Last week I wrote that this was coming. I mentioned how down payment assistance programs like Nehemiah might go away. Well, it's been passed into law now. For buyers and sellers who do not know what I'm talking about...here's the run down:
For a long time it's been quite the norm for a buyer to ask the seller of a home to cover part of their closing costs, if not all of them. A buyer would often even ask for down payment money to come from the seller. The idea is that the buyer wanted to get into the home for as little money down as possible. Who can blame them, right? Nehemiah, Ameridream and other non-profit organizations were formed for the purpose of gifting money to a buyer.
See, most lenders aren't keen on having a seller give money to a buyer as part of a real estate transaction for quite obvious reasons. So what Nehemiah and other non-profits do is accept a "gift" from the seller. I mean, a seller may not be able to give the buyer of their home money, but they can give money to someone else if they want, right? And then of course, for a fee, Nehemiah in turn gives the buyer the money the seller gave them. Since the buyer received money from Nehemiah, not the seller, the bank is OK with it (pretty short-sighted of them, wouldn't you say? The short-sightedness of lenders is the topic of another post though), and the buyer is as happy as can be because he gets to buy a house without spending any of his own money. And the seller is fine with it because it gets their home sold, and it doesn't really cost them any money, because they just bumped the sale price of the home up to cover what they gave to the buyer.
See this is part of the problem, and it's part of why banks have never wanted sellers to give money to buyers in a real estate transaction to begin with. If the seller is giving the buyer $5k and in turn selling a $200k home for $205k, it puts a inflated comp into the marketplace. Not to mention the fact that the lender just put out $205k for a $200k home.
DPA programs have been touted as a godsend from the beginning. They've talked about how they make homeownership possible for people who otherwise wouldn't be able to buy a home. The only problem, as I see it, is that these are the majority of the people who are losing their homes now.
Companies like Nehemiah (I'm only using Nehemiah as an example. There are several other companies that do DPA; they are just one of the biggest) are raising kane about this now of course, now that their programs have been cut. They say that 40% of FHA deals (a very popular loan program) use down payment assistance. This represents about 300,000 home purchases. The conclusion they draw is now that DPA programs are illegal, these buyers will be unable to buy homes, and that this huge segment of buyers are now out of luck. I don't agree with this conclusion at all. Just because someone uses DPA doesn't mean it's the only way for that person to have bought a home. They have the option to get the home with no money down.
Imagine you went to the store to buy a new computer and you had the money to buy one no problem. But when you got there, you saw the store had a promotion going where you could get the computer you wanted with no money down and zero percent financing for 6 months. Would you do the financing deal and just pay later? I would do the no money down. But if the deal hadn't been available, I still would have bought the computer. That's the point.
And further more, they don't ever seem to mention that the vast majority of foreclosures right now are from DPA deals. In other words, this "essential" down payment assistance that "makes homeownership possible" for so many of us doesn't really translate into a lot of actual homeownership...not if these people are losing their homes a year or two later. To me, that doesn't really count.
I felt from the beginning that this law would eventually pass, but I was getting quite sick of people just talking and talking about it. I kept hearing that DPA was going to get the boot, but then it kept falling into the backdrop. But eventually all good things must come to an end. I'd assert that in this case it's more like all kind-of-ok things must come to an end. I don't mean my comments to be completely negative about DPA. Those programs were helpful on occasion. The problem is that they had become the norm. I scarcely had a buyer come into my office that would even consider putting down money on their home. I mean, why should they? And I couldn't argue with them. It had become so commonplace. I've not ever been a really big fan of down payment assistance programs for this reason.
So the point is, if you want to buy a house these days, you're gonna need to be able to come up with at least a little money to put down. It looks like FHA down payments will go up to 3.5% as well. People have been buying and selling real estate successfully for decades before these DPA programs were around. It's worth making the obvious comment also that foreclosures have never been such a problem until now either. We've never had so many foreclosures as we have now, and most of them come from DPA deals. Are we really going to cry about this any more?
Mario Trejo Romero
www.talktomario.com
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Good opinion Mario, I like what you have to say about DPA programs. I'm glad they are gone. But for how long?