Restrictions on Down Payment Assistance Programs
Under the Housing and Economic Recovery Act of 2008 (ACT), several restrictions were placed on Down Payment Assistance programs (DPAs). The language in the ACT explicitly prohibits the following sources from contributing funds to the mortgagor's cash investment:
•(i) The seller or any other person/entity that financially benefits from the transaction; and
•(ii) Any third party/entity that is reimbursed by any of the parties identified above.
"Any other person/entity that financially benefits from the transaction" should be deemed to include the seller, buying or selling realtor or their respective firms, builder, loan officer, broker, bank, etc.
For ease of reference, all DPAs involving any of the parties noted above will be referred to as Seller-Funded DPAs.
Effective with all FHA loans underwritten on or after October 1, 2008 Seller-Funded DPAs are prohibited.
In order to be excluded from this prohibition the final approval and sign off of the MCAW MUST precede October 1, 2008. All loans containing a Seller-Funded DPA must close by October 31, 2008. Please keep this date in mind on existing and new applications as exceptions will not be granted. To ensure that mortgage companies can comply with this directive from the FHA, many mortgage companies will cease accepting new registrations wherein the applicant is utilizing a Seller-Funded DPA on September 1, 2008.
While the ACT prohibits Seller-Funded DPAs, it further states that:
Down payments from other sources such as Community Development Block Grants (CDBG) and HOME assistance are permissible. Municipalities and other government agencies can continue to offer down payment assistance on or after October 1, 2008 provided that the assistance is in the form of a second lien; and
- Amounts borrowed from a family member are to be treated as cash or cash equivalent as long as any lien for repayment is subordinate and the total liens do not exceed 100 percent of the value of the property plus appraisal, inspection and other fees.
The October 1, 2008 effective date is intended to protect homebuyers and homeowners refinancing from a sudden change in these requirements, you should abide by the cutoff dates noted above.
There are many people diligently sorting through other changes and requirements of the ACT, I wanted to alert you of this change as quickly as possible. Please continue to watch for updates to the FHA product.