As a loan officer, I first began using seller paid down payment assistance programs with my customers almost as soon as the program was available in my area. I remember very clearly the feeling I had at the time that the programs could not last long before HUD put a stop to them. I told every customer I prequalified for the first couple of years that they better hurry up and find a home because their down payment program couldn’t possibly last very long.
When I first took the classes to get a real estate license and later a broker’s license, and then when I started training to become a loan officer, nothing was drilled into my head more firmly than the rule that any payments from the seller back to the buyer to cover down payment money were fraudulent and illegal. Now suddenly this particular money back from the seller was not a kickback as long as the money was funneled through a non-profit organization.
Yet at the same time I saw many deserving families who were ecstatic about becoming homeowners and who were ultimately very successful homeowners. They put up with a whole lot of extra scrutiny to qualify for an FHA loan instead of a subprime loan because owning a home was important to them. In fact, they went through a lot more than most of the high credit score, conventional loan borrowers who sold their previous home and made their relatively painless down payment. As a matter of fact, my personal experience with seller assisted down payment programs is that this is the group of borrowers who most appreciate the opportunity to buy a home and fight tooth and nail to keep it and foreclosures are very rare. This experience shades my view of the program.
On the other side of the coin, past loans where seller paid down payment assistance was involved do have higher default rates. They have had higher percentages of straw buyer fraud than other loans. They have had too many instances where the down payment and transaction fee were just added on top of the listed price. But are these issues with the seller paid down payment assistance programs or are they underwriting and quality control issues.
I don’t know if seller paid down payment programs are the answer or not. Maybe they are, or maybe some program similar to the VA 100% loan program would make more sense. I do believe that lack of a down payment isn’t the huge factor causing foreclosure that some of it’s critics suggest. I believe the problem is layering of risk - specifically high debt to income ratios. I know of lenders who have studied their own numbers and come to the conclusion that the difference between the default rates on FHA loans with seller paid down payment assistance and FHA loans without it would essentially disappear with some tighter underwriting standards.
I don’t believe the bill which is presently being pushed to restore seller paid down payment assistance has the right guidelines to make the program work. I’m going to discuss this in more detail over the next few posts, but in the meantime let me direct you to some viewpoints on each side of the argument:
- LA Times - Down-payment aid program resurfacing
- Subtly Misleading LA Times Article Distorts In Favor of Seller-Funded Downpayment Programs
- LA Times Glosses Over Critical SFDPA Issues
- Are Seller Assisted Down Payment Programs Bad For FHA?
- FHA Down Payment Assistance On The Chopping Block?
- FHA Mortgage Hysteria From The Wall Street Journal
- FHA Down Payment Assistance - Down But Not Out?
As you can tell by the titles, a few of these articles are from some time ago before seller paid down payment assistance was discontinued, but the same arguments have been going on for ages. My own opinion of this issue has changed over time, I’d love to hear your thoughts about it.
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