The IRS ruled in April of 2007 that certain down payment assistance programs do not qualify as non-profit organizations, a list of which has been posted online. This list is likely to get very long as the IRS has been investigating over 150 different organizations providing similar services. Probably the most important part of their ruling is that the non-profit status will be revoked back to January 1, 2003.
How Do DPAs work?
Down Payment Assistance programs help low to moderate income, as well as first-time home buyers, to afford the cost of the down payment on a new home. These programs typically work with borrowers seeking FHA loans. With FHA loans there is a required 3% down payment, but for those with poor credit or no savings even this 3% is difficult to pay. The DPAs help these borrowers by distributing gift funds - to pay for closing costs and the down payment for those who qualify. The controversy surrounding these organizations is that they typically look to the seller to make a donation slightly larger than the borrowers gift. This results in inflated home prices for sellers trying to recoup the loss of their donations. How Does the Ruling Affect You?
It is difficult to say exactly how this will play out. If the IRS rules that gifts made to and from DPAs are not gifts, starting in January 2003, a large number of sellers who have used these programs could possibly owe back taxes. This could also mean that none of the loans made where these organization presented gift funds will continue to be guaranteed by HUD. Considering that more than 1/3 of all down payments for FHA loans last year were paid for by a DPA, this ruling will certainly be affecting a large number of people in some way or another.