Is Seller Paid Down Payment Assistance Coming Back?
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As a loan officer, I first began using seller paid down payment assistance programs with my customers almost as soon as the program was available in my area. I remember very clearly the feeling I had at the time that the programs could not last long before HUD put a stop to them. I told every customer I prequalified for the first couple of years that they better hurry up and find a home because their down payment program couldn’t possibly last very long.
When I first took the classes to get a real estate license and later a broker’s license, and then when I started training to become a loan officer, nothing was drilled into my head more firmly than the rule that any payments from the seller back to the buyer to cover down payment money were fraudulent and illegal. Now suddenly this particular money back from the seller was not a kickback as long as the money was funneled through a non-profit organization.
Yet at the same time I saw many deserving families who were ecstatic about becoming homeowners and who were ultimately very successful homeowners. They put up with a whole lot of extra scrutiny to qualify for an FHA loan instead of a subprime loan because owning a home was important to them. In fact, they went through a lot more than most of the high credit score, conventional loan borrowers who sold their previous home and made their relatively painless down payment. As a matter of fact, my personal experience with seller assisted down payment programs is that this is the group of borrowers who most appreciate the opportunity to buy a home and fight tooth and nail to keep it and foreclosures are very rare. This experience shades my view of the program.
On the other side of the coin, past loans where seller paid down payment assistance was involved do have higher default rates. They have had higher percentages of straw buyer fraud than other loans. They have had too many instances where the down payment and transaction fee were just added on top of the listed price. But are these issues with the seller paid down payment assistance programs or are they underwriting and quality control issues.
I don’t know if seller paid down payment programs are the answer or not. Maybe they are, or maybe some program similar to the VA 100% loan program would make more sense. I do believe that lack of a down payment isn’t the huge factor causing foreclosure that some of it’s critics suggest. I believe the problem is layering of risk – specifically high debt to income ratios. I know of lenders who have studied their own numbers and come to the conclusion that the difference between the default rates on FHA loans with seller paid down payment assistance and FHA loans without it would essentially disappear with some tighter underwriting standards.
I don’t believe the bill which is presently being pushed to restore seller paid down payment assistance has the right guidelines to make the program work. I’m going to discuss this in more detail over the next few posts, but in the meantime let me direct you to some viewpoints on each side of the argument:
- LA Times – Down-payment aid program resurfacing
- Subtly Misleading LA Times Article Distorts In Favor of Seller-Funded Downpayment Programs
- LA Times Glosses Over Critical SFDPA Issues
- Are Seller Assisted Down Payment Programs Bad For FHA?
- FHA Down Payment Assistance On The Chopping Block?
- FHA Mortgage Hysteria From The Wall Street Journal
- FHA Down Payment Assistance – Down But Not Out?
As you can tell by the titles, a few of these articles are from some time ago before seller paid down payment assistance was discontinued, but the same arguments have been going on for ages. My own opinion of this issue has changed over time, I’d love to hear your thoughts about it.
FHA To Allow "Monetization" of $8000 First Time Home Buyer Tax Credit
Related posts:
- FHA Down Payment Assistance: Deal Made To Save Down Payment Assistance?
- FHA Down Payment Assistance – Down But Not Out?
- FHA Down Payment Assistance Is Still Available
- FHA Down Payment Assistance Gone For Now
- Are Seller Assisted Down Payment Programs Bad For FHA?
Tagged with: Down Payment Assistance • seller paid down payment assistance
Filed under: Down Payment Assistance • FHA guidelines • FHASecure • Refinancing
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Lets have an IRS paid closing cost at the table rather then the tax credit . We can not let politians design programs that we exspect to work , most think they know our business but lets face it , do you know any Congressmen or Senators that had a prior life as a loan officer? If anything they have been very negative as to our profession inculuding the prople that run HUD . The tax credit is good don’t get me wrong but it is done after the fact. Now that the borrowers are coming up with 3.5 % for the down payment let them take the credit at closing. In fact think about this , that would create the buyers to not ask for as much seller help so that is two fold . It helps values that way and we need to stop property values from declining , and make it a great investment again to buy a home . That would help . If we had the tax credit at closing we would not need all the red tape of a non profit( one must admit it is pain to process) , plus for underwriting the buyer has sweat equity since they will pay it back over 15 years interest free. Maybe we can get the bill changed!I am working about 15 deals right now as preapprovals that this would help them put an offer in . If any politians read this please get in touch I would love to explain what actually the buyers are asking for right now .
Its a shell game, and has artificially inflated prices, and caused taxes to rise in neighborhoods where it has been prevalent. If you’re an appraiser, and you are performing a lot of these, you’re always having to stretch on values. They are not a good idea.
Not that I want DPA put in place again – I agree they are a bad idea – but I have to keep all sides honest in the argument and I find that everyone overstates their side’s case.
The appraiser is the one who decides the value. If an appraiser submits a value they aren’t comfortable with, that appraiser didn’t do the job they were hired to do on behalf of the lender. As an aside, some of the valuation procedures common today are an overreaction to the problem. Values certainly went up too fast over the past few years, but subprime deals making credit too easy created willing buyers to pay the sellers prices. If we held to the standards of today, values could never increase at all even if buyers were willing to pay. The loose credit was the problem, not a small increase to cover DPA programs.
In my opinion, if the down payment program is a shell game then so is adding closing costs paid on behalf of the buyer at all and so is the fact that values are already inflated to include real estate commissions. Its a circular argument to blame rising values on the DPA programs.
That being said, there are better ways to accomplish the goals of the DPA programs.
Hi-
Seems everyone is missing one of the central points.
If a seller contributes cash towards a downpayment on a purchase, effectively they are accepting a lower (net) price.
This can mean the value of the securing property is misstated (higher than is true).
If the bank doesn’t subtract the downpayment assistance from the sales price, they can be misstating the value of the property.
If a seller contributes the entire downpayment and the sales price is devalued by that amount, the lender is really supplying 100% financing.
Isn’t that a big part of what got us into this mess?
Not necessarily, in my opinion. Neither the seller’s net or LTV of the financing determines the value. If two houses exactly the same next door sold for $100,000 each cash with seller paying no closing costs at all and the third house sold for $100,000 with the seller paying 6% closing costs and 3% to a DPA, the third house wouldn’t be worth less. On the other hand, there would be a problem if the third house sold for $109,000 with the same closing costs and DPA payment.
In the past, sellers would actually use that last option since they had buyers waiting in line, and the loan officer, appraiser and lender would look the other way and whistle. This wasn’t an inherent part of the DPA process. It was a quality control issue.
Now, they can’t do that because no one can stretch the value that way if they wanted to.
I absolutely disagree that 100% financing is what got us into this mess. I know most people don’t remember, but I have checked and many of the supposedly conservative local banks in business back in the old days before the secondary mortgage market regularly gave 100% financing and the loans were paid back. They just didn’t give it to people with 58% debt ratios and 1 month work history.
If people who got 100% financing had to stick to even 28/33 debt ratios, for instance, values couldn’t possibly have risen as fast as they did and those who were buying a home as a place to live and raise their family would be able to stick out any bad times.
There are some good arguments that a real value buffer provided by a DPA type deal would actually help the situation. Unfortunately, the quality control process can’t be relied upon, so I think a 100%LTV FHA program with strict, manual only underwriting would be an ideal replacement.