Effective November 7, 2007, the Federal Housing Administration is expected to ban home buyers’ use of seller-financed Downpayment Assistance programs.
DPAs are (were?) very popular in FHA mortgage circles as a way to help buyers finance their new homes.
FHA loans currently require a downpayment of at least three percent on a home purchase. That three percent, however, is not required to come from the buyer’s own funds; it can come from a “gift” as long as the gifter is a family member or a non-profit organization.
Downpayment assistance programs are the latter, incorporated as non-profit organizations.
Typically, DPA programs works like this:
- Buyer makes an offer for a home
- Seller accepts the offer
Seller contributes the necessary three percent to non-profit organization
- Non-profit organization “gifts” the three percent to the buyer while keeping a $500 service fee
- Buyer buys home with three percent gift as downpayment
The main reason cited for the ban is that downpayment assistance programs push home sale prices three percent higher than they otherwise should be. The extra three percent is not “home value” — it’s “help” and is repaid over time in the form of a higher loan amount.
One study cited by FHA and used to pass the ruling said that home buyers participating in downpayment assistance programs go delinquent with two times the frequency of home buyers that don’t.
According to the Washington Post , there are more than 200 charities nationwide currently offering such programs.