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Not all down-payment programs are equal

Mother told you to never look a gift horse in the mouth. Ignore that advice when a gift of money is offered from a down-payment-assistance program. Check whether the nonprofit program is legitimate and whether accepting the money is in your best interest.

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Each month, more than 15,000 home buyers use the programs to make down payments while qualifying for mortgages insured by the Federal Housing Administration. That amounts to almost one in five FHA borrowers.

The programs offer a way for home buyers to qualify for mortgages when they earn enough to make the monthly loan payments, but can't save enough for a down payment. It works like this: The seller gives money to a nonprofit down-payment-assistance program. The program then gives a similar amount to the home's buyer when the loan closes, and the gift is treated as a down payment. The amount typically is 3 percent to 6 percent.

A middleman is necessary because lenders don't allow home sellers to give down-payment money directly to buyers. But under the rules governing FHA loans, borrowers can accept down-payment money from charities. This loophole gave rise to down-payment-assistance programs, which have abandoned the pretense of charity and have embraced their role as facilitators of the home-buying process for low-income and minority families.

With so many home buyers using them, down-payment-assistance programs have joined the mainstream. But not all of the programs are equal.

An unknown number of borrowers found that out the hard way in the spring of 2003, when the federal Department of Housing and Urban Development barred a down payment provider from doing any business connected with FHA loans for a year. According to a HUD spokesman, Florida-based Affordable Housing Concepts Inc. lied to a lender and to the public that it was HUD-approved.

Affordable Housing Concepts and its principal, Michael E. Beauchaine, could not be reached. The nonprofit's phone number is no longer in service.

After HUD suspended Affordable Housing Concepts, worried lenders called another down payment provider, AmeriDream, and said "their buyers were stranded at the table," says Ann Ashburn, CEO of AmeriDream, which offered to help those borrowers.

How can you avoid questionable providers? Ashburn suggests dealing with nonprofits that, like AmeriDream, belong to the Homeownership Alliance of Nonprofit Downpayment Providers. The organization, called HAND, has a set of best practices and a code of ethics, and lobbies Congress and HUD on behalf of its members. A list of member companies is posted on HAND's Web site.

Ashburn urges consumers to assess a down payment provider's quality by asking about its financial stability, the range of services it provides and the partnerships it cultivates with community organizations and businesses.

Sometimes it's simply a matter of common sense to sniff out the questionable down payment providers. Affordable Housing Concepts, the nonprofit that was suspended by HUD, raised money by raffling vehicles on cheesy Web sites: a BMW sport-utility vehicle and a Harley-Davidson Electra Glide. Its partner companies included an online pharmacy selling Viagra and a company offering loans for cosmetic surgery.

There are other red flags to watch for. One of the practices that HAND discourages is that of allowing borrowers to use their down payment gifts to pay off bad debts, judgments and liens so they can qualify for loans. People who use the money that way "have a higher probability of not living up to their mortgage expectations," says Scott Syphax, president of the Nehemiah Corp., the oldest down-payment-assistance program and a member of HAND.

Syphax says another thing to watch out for is any sign that the down-payment-assistance program is giving kickbacks to real estate agents, mortgage brokers or others involved in the transaction. Down-payment-assistance providers have been known to offer prizes for referrals, or to give away cruises and vacations disguised as training. HAND members pledge not to give kickbacks.

Consumers have one other major thing to watch out for: inflation of home sale prices. Sellers are reluctant to negotiate downward on price with buyers who use down-payment-assistance programs, which exerts subtle upward pressure on prices. More flagrantly, some home sellers jack up the price of the house by the same amount that they give to the down-payment program. For example, someone might be selling a $100,000 house. A buyer without much cash comes forward and asks the seller to give $3,000 to a down payment charity, which will pass along the money to the buyer as a 3 percent down payment. The seller gives the $3,000, but raises the price of the house to $103,000.

This practice makes loans riskier because the house sells for more than it's worth. If the property is foreclosed upon, the lender won't get all of its money back and will file a claim with the FHA insurance fund. Having borrowed the down payment, the buyer walks into the home owing more than it's worth, and therefore is more likely to default on the loan.

"When we find out about it, we refuse those transactions," Syphax says. The most common way of finding out is when a seller registers a property with Nehemiah, then cancels it and re-registers it at a higher price.

Sellers can sidestep such scrutiny by pricing in the down payment from the beginning. "That," says Ameridream's Ashburn, "is where it's so important for the appraisal company to do a fair and balanced and accurate appraisal."

Down-payment programs don't require buyers to go through homeownership counseling, but all HAND members encourage it. They either offer counseling themselves or refer clients to agencies that do.


-- Posted: Oct. 2, 2003




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