Is An FHA Downpayment Compromise In The Works?

by Peter G. Miller
September 16th, 2008

The ban on downpayment assistance for FHA mortgage borrowers is set to begin October 1st, but there are rumblings on Capitol Hill that maybe an outright blockade is not the right way to go.

When last we had left off with downpayment assistance programs (DAPs) they have been prohibited as of October 1st under the FHA Reform package passed during the summer. To get that bill passed a threatened veto from President Bush, congressional Democrats had to offer various carrots to Republicans in the House and Senate. One of those carrots was a ban on downpayment assistance from third-parties for FHA loans.

Under FHA rules, borrowers must come up with their own downpayment money unless they get a gift or grant. With a downpayment assistance program a seller pays an amount, say 3 percent, to a charity. The charity give the home buyer a grant, also 3 percent. In addition, the charity receives a fee from the property owner, say about $500.

The problem with banning DAPs is that a large percentage of FHA borrowers have been using such funding, including a lot new home buyers — reason enough for the National Association of Home Builders to oppose the DAP ban.

The DAP ban is also distasteful for other reasons: First, FHA rules allow owners to offer “seller contributions” of up to 6 percent, a huge monetary incentive for lucky buyers or those who are skilled at negotiation. Second, buyers with rich parents can get downpayment assistance but not those from poor families. Lastly, HUD figures regarding DAP foreclosure levels are like a lot of HUD numbers, curiously debatable.

The biggest provider of DAP services, the Nehemiah Corporation, says some 300,000 homebuyers have been helped with its programs — a significant percentage of all FHA borrowers.

Now a swap of sorts is being proposed on Capitol Hill: H.R. 6694 would once again allow downpayment assistance programs AND it would also lift the one-year ban on risk-based FHA premiums that begins October 1st.

HUD has been hot to start risk-based insurance pricing because it means that those with woeful credit would have to pay higher rates for coverage when financing with an FHA mortgage. In practice, it would really mean get rid of would-be borrowers with spotty credit histories while at the same time getting more money for the FHA insurance fund.

And what does HUD do with the extra dollars it collects from FHA borrowers? Does it refund the money back to borrowers like it once did? Nope. It gives the money to the Treasury so that national debt looks smaller.

Don’t believe it? Since 2001 HUD has turned over premium money worth $13.5 billion to the U.S. Treasury.

Will the compromise measure pass? While it would certainly be good for buyers with little downpayment cash, H.R. 6694 would effectively make FHA mortgages off limits for large numbers of would-be borrowers, not exactly a good strategy when the market needs purchasers to reduce soaring real estate inventories.

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This entry was posted on Tuesday, September 16th, 2008 at 3:29 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

5 Responses to “Is An FHA Downpayment Compromise In The Works?”

  1. Cheryl Says:

    “Don’t believe it? Since 2001 HUD has turned over premium money worth $13.5 billion to the U.S. Treasury.”

    Where is this data?

  2. Tami Says:

    I really hope the government overturns the ruling against down payment assistance. We are trying to purchase a home right now. We have good credit no down payment. We plan on using the Nehemiah program. Not sure all will fall into place before Oct 1. I am sure there must be others out there like me.

  3. Jovan Says:

    Good Afternoon,

    I have GREAT NEWS! Down Payment Assistance (DPA) is one step closer to being preserved thanks to all of your efforts. HR 6694 was passed by the House Financial Services Committee earlier today, positioning the Bill for a floor vote in the next couple of days.

    Our fight is far from over. It is more critical now than ever before that we continue the charge to preserve DPA. Therefore, I am calling on you once again to assist with our collective efforts. We must make contact with some key individuals to voice our profound support of Down Payment Assistance. Failure to do so at this point in time could result in adversity to HR 6694 thus making all of our previous efforts a moot point.

    I am respectfully requesting that you call, email, and / or personally visit the following individuals:

    Congressman Steny Hoyer of Maryland

    Congressman Roy Blunt of Southwest Missouri

    Congressman John Boehner of Ohio (Minority Leader of the United States House of Representatives)

  4. Peter G. Miller Says:

    Cheryl –

    Please see:



  5. Joe Says:

    Don’t be fooled by so called down payment assistance programs. There is not such a thing as “free money” or assistance. Bottom line is the customer/borrower will pay for it one way or another.

    Let’s say for example if the purchase price is $200,000 – if you need 3% downpayment or $6,000 – chances are the seller/realtor will negotiate a higher purchase price so they can get their investment back.

    Even if the price is not increased… if you were to ask for a price reduction, there is a 99.99% chance you won’t get it!

    When you ask for downpayment assistance, you lose your bargaining power. In a buyer’s market you are simply missing out on the opportunity of getting a good deal.

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