Could Down Payment Assistance Programs Make a Comeback?

April 27, 2009

Down payment assistance programs were all the rage, once upon a time-until President George Bush sighed H.R. 3221, The Housing and Economic Recovery Act of 2008. Part of the act banned seller-funded down payment assistance programs such as AmeriDream, the Nehemiah program and others.

Down payment assistance programs allowed the seller and charitable organizations to contribute towards the closing costs and down payment of FHA loans. For first-time homebuyers, down payment assistance programs helped make getting that first home with an FHA loan even more affordable. When the law banning down payment assistance programs took effect on 1 October, 2008, many borrowers and lenders had to find other ways to reduce or mitigate closing costs and down payments. Now there are developments that could give hope for homeowners who want to purchase using an FHA guaranteed loan; a bill called the FHA Seller-Financed Downpayment Reform Act of 2009. This was introduced in January 2009 by Representative Al Green (D-TX) and 17 co-sponsors.

The bill is designed to, "revise the requirements for seller-financed downpayments (also known as SFDPA for short) for mortgages for single-family housing insured by the Secretary of Housing and Urban Development under title II of the National Housing Act," according to OpenCongress.org.

There are pros and cons to reviving down payment assistance programs. Opponents of the 2009 FHA Seller-Financed Downpayment Reform Act say bringing back downpayment assistance programs like AmeriDream or GrantAmerica could potentially distort housing prices. According to one site which opposes the return of seller-financed downpayment assistance, "Usually the SFDPA money comes from simply marking up the home (sic) value."

Those in favor of SFDPA programs point out that the FHA requires a 3.5% down payment as part of the terms of an FHA home mortgage. When down payment assistance programs are available, that down payment isn't necessarily made by the borrower. Some down payment assistance programs even offer additional money to cut the costs further. The advantage to the cash-strapped buyer is obvious. Little or no downpayment means a smaller financial drain during the transition to becoming a homeowner.

Assuming the "marking up the home value" complaint is legitimate, the issue can be viewed from a different perspective. If a buyer knows in advance that getting a greatly reduced down payment means getting a markup to offset the down payment issue, seller financed down payment assistance becomes an option--IF the buyer is willing to accept the markup.

You could choose to pay the required FHA loan down payment in full, or opt to pay a bit more over the long run to make up for not having to put a larger amount of money down at closing. The real issue is being an informed borrower, reading the fine print, and knowing how your choices about making the down payment and how much could affect your bottom line overall. Choose a larger downpayment and lower FHA loan payments every month, or accept a higher monthly bill to avoid putting a drain on your bank account. It's the informed decision that counts.

For now, the "controversy" is moot-the 2009 FHA Seller-Financed Downpayment Reform Act has not been passed or rejected. Until changes to the law are passed by the federal government, down payment assistance programs are still banned; the programs active until October 2008 are over until new laws give them permission to return to business in some form.