Seller funded down payment assistance programs are being halted by HUD and the FHA. What this means is that if you are approved for an FHA loan requiring a 3% down payment - you can no longer enroll in these programs which use a 'gift' from sellers by inflating the purchase price to cover the 3% you need for the down payment.
Surprisingly, the FHA's reason for closing these programs down has little to do with the risk factor of the buyers receiving a 100% financing. Margaret Burns, the Director of Single Family Program Development for the FHA states in a written press release:
The core problem with these programs is not that the borrowers they serve
are riskier or less credit-worthy; it's that the programs disrupt the natural
negotiations between buyers and sellers in a way that results in inflated sales
prices and thus higher mortgage amounts. Seller-funded down payment assistance
programs flourish in weak real estate markets. In weak markets, low buyer demand
means that sellers are less likely to get full asking price for their homes and
are therefore willing to participate in programs that will help them sell for a
higher price. As such, the property overvaluation associated with seller-funded
gift programs occurs in markets that are least able to adjust to and accommodate
pricing variations.
If you are about to purchase a home and were going to use one of these programs, all hope is not lost. Nehemiah, due to a judgement in 1998 gets a 6 month reprieve from the immediate effects of this change. Eligible borrowers may still receive 100% financing through Nehemiah until March 31st, 2008.
Going from fact to speculation: our in-house lenders believe that FHA and HUD are making room for different programs that don't use artificially inflated purchase prices to cover the required down payment. I suppose they are basing their opinion on this statement from FHA:
I want to conclude my testimony by thanking this Committee for the bipartisan
support and leadership it has shown on FHA Modernization. I also want to point
out that if enacted, both the legislation introduced by Chairwoman Waters and
the legislation introduced by Ranking Member Biggert, by authorizing FHA to
insure "Zero Down" mortgages, would go a long way toward resolving the issue before us today.
Now, the question remains, with the national foreclosure rates and sub prime crisis (which is blown out of proportion, but that's a story for another blog entry) will our politicians be willing to let the Federal Housing Administration to completely insure 100% financing? Time will tell, but in the meantime people better jump on these programs before they flat line.
1 comments:
You hit the nail on the head when you said that FHA and HUD were trying to get rid of DPA programs to make way for their own programs.
The facts do not support the claim that sellers increase the price of the home to cover the service fee. As a matter of fact, industry statistics show that the average price of homes using DPA programs are lower than the average price of those using traditional FHA without assistance. Additionally, the price of the home has to be supported by an appriasal by a FHA certified appraiser.
Putting buyers in a home with 100% financing and charging them premium pricing thrusts homeowners into a negative equity position, with a higher payment, right out of the gate. That right there should be a huge red flag, and certainly is far more risky than the DPA alternative.
Experience has shown that defaults traditionlly take three to five years to play out. It is not much of a stretch to say that by the time the subprime loan problems settle down in the predicted 18 months or so, we had better get ready for another round of defaults, should FHA have its way.
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