News, updates, and explanations to keep you informed.
Down Payment Assistance Programs--Are They Making a Comeback?
Seller-financed down payment assistance programs were, at once time, a way to cut down payment costs for FHA loan borrowers to almost zero. These programs were terminated when President George Bush sighed H.R. 3221, The Housing and Economic Recovery Act of 2008--the act banned seller-funded down payment assistance programs such as AmeriDream, the Nehemiah program and others like it.
Down payment assistance programs allowed the seller and charitable organizations to contribute towards the closing costs and down payment of FHA loans. This kind of down payment assistance helped FHA loan applicants get into their new homes with little or no downpayment--something valued by those with little money in reserve but plenty of income to make monthly FHA mortgage payments.
Recent developments could offer hope for homeowners seeking to purchase homes with an FHA guaranteed loan--a new bill called the FHA Seller-Financed Downpayment Reform Act of 2009 was submitted in January by Representative Al Green (D-TX) and 17 co-sponsors.
This bill was created to change the requirements for seller-financed downpayments or SFDPA for short. The bill would allow seller-financed down payment assistance, but with a set of restrictions and controls designed to keep SFDPA fair and equitable. The new bill has created a fair amount of controversey, especially among those who believe this type of downpayment assistance creates problems for the homebuyer.
It's true that pros and cons exist when it comes to bringing back down payment assistance programs. Opponents of the 2009 FHA Seller-Financed Downpayment Reform Act say SFDPA has the power to artificially distort housing prices. According to one site lobbying against the return of seller-financed downpayment assistance, “Usually the SFDPA money comes from simply marking up the home value.”
The FHA requires a 3.5% down payment as part of the terms of an FHA home mortgage. When down payment assistance programs are available, that down payment doesn't have to come from the borrower. The downpayment assistance program provides a large portion--if not all--of the down payment instead of the buyer.
The advantage to the cash-strapped FHA loan applicant? Getting to take out the FHA mortgage without dipping into a large amount of money in a savings account.
Is the “marking up the home value” complaint is legitimate? Assuming so, if the buyer is fully informed of the results of choosing a smaller down payment there may not be any controversy at all. If you're told in advance that getting a greatly reduced down payment means accepting a markup to offset the down payment, you can do the math and decide which course of action is best for you. Some FHA borrowers will choose the smaller down payment and higher mortgage payments, others will opt to pay more up front to lower their monthly FHA mortgage bill.
The real issue is being an informed borrower. Those who read the fine print, and make smart choices based on their financial goals could do well in either case. The key is to determine what's best financially for your specific situation.
For now, the entire issue is a moot point. The 2009 FHA Seller-Financed Downpayment Reform Act has not been passed into law. Until that happens, down payment assistance programs are still banned.