As you know, AmeriDream, Nehemiah and other Down Payment Assistance programs (DPA's) were eliminated October 1, 2008. FHA had been trying to eliminate these programs for years, and they were heavily opposed not only by the organizations that provided this service, but also by many Brokers and Loan Officers who made a very good living as a result of their Borrowers utilizing the DPA's. The two sides went at it pretty hot and heavy but when the smoke cleared and Bill H.R. 3221 was past, FHA came out on the winning side.
The merit of DPA's has been blogged about here in the Rain many times since October 1, 2008, mainly by those who support this concept, and have vowed to keep on fighting to bring them back. To-date they have not managed to do that, and I for one hope that these programs do not come back. I am all for the State Bonded Programs Like CHFA here in Connecticut, but I for one think that the DPA Programs like AmeriDream, and Nehemiah were and still are a bad idea.
My reasons for being opposed to these programs are like me, very simple. In my opinion these programs were an out right violation of the FHA guidelines in regards to who my provide downpayment assistance. Section 302 of the FHA Guidelines states:
Gift Funds. An outright gift of the cash investment is acceptable if the donor is the borrower's relative, the borrower's employer or labor union, a charitable organization, a governmental agency or public entity that has a program to provide homeownership assistance to low-and moderate-income families or first-time homebuyers, or a close friend with a clearly defined and documented interest in the borrower.
The gift donor may not be a person or entity with an interest in the sale of the property, such as the seller, real estate agent or broker, builder, or any entity associated with them. Gifts from these sources are considered inducements to purchase and must be subtracted from the sales price.
So where is the violation? For those of you that are not familiar with how DPA's like AmeriDream, and Nehemiah work, let me just give you a very brief and simple explanation.
A Buyer is interested in purchasing a home but does not have the downpayment, or for that matter the closing costs either. The Seller, who by the guideline above cannot contribute to the downpayment, goes to an organization that is set up to provide downpayment assistance (DPA), and gives them the money that the Buyer needs for the downpayment and/or closing costs. The DPA them gifts it to the Buyer under its name. By the way the DPA does not do this out of the kindness of their heart, they receive a fee for their services.
So there you have it the "charitable organization" which is allowed to provide "Gift Funds" gets the money from a "Seller" who is not allowed to privide "Gift Funds" and gives it to the Buyer, there by doing an end run around the loop hole in the rule, and violating the intent of the rule.
Now do I have a problem with Sellers contributing towards a downpayment, not at all. But I do have a big problem with using loop holes to violate the intent of the rules.
In my opinion since FHA allows a Seller to presently contribute up to 6% of the Sales Price towards closing costs, then why not allow the Seller to include in that 6% the downpayment as well. Therefore, eliminating the DPA's, their paper work, and their added costs.
I don't know if I am the only one experiencing this, but these days when I am doing a loan I hold my breath until the appraisal comes in. More often then not it is coming right in at the Sales Price. Now inflate the Sales Price to include the added cost of the DPA's fees, and possibly the Seller wanting more because they are having to contribute more then they wanted to, and you have a recipe for either the house not appraising or possible fraud.
I said I would keep it simple and I have already gone on longer then I planned. If needed I will write another blog to go indeeper into my opinion about DPA's, but for now I thought that at least another view point should be put out there as to why DPA's might not be such a good thing.
I would expect that many of the comments on this post will be in defense of theDPA Programs, and while I recognize why some may support them, I do not share their opinion, and in the end that is what it all comes down to opposing opinions.
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Info about the author:
George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com
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