Is FHA Downpayment Assistance Coming Back?

by Peter G. Miller
January 28th, 2009

Paul writes and asks, “do you think restoring DPA will be a priority of the Obama administration? I believe H.R. 600 was introduced last week in the House.”

Paul is correct. H.R. 600 was introduced on January 19th by Rep. Al Green (D-TX), a measure designed to again allow seller-financed downpayment assistance (DPA)for FHA mortgages.

However, a close look at the bill’s language shows that it’s not a broad bill that would allow assistance to all borrowers.

The “FHA Seller-Financed Downpayment Reform Act of 2009″ says that borrowers must have certain credit scores — at least 620 in one situation and as much as 680 in others.

The bill also says that beginning in fiscal year 2010 — a period that starts October 1st — assistance may be allowed if the borrower “has a credit score equivalent to a FICO score of 619 or less, but only if the Secretary certifies that such loans can be insured without resulting in a need for an appropriation for a credit subsidy.”

Translation: HUD is going to have to keep careful records showing default rates for loans which were originated with downpayment assistance. Too many defaults will limit assistance to those with credit scores of 620 or better — and ban them for buyers with weaker credit.

The bill also has new requirements for nonprofit organizations that provide downpayment assistance. Typically such organizations get a fee, say $500, for their work as an intermediary and counselor. In a common transaction, for example, a seller would make a contribution to the nonprofit equal to 3 percent of the property’s purchase price. The nonprofit would then provide the money to the buyer. In addition, the seller would usually chip in $500.

The necessity for a third party arises from a HUD rule which says sellers cannot provide downpayment dollars to buyers. Sellers, however, CAN provide so-called “seller contributions” equal to as much as 6 percent of the sale price. HUD rules also allow for downpayment gifts to buyers from families and friends, great news for those who have wealthy parents…but not so good for many buyers.

The bill also says that nonprofits will also have to:

___ Offer to make counseling available to the buyer regarding the responsibilities and financial management involved in homeownership;

___ If such offer is accepted by the mortgagor, make such counseling available for the mortgagor; and

___ In the case of any such entity that is a private nonprofit organization, it must implement a conflict of interest policy that prohibits directors, officers, employees, and immediate family members from receiving financial benefits from any entity that is providing the program with goods or services other than the homeownership assistance program entity itself or its wholly-owned affiliate.

Will this bill pass? The odds are good given that Congress has repeatedly objected to HUD’s DPA policies during the past few years.

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This entry was posted on Wednesday, January 28th, 2009 at 8:36 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.

One Response to “Is FHA Downpayment Assistance Coming Back?”

  1. Steve Odierno Says:

    It is quite interesting that FHA, which technically has no credit score requirements, is increasingly being associated with credit scores. For instance, while a loan might come back as “Approve/Eligible” through DU with a sub-500 FICO score, some wholesalers will not purchase the paper unless the FICO is 550, 580, or in some cases 600. While I understand the need for prudence – particularly in light of the sub-prime debacle – there seems to be a disconnect between FHA parameters and bank guidelines. I suppose we can now add DPA to the list.

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