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Down with Assistance

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Posted On: 10/29/2008

Q: Is it true that down-payment assistance programs are no longer available with FHA loans?

A: Yes. The Housing and Economic Recovery Act passed over the summer bans down payment assistance programs for FHA home purchases. Such programs work like this: A seller makes a contribution to a nonprofit third party, say 3 percent of the sale price. The third-party gives a grant to the homebuyer, say 3 percent of the sale price. The buyer buys the home. The seller makes a contribution to the nonprofit group, say around $500.

Why not just discount the sale price?

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The FHA requires buyers to come up with down payment money from their own funds - unless they get a gift or grant. If the price was simply discounted there would be no down payment cash from the buyer and that has been an FHA no-no.

There is now an effort to restore down-payment assistance programs. While the FHA says such programs produce higher foreclosure levels, not everyone agrees. Writing in the Sacramento Bee, Scott Syphax, the president and CEO of Nehemiah Corporation of America, a major provider of down payment assistance funding, says "data used by FHA and the Government Accountability Office comes from a data warehouse that the U.S. Department of Housing and Urban Development's own inspector general cited as unreliable."

There are some other reasons to oppose the ban:

First, banning the program favors those with rich parents, individuals who can readily provide down payment money.

Second, the programs have represented a large portion of FHA loan volume - more than 30 percent. Cut out the down payment assistance programs and a lot of buyers will be frozen out of the market.

Third, the FHA allows owners to offer "seller contributions" of up to 6 percent of the sale price - money that can be used for just about anything except the funding of a down payment.

For specific information speak with brokers and lenders, and check your local real estate section to see if the FHA ban is overturned.

Q: Has the ability to afford a house changed as a result the current real estate downturn?

A: Yes. Even if your income, debts and credit are solid, the odds are overwhelming that affordability has declined. Here's why:

First, many subprime lenders are gone, so it's tougher to get such loans today.

Second, many Alt-A loans, such as option ARMs, have vanished. These were loans for those with better-than-subprime credit but a desire to maximize borrowing.

Third, lenders want more documentation. Even the best borrowers are being asked for additional paperwork.

To some extent the new standards are actually an improvement over the loose requirements of the past few years - the ones that have gotten so many borrowers (and lenders) in trouble.

Q: Are there new programs to help first time buyers?

A: Under the Housing and Economic Recovery Act first-time buyers can now get a $7,500 tax credit when they buy a home. This means if your federal tax bill for the year is $8,000 you get to subtract the $7,500 and will owe just $500.

There are complications. The credit is equal to 10 percent of the property you buy, meaning that most buyers will get the full credit regardless of where they purchase. However, to qualify buyers must not have owned a home for at least three years and they must purchase before July 1, 2008.

The big complication is that the "tax credit" is really a loan. When you sell the property you must repay Uncle Sam. The good news is that you have up to 15 years to pay off the credit, so buyers can see it as an interest-free loan to be repaid at some distant point in the future.

For details, speak with a tax professional, such as an enrolled agent, CPA or tax attorney.

Q: What happens to my mortgage if my lender goes bankrupt?

A: The debt is not erased. Your loan remains in place and all payments must be made in full and on time.

If you have a toxic loan and face hardship or foreclosure you should watch your former lender with great care. In the case of IndyMac, a failed lender taken over by the Federal Deposit Insurance Corp. the government says some delinquent loans will be "modified into sustainable mortgages," meaning loans with affordable payments and market-level fixed rates. The FDIC effort is designed to hold down foreclosures and reduce additional losses. If it works it may emerge as a model strategy for lenders.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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