Not all down-payment programs
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.
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
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
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
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
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