The Mortgage Report

Down payment assistance down the drain?

Once again reality has caught up with greed, and the result will be fewer first time home buyers.

One of the provisions of the Housing Stimulus Bill (HR 3221) was to eliminate down payment assistance programs that were funded directly by the seller of the property.

While their elimination is long overdue (they never should have been allowed to begin with), this will further reduce the number of first time homebuyers who qualify to purchase a home, which obviously can't be good for the much needed real estate recovery.

Down payment assistance has been available to first time homebuyers forever. It's purpose was to allow first time buyers to get assistance with their downpayment and closing costs from family members, government programs or charities - none of whom had a financial interest in the transaction. Somewhere along the line, someone decided to form a non-profit organization, have the seller of the property make a "contribution" to the non-profit, which then "gifted" the funds to the buyer for the closing. They have been used almost exclusively in conjunction with FHA loans, which are government insured. Other lenders (non-government insured) figured that the default rate on such loans would be too high, and so stayed away from them. They were right. In 2007, the default rate on seller funded down payment loans was 28%.

Think of the impact this has had on the home market in the past. It has expanded the potential homebuyer base from those with $5,000 either of their own funds or funds gifted to them by a relative to those with no savings whatsoever. While this approach doesn't always work - the seller obviously has to either give away some of his proceeds, or increase the price of the home - it works often enough to have a substantial effect on the real estate market as a whole.

So, unless congress caves in to pressure from these "non-profits" effective October 1, 2008 a purchaser of a home will no longer be allowed to get a gift from the seller for his downpayment.

What is this world coming to?

Carl Trawick is a Mortgage Specialist and Licensed Mortgage Broker with the firm Access e*Mortgage. He can be reached at 904-343-1145 or ctrawick@nefcom.net