Down payment assistance bites the dust
By Marcie Geffner • Bankrate.com

A countdown clock on a Web site operated by Nehemiah Corp. of America is ticking off the days, hours, minutes and seconds until a new government ban will terminate virtually all seller-funded down payment assistance programs in the United States. But the clock may be stopped, now that a bill has been introduced in Congress that would reverse the ban.

The clock will tick off its last second Oct. 1, the last day when homebuyers will be able to use seller-funded down payment assistance with any mortgage backed by the Federal Housing Administration, or FHA, a division of the U.S. Department of Housing and Urban Development, known as HUD.

The ban is part of the Housing and Economic Recovery Act of 2008, which President Bush signed into law July 30. The act states that a borrower's down payment for any loan backed by the FHA can't be provided before, during or after the sale by:

• The seller.
• Any other person or entity that financially benefits from the transaction.
• Any third party or entity that is reimbursed, directly or indirectly, by the seller or any other person or entity that financially benefits from the transaction.

An "entity that is reimbursed ... by the seller" clearly refers to seller-funded down payment assistance programs, which collect "donations" from home sellers and then "gift" those donations to buyers, who use the funds to purchase the seller's home. The seller also pays a fee, typically of several hundred dollars, to the organization.

More than 1 million buyers and sellers have utilized these programs, according to industry figures. The two largest organizations, Nehemiah in Sacramento, Calif., and AmeriDream in Gaithersburg, Md., have processed more than 300,000 and 250,000 transactions, respectively, according to company statements. Since 1999, AmeriDream alone has processed more than $26 million worth of the payments in chunks averaging about $3,600 per "gift." Numerous smaller down payment assistance organizations also operate throughout the United States. Both Nehemiah and AmeriDream also sponsor homebuyer counseling programs.

Nehemiah is still taking applications from buyers and accepting donations from sellers, according to CEO Scott Syphax. The housing recovery act specifies that seller-financed down payments can still be utilized as long as the borrower receives credit approval from the lender prior to Oct. 1.

Act now to tap seller-funded down payment
Homebuyers will have very few, if any, opportunities to buy a home without a down payment after the ban on seller-financed down payments becomes effective.

Conventional loan programs that allow seller-funded down payment assistance are "few and far between" and have accounted for less than 3 percent of Nehemiah's transaction volume, Syphax says.

An FHA-backed loan with a seller-funded down payment was "the last of the 100 percent loans available," says Peter Thompson, a senior loan officer with Professional Mortgage Partners in Downers Grove, Ill. "The conventional homebuyer programs have pretty much all done away with doing this. This is something that has been specific to FHA loans for quite some time."

Indeed, seller-funded down payments have become so closely associated with FHA-backed mortgages that more than 33 percent of loans backed by the agency last year included such assistance, according to FHA data.

"The new housing law says that the lender must have provided final credit approval on the loan before Oct. 1 in order to use seller-funded down payment assistance for the down payment. As of Oct. 1, it is prohibited," says HUD spokesman Lemar Wooley.

Buyers who want to use a seller-funded down payment may decide to "move up their time frame to (buy a home) a little quicker," so they can take advantage of such assistance, Thompson says.