FHA May Nix DAP

In an article online today the head of the FHA, Brian Montgomery, stated that FHA may soon do away with its Downpayment Assistance Programs. Apparently they are suffering a glut of defaults right now and loans with DAP are defaulting at a rate three times higher than non-DAP loans.

Right now FHA requires 3% down in order to make a loan. However, there are rules in the books that say that the seller of a home can "gift" some of the equity in a sale to the buyer as a downpayment.

For instance, Joe and Jane want to buy a home. They are just getting out of school and don't have much in savings. Joe doesn't even have much credit to his name. His professional mortgage officer is able to qualify him for an FHA loan. They go shopping and find a home listed for $100K. The catch: FHA wants $3K from Joe and Jane to make the loan. Joe just put $3K down on a new car and doesn't have the funds. He explains this to his Realtor. His Realtor suggests they put an offer in of $100K and ask the seller to contribute $3K toward a down payment assistance program and $3k toward closing costs. In this case the seller is motivated and accepts the offer. The home appraises for $100k and the transaction closes.

The way these programs work are not as straight forward as I described above. What happens to make this 3% downpayment assistance work is this: The seller signs an agreement to give 3% of the purchase price (plus a $500 fee in this instance) to XYZ Company at closing. In return, XYZ company agrees to provide 3% of the purchase price to the Buyers at closing. XYZ puts up the money in advance at closing for the buyers and collects its money back plus its fee the following day when the transaction funds. Its a brilliant strategy. The only problem is that, as FHA has reported, buyers who use these programs are 3 times more likely to foreclose in the future. That is very unfortunate. Hopefully, buyers can act more responsibly in the future so that these kinds of programs are around to help them. Otherwise, they will need to be much more prepared when purchasing a home.