The Housing and Economic Recovery Act of 2008 shuts off an important form of funding for some homebuyers.

French writer George Sand once said, "Charity degrades those who receive it and hardens those who dispense it." This might be the reason why the federal government has chosen to limit the use of seller-funded down payment assistance (DPA) programs.

It would make sense that a housing stimulus package would make it easier to buy a home, not harder. But the Housing and Economic Recovery Act of 2008 prohibits FHA borrowers from using one of the more popular means of complementary funding-seller-funded down payment assistance (DPA). The feds have their reasons for the ban, and they appear to be good ones-but the critics still aren't convinced.

Down payment assistance can be arranged by way of a transaction directly between the seller and buyer, or through a third-party intermediary. One of the largest third-party organizations that facilitates DPA is Sacramento-based Nehemiah, which accepts donations (plus a fee) from the seller, and then gifts those donations to the buyer.

The FHA, a division of HUD, guarantees loans made to low- and moderate-income households under relatively flexible underwriting guidelines. Up until recently, the FHA required borrowers to provide a 3 percent down payment; with the passing of the housing stimulus package, the down payment requirement was raised to 3.5 percent.

To date, hundreds of thousands of home shoppers have purchased their homes by combining DPA with an FHA mortgage.

Inflated home prices, higher chances of default

The feds say that DPA makes home ownership more expensive because it inflates home prices. Theoretically, a seller could raise the asking price, and then fund the borrower's down payment by a similar amount. That essentially provides the borrower with 100 percent financing-which isn't the business that the FHA wants to be in. The FHA also believes that borrowers who use DPA are more likely to default.

Greater opportunity for cash-poor borrowers

Those who disagree with the government's opinion feel strongly that DPA provides opportunities for homebuyers who have few options. Critics also argue that shutting down this avenue for down payment funding is the wrong strategy to use when the housing market is depressed.

Representative Al Green of Texas has introduced a bill that would require the FHA to accept seller-funded DPA. H.R. 6694 also gives the FHA the right to adjust interest rates (based on the borrower's FICO) on mortgages that use down payment assistance.

Approaching deadline

You can still use DPA as long as you obtain a loan approval prior to October 1. If you forget the date, take a quick jump over to Nehemiah's website; it has a clock counting down the minutes until the ban takes effect. HUD and FHA officials are responding to their belief that DPA is nothing more than greed disguised as charity. Unfortunately, kind-hearted sellers and qualified buyers-who truly need the help-aren't likely to agree.

Published on September 16, 2008