Down Payment Assistance Set to Bite The Dust October First
Below is a link to a very informative article from BankRate regarding the possible (PROBABLE) end of Seller down payment assistance.
I had mentioned in an earlier blog what I felt were the pros and cons of these "Gift" programs. As of October 1st if the legislation stands as written - these will no longer be allowed for any Fed Insurance backed mortgages.
My own experience with them is a real mixed bag. Yes they DO allow people with very little of their own money to put in to achieve home ownership and get a mortgage. That in itself is a two edged sword. Home ownership is a positive influence on the economy in many ways and obviously personally for us as well.
The downsides as I see it are these: First, with so little down and with the market in many areas continuing to fall, we will be left again with a large number of these where the folks who feel any financial pinch will realize that they have zero equity and no real reason not to default. For the market to finally stabilize we HAVE to get all these defaults with their corresponding Short Sales and Foreclosures to work their way out of the system. They depress appraisals in general and continue the downward spiral in property values.
Second the entire practice of turning cash back from the seller into a "Gift" that meets the current lending guidelines has created a nice "cottage" industry for companies that do exactly that - they take a Seller's cash back at closing and, for a fee, convert it into a complying "gift". So what's the problem with that? Well in the ones I have been a party to (and I have NEVER had one of my buyers do it - I have only been part of having my sellers participate) the cost these "not for profit" companies charge is very dear. In one case it was $750 to convert just $5000!! That's FIFTEEN PERCENT to convert it into a complying gift. No surprise that in this article two of the biggest players in this business are very vocal and actively trying to protect first time homebuyers (and their own best interest) in finding a way to keep this very lucrative (for them) program alive.
My point would be, if you're going to allow seller participation and take the risks associated with it. just allow it, with some reasonable guideline. But let's just call it what it is, let the market assume the risk associated with it, and eliminate the need for "clever" conversions that only add needless expense and just line someone's pockets with the already crimped funds available from a buyer with limited funds and seller's who keep having their equity chipped away. Otherwise let's live without the practice.
www.bankrate.com/brm/news/mortgages/20080821-down-payment-assistance-a1.asp
- Mike W. | 
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• Aug. 21, 2008 - RE: Is this the END of Downpayment Assistance?
I agree Mike.
These programs are helping our first time buyers especially get into homes that are sitting on our market however, these incentives are cash cows for the program holders. The sellers are hit the hardest when in addition to paying a hefty price (up to 3% of the negotiated sale price) to a 3rd party for down payment assistance and another probable 3% towards closing costs they are then obligated to the "fee" and these are all different and are subject to change. As a buyers agent it is a challenge to make buyers understand that a less than full price offer is not acceptable when asking for all of this assistance and they tend to understand when you tell them how much 6% would be to their buying power (bottom line).
I'm glad to see the lenders are tightening their standards but the pendulum is now swinging opposite and it will be a long time before it's back to center and credit guidelines become reasonable and achievable. In the meantime, we need to stay focused and stay proactive to get our deals closed for our buyers and sellers.