down.

Of course, the National Association of Realtors (NAR) and the lobby for home builders love selling folks properties they can’t afford and leaving the tax payers holding the bag…so they are opposing the new Rule crying to Congress for help.

Time to call in bought and paid for political influence. Let’s hope HUD can fend off the political pressure and do the right thing this time.

The NAR, the home builder lobby, and the banking lobby, should remember just because you can do something, doesn’t mean you should do something.

With property values dropping all over the country, putting unwitting folks into homes with the false belief they have equity, circumventing underwriting rules, and risking FHA solvency just to do more deals is …

…well, just plain wrong…and gigantically stupid.

Rob K. Blake

Author: Rob K. Blake
Published December 15, 2007