On Friday, May 11 The Department of Housing and Urban Development proposed a rule that would prohibit potential home-buyers from taking advantage of down payment assistance programs like Nehemiah and AmeriDream.
These programs will help buyers by offering them grants to help pay for closing costs as well as the minimum 3% down payment required with FHA loans. Typically these grants are offered to low-income buyers who would otherwise be unable to afford the down payment.
The controversy surrounding these down payment assistance programs (DAPs) stems from two facts. The first is simply that home buyers that use DAPs are more likely to default on their loan.
The foreclosure rate on all FHA mortgage loans is around 3%. For buyers who use gift funds for their down payment the foreclosure rate is approximately 6.5%. Both of these foreclosure rates are considerably smaller than other sub-prime mortgage loans serving low to moderate income buyers.
The other issue with DAPs is that they are typically reimbursed by the home seller or builder. This means that instead of haggling over the price of the home, the buyer accepts the initial price of the seller. The seller will reimburse the down payment company and will typically make at least an extra 1-2% on the home.
Some say that builders and sellers are including the down payment assistance into the price of the home, causing inflation of the homes value. The IRS said, a year ago, that many of the down payment assistance programs do not qualify as charitable organizations because the gifts end up benefiting profit seeking sellers.
Down payment assistance programs are used by almost a third of all FHA borrowers, most of which are low to moderate income home buyers.
Instead of getting burned by a predatory sub-prime loan where they are likely to default, they are able to afford a new home and achieve the American dream of home ownership. Scott Syphax, the Chief executive of Nehemiah, has this to say about the new rule, "At the very time that the collapse of subprime is killing access to the American dream, the one program that is a lifeline for working families is marching to the front of the line to shut the last open door."