For a few years now the IRS has had issue with down payment assistance programs which borrowers use to meet the 3% required down payment on a FHA loan. Basically, the IRS doesn’t think these assistance programs are non-profits. Since FHA only allows non-profits to contribute towards this 3% the whole thing falls apart if the IRS strips them of their non-profit status.
Today the FHA announced that it will prohibit borrowers from using seller-financed down payment assistance programs.
WASHINGTON — The Federal Housing Administration will prohibit borrowers from using seller-financed down payment assistance programs that have helped hundreds of thousands of people buy homes but have come under the scrutiny of federal authorities.
Such programs allow home sellers to give money to charities, which then give down payment assistance to buyers. The sellers pay the charities a service fee, then often recoup the money by charging a higher price for the homes, usually 2 or 3 percent more, or an amount equal to the down payment, according to a study by the Government Accountability Office.
Inflating the price is bad, however, this isn’t easily done in todays market and appropriate safeguards are already in place. Furthermore, the seller (if accepting an offer from a FHA borrower) needs to understand that they will need to give 3% from their proceeds towards down payment assistance. If they choose to do so then the loan should move forward.
Talk about bad timing. Since the collapse of the subprime market FHA has seen a resurgence in the past few months. This new ruling will essentially kill the FHA program for now and will make the housing market worse. I can understand greater scrutiny, but to freeze out all these assistance programs in one big swoop doesn’t sound right. Isn’t there a better way?
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on Oct 5th, 2007 at 11:00 am
Yikes! Talk about throwing out the bathwater with the baby. Plus, it’s terrible timing. I’ve been telling potential first time buyers that this is a great time for them to jump in and buy something already. Sellers are anxious and many have equity to offset their contribution to the buyer’s downpayment/costs ; non-credit driven products like FHA loans are a great alternative to the current clampdown in subprime markets ; and there’s almost never been more inventory to choose from in the metro Phoenix area. Shailesh, any idea if this is an immediate stoppage to seller contribution programs? Or will the cease and desist order be phased in? I’ve got an AmeriDream loan set to close on Oct 24. Yikes.
on Oct 5th, 2007 at 1:33 pm
Heather,
This new rule goes into effect 30 days after publication. It was published on October 1st. Your current escrow is file. It will certainly affect any files closing after the 30th. The FHA has been sued on this, who knows when this will be settled.
on Oct 23rd, 2007 at 9:45 am
[...] this month, the HUD had issued a statement announcing that it would prohibit borrowers from using seller-financeddown payment assistance programs. The major assistance providers have filed suit against this [...]
on Apr 10th, 2008 at 8:01 pm
Typically when one donates to a charity one does not get to designate the recipient of the charity’s benevolence. One can often choose from a list the charity has of needy individuals, like many Christmas sponsorships. This program was just a scam for the American taxpayer to insure a mortgage on overpriced houses and look what happened because of this and other similar programs. Now the golden goose has been cooked.
on Apr 11th, 2008 at 11:43 am
Mamie N,
You make a very valid point. In fact the whole system is being challenged and I’m not sure which way things will fall. However, the way it is right now it helps a lot of lower income borrowers and has been a pathway for homeownership for many deserving families. That is something the courts are figuring into their decision.