Don't lie about your down payment's source -- Page 2

Syphax says that mortgage brokers and real estate agents are always pressuring down-payment assistance providers to cut corners and shave fees. It's difficult, he says, for nonprofits without the track record or stability of Nehemiah to resist.

Told that he sounds disgusted, Syphax says, "I am, because I've been singing this song by myself for almost four years." This month, Syphax added a new verse to the old song: Nehemiah announced a code of conduct that it abides by, and asked other down-payment assistance providers to adopt similar standards. Nehemiah asked HUD, the federal housing department, to regulate the industry.

It's rare for an industry to request federal regulation, but at least two down-payment assistance programs have done so this year: Nehemiah and AmeriDream. The latter requested regulation in congressional testimony in March, when the House Financial Services Committee held hearings on a bill called the Zero Downpayment Act. (The bill wasn't enacted and probably will be introduced next year.)

AmeriDream's president, Ann Ashburn, suggested a partnership between down-payment charities and the federal government, "perhaps by ensuring a formal role for HUD-approved providers that demonstrate a clear, publicly minded commitment to our shared goal of increasing homeownership."

She advised that zero-down borrowers be required to demonstrate creditworthiness, and that they undergo pre- and post-home buyer counseling.

Nehemiah, too, wants some sort of formal relationship with HUD, but the housing department hasn't responded. A HUD spokesman didn't return an e-mail and phone call for this story.

Syphax says regulations and a code of standards are necessary because 30 percent of FHA borrowers get down-payment assistance. "It's not sort of a cottage activity anymore, but has become a major part of the home purchase world, especially for first-time and lower-income home buyers," Syphax says. "And in the absence of clear regulation, operational standards tend to drive down to the lowest common denominator, which usually is not in the best interest of the first-time home buyer that we all ostensibly seek to serve."

For home buyers, the biggest danger is that down-payment assistance will artificially inflate the home's price, so that the buyer borrows more than the house is worth. "What that leads to is a situation where the person walks into negative equity," Syphax says. With a mortgage done in accordance with Nehemiah's code of conduct, "the home buyer should walk into equity and not into instant non-equity."

Ashburn and Syphax say consumers should look for red flags and green flags when they deal with a down-payment assistance program:

Red flags

• "If the seller is told that they can deduct the cost of the down-payment assistance as a charitable contribution, that's a clear red flag," Syphax says. Ashburn adds: "A lot of people state that the contribution is deductible as a contribution to a charity, but let me tell you: It's not."
• "If they're trying to hide or conceal the transaction in any way, that's a red flag," Ashburn says.
• "If the down-payment assistance provider or anyone else in the transaction provides you personally with the down-payment assistance funds and asks you to deposit them into your bank account, that is a huge red flag," Syphax says. "It indicates they're attempting to fool the underwriters into showing that the funds were your funds."
• "If the seller is asked to re-sign documents in order to raise the purchase price, that is a red flag, and that's likewise for buyers," Syphax says. "If somebody comes back and tells you, 'We agreed on a purchase price of $100,000, but really we need to make it $105,000,' and the home buyer doesn't know what's going on but agrees to it, that ultimately harms the home buyer."
• Does the program pay kickbacks or referral fees to builders, real-estate agents or mortgage brokers? That's a bad sign, Syphax says. The organization is unlikely to go around blabbing about the practice, but you always can ask point-blank about the nonprofit's kickback policy and see what kind of reaction you elicit.
• Oftentimes, a builder, mortgage broker or real estate agent refers the buyer to a down-payment assistance program. Syphax says you should ask that person how he or she decides which down-payment provider to use. "And if the answer is based solely on cost, I would question whether the home buyer is best served by that recommendation."

Green flags

• Look for a down-payment assistance program that offers home-buying education. Most programs don't offer this, but a few do, including AmeriDream and Nehemiah. Both offer online courses.
• Similarly, ask what types of charitable activities the nonprofit does besides down-payment help to individuals. Some down-payment assistance providers operate community redevelopment programs, buying and fixing up abandoned houses, then selling them to low- and middle-income families. "If a down-payment provider is either just a mill for completing down-payment assistance transactions or merely a front for a for-profit corporation, then that should make some alarm bells ring in the ears of the prospective home buyer," Syphax says.
• Does the program provide materials in Spanish as well as English? If so, that's a sign of a thorough organization that's in the business for more than just a buck, Ashburn says.