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Don't lie about your down payment's source

Honesty is the best policy when getting a mortgage. Watch out for anyone who asks you to withhold information from the lender.

Some home buyers might be tempted, for example, to fudge the facts about the source of their down-payment money. A lender will assume that the down payment comes from savings. If the money comes as a gift or a grant, that fact has to be disclosed -- even if it means the borrower has to pay a higher interest rate or shell out for mortgage insurance.

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This issue can come up when the buyer receives money from a down-payment assistance program. Here's how these programs work:

In most cases, the home buyer wants to get a Federal Housing Administration-insured mortgage, which requires a down payment of at least 3 percent. But the buyer hasn't saved that much money. Buyers are prohibited from receiving down-payment money directly from sellers, but buyers can receive down-payment money as gifts from nonprofit agencies. So the seller contributes the down payment (plus a fee) to a nonprofit agency. Then, at closing, the nonprofit gives the down payment to the buyer.

These procedures comply with the letter of the regulations that govern FHA-insured loans. The transaction is recorded on the HUD-1 settlement statement, a form that the federal Department of Housing and Urban Development requires for virtually all home mortgages. And the buyer never has the cash -- the nonprofit transfers the money directly to the settlement agent at closing.

In early autumn, a down-payment assistance program was advertising a way to give money to buyers without disclosing the transaction on the loan paperwork.

The e-mail advertisement, sent Sept. 22 by an entity called the SNAP program to mortgage brokers and real-estate investors, reads in part, "Now your buyers will never come up short." In the e-mail's list of the SNAP program's features, the first is, "Does NOT appear on the HUD-1." Another feature: "We set up a bank account in buyer's name."

The HUD-1 specifies the closing costs, interest rate and amount of down payment, among other things. Federal law requires disclosing side deals on the HUD-1.

"Any money that flows back and forth needs to be disclosed," says Bob Moulton, president of Long Island-based Americana Mortgage. Without making a judgment about the SNAP program, of which he has no direct knowledge, Moulton says the federal guidelines are clear: "If it's a full-documentation loan, everything needs to be properly disclosed. You need to provide the underwriter with a gift letter and we need to attach a statement to demonstrate that the donor has the financial wherewithal to give the money to the recipient."

It's a federal crime to make a false statement on a loan application, says Stephen Brandt, executive vice president for Countrywide Home Loans, "whether you're altering the source of the down payment, overstating your income, or improperly disclosing how long you've been employed."

Brandt is speaking generally and not about SNAP. Borrowers who falsify loan applications can be subject to criminal penalties. More likely, "there's always the risk of the mortgage company calling the loan due, which can create a real challenge for the borrower.

"The thing is, now more so than ever before, borrowers have options," Brandt continues. "Typically a borrower can find a loan option that allows for financing without having to be deceptive." Where borrowers often get into trouble, he says, "is allowing somebody to persuade them to make a false statement."

SNAP's e-mail refers recipients to the program's Web site, www.snapprogram.com, which now is blank save for the name and phone number of the Franklin Foundation. The foundation, based in Gaithersburg, Md., is a nonprofit down-payment assistance program. Its executive director is Scott Nash, who is denoted as the sender of the e-mail touting the SNAP program.

The Franklin Foundation offers a better-known product called the Key Grant, which operates like dozens of other down-payment assistance programs.

Nash did not respond to phone calls and e-mails. He did speak briefly to Kenneth Harney, a syndicated real-estate columnist who broke the story about the SNAP program. Nash told Harney that SNAP was "being put on hold." SNAP stands for "Sell Now Assistance Program."

SNAP's hiatus comes as cold comfort to Scott Syphax, president of The Nehemiah Program, the nonprofit that invented the down-payment assistance industry. He worries that the government will regulate the industry out of existence if the feds think too many nonprofits are cutting corners, enabling buyers to get unaffordable loans for inflated home values.

It incenses Syphax to hear that the SNAP program was advertising that the transaction doesn't appear on the HUD-1, and that the program sets up a bank account in the borrower's name. "You're clearly attempting to fool the underwriter and the lender as to where the down payment came from," he fumes. "If any down-payment assistance provider puts money in your account or gives you a check to put money in your account, they're clearly attempting to circumvent existing law."


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-- Posted: Nov. 18, 2004

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