Downpayment Assistance Programs are being allowed less and less. One "stated" reason is that they likely helped contribute to the breakdown of the real estate market.
Here's how a downpayment assistance program (DAP) usually worked:
The Seller would give 3% plus some "administration fee"...
(sometimes 1% of the Purchase Price)
to a "neutral" third party "non-profit corporation"...
(Did I mention they sometimes took up to 1% of the Purchase price in exchange for providing a paper and money shuffle?)
who would then "gift" that money (well, just the exact amount needed) to the Buyer to use as a Down Payment.
(On loans requiring 3% down payment).
The Buyer, in most cases, paid the Seller 3% (plus the "fee") more for the home than they would have without requiring "participation" in the down payment assistance program.
The third party would "technically" use funds from a separate pool of donations, although if the Seller didn't "participate" in the program (at the amount the Buyer needed plus the admin fee), the Buyer wouldn't get any funds from the "pool."
So, essentially, the borrower was taking out a 100-104% loan, even though the lender would view it as a 97% loan. (Yes, they were wearing rose-colored glasses, now banned.)
The Buyer very likely could have bought the home for that much less without the program in the deal. I believe many Buyers could have done even better in negotiations without the DAP (Downpayment Assistance Program) as part of the deal. (If the Seller or their agent knew the Buyer needed the assistance, they would often hold out at full price plus the cost of participating in the DAP.)
Oh yeah, and I forgot. Closing costs. On top of the cost of the DAP, the Buyer often "rolled" the closing costs into the loan the same way: Pay the Seller more, the Seller pays the Closing Costs. (The TOTAL allowed to be "contributed" by the Seller for all of these things could not exceed 6% of the Purchase Price.)
Why the shell game?
Sellers are not allowed to give the Buyers the down payment funds directly, specifically because that messes with the true market value of the home. Lenders consider that something "abnormal" is going on if the Seller were to "pay" the Buyer's Downpayment. Well, somewhere along the way, the DAPs became "acceptable" to lenders, underwriters and investors, and yes, even the FHA.
Strangely enough, nobody seemed bothered by the fact that it was actually costing everybody more to run the funds through these third parties than it would have cost to simply allow the Seller to pay the Downpayment, but that's how it was. They wanted to be able to show a 97% loan to value at the end of the day, even if it weren't true. (Sounds a little like "cooking the books" doesn't it?)
So, are Down Payment Assistance Programs bad? Read on...
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©2008 Homebuyer Representation, Inc. - Salt Lake City, UT
Exclusive Buyers Agents (EBA) - All Rights Reserved