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Buyers Who Thought They’d Missed Their Opportunity To Buy With No Down Payment May Get A Second Chance After All

September 15th, 2008 categories: Buying

Several months ago, when the historic Housing Bill was passed, one of its provisions was to eliminate the use of down payment assistance (DPA) programs on FHA loans. So far this year, the popular Nehemiah DPA program has enabled a huge number of qualified home buyers to get into their first homes. Without it, many of those buyers wouldn’t have been able to buy, which would have made the current housing slowdown even deeper.

The government’s reasoning in eliminating these DPA programs was that those who weren’t putting any money down posed a much risk of going into foreclosure down the road. And they had the numbers to back it up, showing how those with 100% down, DPA-assisted loans went into foreclosure far more often than those using a traditional FHA loan with an almost-3-percent down payment.

But by making a blanket “sorry, this program’s over” decision, the government’s ban on DPA-assisted FHA loans, which takes effect Oct. 1, effectively cuts off many well qualified borrowers; those who can easily afford the payments but don’t have the enough in the bank to come up with three percent down.

Now, however, there is a bill afloat in Congress (HR 6694), that would revive DPA programs like Nehemiah. And if the bill moves through the House and Senate quickly enough, it’s possible it could still be approved in time to save these DPA programs before their current termination date.

With that Oct. 1 date looming, most lenders stopped taking applications for new Nehemiah loans in mid-August, knowing that they’d need about 45 days to get the loan closed. So for the past month, buyers who couldn’t buy without a DPA loan have been essentially frozen out of the market.

When the government made its blanket decision to eliminate all DPA loans, it did so in the midst of the worst foreclosure crisis in modern times. They knew that all those 100-percent-financed loans that were so popular a few years ago now represented the lion’s share of the homes that were in foreclosure. The government wanted desperately to prevent a similar occurrence several years from now by calling a halt to those DPA programs which allowed FHA borrowers to essentially take out 100 percent financing.

Under FHA’s guidelines, borrowers must come in with approximately three percent down. However, the entire down payment can come from gift funds from a qualified donor. Traditionally, that donor would be a parent or other family member. It can’t come from the seller nor from anyone else associated with the transaction (i.e. real estate agent, lender, etc.).

But the gift could come from a non-profit organization. And that’s where organizations like Nehemiah come into the picture.

A seller who’s anxious to sell might be very willing to offer the buyer a 3 percent credit to cover the down payment in order to make the sale work. But since the seller can’t give the money directly to the buyer, he instead gives 3 percent to the Nehemiah Corporation, which then gifts the money back to the buyer. Nehemiah is essentially a pass-through organization, which collects a small fee from the buyer to cover its costs.

When the government made the decision to ban DPA loans entirely, it rationale was that it wanted to prevent the riskiest borrowers from taking on a loan with payments they likely wouldn’t be able to afford.

But in its haste to shore up all that’s wrong in the housing market when it passed the housing bill, by banning all DPA loans, they also shut out those borrowers with little cash but who otherwise had excellent credit and incomes that would enable them to easily afford the monthly payments.

So while the housing bill certainly eliminated the riskiest FHA loans, it also pushed those who really didn’t pose a significant risk out of the market altogether. And that’s where this new bill comes into play.

Rather than eliminating all DPA loans, HR 6694 sets certain risk-based minimum requirements for borrowers wanting to use a 100 percent DPA/FHA loan. Those who pose a much lower risk of going into foreclosure would still be able to use programs like Nehemiah. Those who pose a greater risk and don’t meet those requirements wouldn’t be able to buy.

In other words, a common-sense approach instead of a blanket all-encompassing decision.

Congressman Barney Frank of Massachusetts is the sponsor of HR 6694, and is spearheading efforts to get this bill signed into law before the end of the month, when the DPA ban is set to go into effect. Frank has been quoted as saying that the bill is an absolute “lock” to pass the House. And now that it supposedly also has the support of HUD Secretary Steve Preston, he believes that getting the bill through the Senate – something that just a week ago might have seemed like a real uphill battle – will be an easy task, too.

The reports I’ve read indicate that in order to qualify for a DPA loan, under the provisions of this bill, borrowers will need to have a credit score of 680 or higher. I haven’t seen the actual bill itself, so there may be other provisions which no one is publicizing. Moreover, by the time the bill is passed by the house and goes through the Senate other provisions could be added or amended.

In any event, over the next few weeks, though, we’ll find out whether borrowers who were frozen out of the Nehemiah program a month ago will indeed get a reprieve. If they do, it could be another much-needed shot in the arm for a housing market that’s trying desperately to turn itself around.

Stay tuned for more updates…which I’ll post as new information becomes available.

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This entry was posted on Monday, September 15th, 2008 at 9:12 pm and is filed under Buying. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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