Charities Giving Down Payment Assistance

I’m currently working with a couple clients that are getting FHA insured loans. This program offers assistance to homebuyers that may not qualify for typical conforming loans with competitive rates. They also offer loans with down payments as low as 3% and even that can be paid for by a grant from a charity. What!!?? A charity?

Yes. FHA regulations state that a home seller cannot directly contribute to a buyer’s down payment. However, they can contribute to a non-profit charity, which, in turn, gives down payment assistance to the buyer. It sounds a little shady, but it is a very common practice.

Of course the sellers of the home aren’t going to contribute to this ‘down payment charity’ for the good of all mankind! This contribution is just added to the sales price. That means if a buyer wants to purchase a $100,000 home and needs the 3% down payment assistance, they should offer –roughly- $103,000 for it.

It is common for buyers to make such requests. Typically a buyer may offer a higher price if the sellers will pay a portion of the buyer’s closing costs. Some sellers will balk at this, but most are just interested in the NET, or what is left for the Seller after all those costs are paid.

This system is, for the most part, good. The sellers get their home sold, and the buyer gets a home without a lot of up-front cash. However, one problem that may arise is that the price may have been inflated to account for these costs. For example, our $103,000 sale from above would be more accurately recorded as a $100,000 sale. The problem could be that the property may not appraise for that amount and the deal would fall through, or the buyer may be generally paying too much for a home in order to finance his/her downpayment into the deal.

I was speaking to one mortgage broker recently who works with many first time homebuyers. He said that probably 85% of his business deals with FHA loans. A couple of the lenders I work with have mentioned that the FHA has loosened their eligibility requirements a little over recent years making it easier for people and homes to qualify. This means I'm sure to see a lot more FHA loans in my clients futures.

For more information, click here for a great article I found from BankRate.com.

Have questions? Contact me here.

Have a ‘charitable’ day,

-Peter

www.NashvilleCityHomes.com
REALTOR. City Home Specialist.