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 October 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.
Controversy swirls around seller-funded down payments
The FHA has tried for some time to ban seller-funded down payments in connection with FHA-backed loans. The agency argues that sellers' "donations" result in artificially inflated house prices and that homebuyers who use such assistance are more likely to default on their loan. Two federal government reports in 2005 concluded that these programs made homeownership more expensive for homebuyers who used them. The IRS has revoked some of the providers' status as tax-exempt non-profit organizations.
Proponents say these programs create opportunities for minority and low-income families to become homeowners.
Thompson believes the ban will push some well-qualified buyers who only lack a down payment out of the housing market, though he also thinks it would make sense to take a closer look at these programs to make sure people aren't abusing them.
Seller-funded down payment assistance "is one of the things that is getting more people into the housing market when this is what we really need to get the economy going," he says. "It doesn't seem like the timing (of the ban) makes sense."
FHA may raise cost of mortgage insurance
The housing recovery act also makes two other important changes to FHA loan programs. As of Oct. 1, the same day when seller-funded down payment assistance will be ended:
- The minimum down payment required for an FHA-guaranteed loan will be increased from 3 percent to 3.5 percent.
- A brand-new risk-based pricing structure for FHA mortgage insurance will be discontinued.
The FHA had pushed hard for its plan to charge riskier borrowers higher mortgage insurance premiums. HUD Secretary Steve Preston said in a statement that without such flexibility, the FHA will have to increases prices for all borrowers or eliminate its refinancing program for subprime borrowers.
Program providers plan to fight back
Homebuyers may want to monitor H.R. 6694, a bill introduced by Rep. Al Green (D-Texas) that would require the FHA to accept seller-financed down payments and authorize the agency to apply a risk-based pricing structure for FHA mortgage insurance on loans that utilized such down payments. The pricing would be adjusted on the basis of the borrower's FICO credit score. The bill has two co-sponsors, Reps. Gary Miller (R-Calif.) and Maxine Waters (D-Calif.), and has been referred to the House Financial Services committee.