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Down Payment Assistance In Jeopardy

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For years now, home buyers have been able to receive down payment assistance when buying homes approved for FHA financing. Basically, when the buyer makes an offer, they ask the seller to contribute a percentage of the sales price towards a non-profit company as a gift towards future home buyers. Since the minimum down payment amount on FHA insured loans is only 3%, the buyers could ask for the seller to provide it.

When you purchase a home, you are not allowed to receive funds from the buyer directly to help you with your down payment. The seller, however, is allowed to gift the down payment to non-profit organizations who then provide the same dollar amount to the Title company at closing, covering your down payment obligations according to FHA rules.

The Department of Urban Housing and Development has issued a release that may end this practice altogether.

The purpose of FHA insured loans is to provide affordability and sustained home ownership. Here is a link to the proposal. It’s long, very long, and some of it is quite annoying to read, but it’s there.

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The problem that we have when someone provides a buyer with funding is that it may be unfair to other sellers. If I am selling my home for $300,000.00 and you need an FHA loan whereby you need to come up with $9,000.00 as your down payment, but you don’t have it, I as the seller could, at close of escrow, contribute $9,000.00 of my net proceeds (the money I make on the home) to that non-profit organization. The non-profit would then turn right around and pay you a gift of $9,000.00 towards the down payment.

By offering you the “gift” I’m basically telling you that I’ll pay you to buy my house over the neighbor’s $300,000.00 home. This does two things. It fulfills the down payment requirement by FHA, and allows the home to remain at full price.

We’re looking at these deals as the current “Sub-Prime” loan, and whenever Sub-Prime is mentioned, lenders cringe. What we don’t want is to perpetuate the idea that any average joe can get into homeownership when many of these people have no business buying homes.

Right now in the market, the opportunity to find a great home for the first time home buyer is at the forefront. If you are a first time home buyer, and you have been responsible about your savings and you have the required 3% to put towards the purchase of your home, then it’s likely you’ll be in good standing for years to come as you build equity and wealth through your home ownership. If you’re just looking to get into a home free, then statistics show that it’s more likely that you’ll also be walking away from that home because you have no real investment in it.

What is a short sale?

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What?

The concept is rather simple. When you sell something for less than the amount that is owed, you are selling it short of the full amount.

Why?

Lenders became opportunists during the past few years and decided that they would irresponsibly lend the full value of homes to nearly anyone without proof of income. In some cases, lenders were giving homeowners more than 100% of the value of their home. They were giving away money without explaining to buyers that the reason their payments were so affordable was because the loans they were issuing were interest only adjustable rate loans; a perfect solution for a short term investment, but horrible for long-term homeownership.

How?

John Doe in 2006 finds a home that he wants to buy. At his income level, he can afford to spend $2000.00 every month on a mortgage. The home that he wants to purchase, if financed conventionally on a 30-Year fixed interest mortgage would put him over his monthly mortgage payment budget. He could solve that problem by including a down payment to reduce the loan amount, but he doesn’t have any money in the bank. The lender, knowing they would make their money on closing costs and doc fees, decides to offer creative financing to John Doe Roofers Surrey so he can afford the home. They write an interest only, adjustable rate mortgage with a pre-payment penalty and more than likely a 5 year expiration period on the adjustment for the full amount of the home. The adjustable rate mortgage ensured that after 5 years, sometimes 3 years, the loan would come due to adjust up, which would bloat his payment way above what he would have been able to afford in the first place.

At this point, John Doe has zero equity in his home and a payment he can’t afford. With the declining market values, his situation is worsened by the fact that he won’t be able to sell the home for as much as he bought it. He owes more than the home is worth. Why is this a problem? Well, normally the homeowner could simply stay put in their home, make their monthly payment, and ride the market until the natural average increase in value caught up to them. The real problem is that John Doe couldn’t afford the home in the first place, and he’s out of cash. He has to sell.

In comes the Short Sale.

Since John Doe is in a position where he MUST sell, he would rather do that than file bankruptcy and walk on the property, so he appeals to the bank for approval to sell the home for less than what he owes. He must prove that he has a legitimate hardship before the bank will actually allow his chosen brokerage to sell the home. He can list the home for sale, but when it comes to actually selling the home, accepting an offer, he must obtain bank approval, and that may take up to 90 days, depending on who the lender is and how well they process Short Sales.

If the home that John Doe is living in doesn’t receive an offer quickly enough, the property may enter into foreclosure and the bank might have to give him the boot. When this happens, the bank puts the property on the auction block. If the property doesn’t sell at auction, the bank owns it.

As a result, the buyer believes that he/she is entitled to pay less than listing price on just about any property out there, whether short sale or not.