HUD Tightens Guidelines for DPAs, Providing Opportunity and Options for Mortgage Professionals & Homebuyers
HUD has issued a new rule to block the loophole which allowed for down payment assistant programs to provide charitable gifts toward homebuyer's down payment requirements. The impact will touch low- to moderate-income homebuyers, the majority who are first time, who would have relied on a charitable organization to meet the requirements for an FHA loan and down payment on a home. However, allowances are made in the case of gifts from relatives, and FHA is not doing away with DPA programs and maintains a wide array of options and opportunities for down payment.
The Department of Housing and Urban Development (HUD) plans to disallow existing down payment assistant programs which are either directly or indirectly funded by any individual who will benefit financially from the mortgage transaction. AmeriDream, Inc. and Nehemiah are two such grant programs that operate using seller contributions to fund their buyer gift program. The effect is significant for originators and lenders who utilized these programs for gift funds which allow borrowers to meet their minimum required investment of 3% as set forth by FHA, enabling low- to moderate-income homebuyers to meet the down payment.
To gain the skills in handling down payment, as well as learn how to optimize available initiatives for those struggling to meet down payment requirements, mortgage professionals can enroll in courses through FHA Online University. The partnership between the National Association of Mortgage Processors (NAMP) and FHA Online University is designed to help mortgage professionals to more effectively navigate the ever-changing mortgage market. Their course on Mortgage Processing provides insight and knowledge for mortgage professionals who wish to continue serving low- to -moderate-income borrowers in light of the recent developments.
Says Stacey Sprain, a Certified Ambassador Loan Processor (CALP) for NAMP, "As with every rule, there are followers and there are abusers. It seems quite clear to me that HUD's ruling is the result of the abusers who used DPA to market their products in order to make personal profit while in turn, using inflated property values and taking far too high of risks on borrowers who didn't fit into standard credit guidelines in the first place. In the same token, with every end there is a new beginning. We may not have DPA in the future but other options will come to those of us who are committed to withstanding the changes."
HUD is stating that the rule will take effect within 30 days of publication for non-faith based grant providers and within 6 months for faith based grant providers. Certain grant providers that have been effective by the new rule have taken action to block the ruling. AmeriDeam, Inc., has filed suit as it seeks to continue being able to provide cash gifts to homebuyers who are able to meet monthly mortgage payments, but who cannot amass the down payment necessary to qualify for FHA guaranteed loans. Through an organization such as AmeriDream or Nehemiah, a 3% gift to the buyer through could represent the necessary 3% minimum required investment.
DPA programs have been an effective source of assistance to lower income bracket individuals and families. AmeriDream has assisted over one million homebuyers in the past few years to obtain affordable housing, a significant 80% of which are first time homebuyers. Beginning in the mid-1990s, a number of charitable organizations, with faith-based organizations taking the lead, jump-started down payment assistance. Since then, DPA programs have been on the rise.
This is not the first time the issue has been addressed by HUD. In addition both Ameridream and Nehmiah have been under scrutiny by the IRS, who have questioned their status as Non-Profit organizations. Having a seller provide down payment assistance either directly or indirectly is prohibited by HUD's mortgage credit underwriting guidelines. Funds provided by charitable organizations using this method to acquire funds to provide grants to potential homebuyers have continued due to a loophole in the law which states that non-profit organizations and other local faith based initiatives are allowed to give a gift to a homebuyer to assist the homebuyer with expenses due at closing. In the case of both AmeriDream and Nehimiah, the status of non-profit organization has been maintained, yet donations are received directly from the property sellers, which under HUD's new rule, disallows the grant funds they are providing.
HUD's longstanding guidelines are now simply moving toward a tighter interpretation, thus closing up the loophole by disallowing any party or entity that is reimbursed directly or indirectly by the property seller or any other person, or an entity that financially benefits from the transaction either before, during or after the closing of the property sale to contribute in any way to the borrower minimum required investment.
Importantly, FHA is not doing away with DPA programs. The only effected change is in situations where the seller of the property is either directly or indirectly contributing to the funds used by the borrower to make a down payment. This new rule is in line with FHA's stance on down payment options, and maintains the established guidelines of mortgage credit analysis were asset to close are discussed as outlined in the 4155. "Hud's final rule regarding the prohibition of program such as Ameridream and Nehimiah basically is stating what mortgage credit underwriting standards have stated all along. It really does not deviate in any way from the underwriting standards and practices that have been in place regarding direct or indirect seller help regarding the borrowers minimum required investment," says Bonnie Wildt-Hild, lead instructor at FHA Online University, "to say that potential homebuyers will be harmed as a result of diminished availability of funds with respect to Down Payment Assistance is incorrect.
FHA still allows several grant programs including programs administered directly by HUD. ADDI alone will inject a proposed $1.97 billion dollars in 2008 for down payment assistance for American Home purchasers. This combined with other incentives will provide a more then sufficient resource for first time homebuyers who lack sufficient funds to purchase a home."
Indeed, FHA offers a wide selection of DPA programs which are funded by the federal government, including American Dream Down payment Initiative (ADDI) and HOME which alone assisted over 143,000 American families, to either purchase a home or rehabilitate their existing dwelling. It will also continue to allow qualifying DPA programs administered by local governments and other similar initiative to continue to operate. These opportunities for down payment options are still available to homebuyers nationwide, and HUD's policies regarding gift funds for closing remain the same regarding allowable gifts from relatives. Additionally new proposed guideline under FHA Reform may allow a decreased minimum required investment on borrowers behalf.
HUD's 2008 proposed budget further demonstrates FHA's commitment to the American public and the right for all Americans to own a home. In addition to increasing funding for existing programs such as HOME (Home Investment Partnership), and ADDI, HUD has also included proposed $50million dollars for Housing Counseling Programs for American Tax payers.
Although HUD's new rule has done away with charitable grant programs which allow for seller contribution which will indirectly fund the grant a homebuyer will receive towards the purchase of a new home, there still remains a multiple other possibilities as well as qualifying DPA programs for low- to moderate-income homebuyers to secure affordable housing through alternative HUD initiatives, as well as a wealth of other available local and community programs.