NOTE: RULES REGARDING DPAs HAVE CHANGED.
CLICK HERE FOR AN IMPORTANT UPDATE
One of the biggest obstacles to purchasing a first home is accumulating the down payment. There are many families that have sufficient income to qualify for a mortgage, and an acceptable credit history, but lack the funds for the initial down payment and closing costs. Down payment assistance programs (DPA) are one solution to this problem.
With a DPA, a buyer receives a 'gift' from the DPA (which must be a non-profit corporation defined as a 501(c)(3) Corporation by the IRS). These gifts can cover all or part of the down payment and closing costs on an FHA mortgage.All of the DPAs work in essentially the same way and have the same basic guidelines:
- The DPA must be a 501(c)(3) corporation
- The sellers of the property must agree to participate in the DPA and make a donation to the DPA in the amount of the gift plus a service fee out of the proceeds of the sale of the home.
- The buyers have to qualify and be approved for a program that allows these types of gifts funds such as FHA.
- The maximum amount of the gift may vary by program but they are usually between 3 to 6% of the sales price.
- Funds can be used for down payment and closing costs. If there are funds left over after the down payment and closing costs have been paid, these funds must be returned to the DPA.
- Sellers may not write off the amount of the gift, but MAY use it as a selling expense when completing their tax returns (Consult a tax professional for rules on this)
FHA is the primary financing used with DPAs, but there may be other programs that accept this type of gift for down payment.
Many people ask if HUD approves certain DPAs. The answer is, no. HUD does provide guidelines for using these programs, but the lender must ensure that the program conforms to the guidelines. Here are HUD’s guidelines on DPAs:
“HUD does not approve “gift” programs administered by charitable organizations and, thus, will not offer a formal approval of your program. Mortgage lenders are responsible for assuring that the gift to the homebuyer from the charitable organization meets the instructions in HUS Handbook 4155.1 REV-4, CHG-1 Paragraph 2-10(c) (e.g no repayment implied, etc.). Those charitable organizations that comply with existing regulations and policy guidelines are permitted to give cash gifts to eligible homebuyers and do not need prior FHA approval to do so.” Your lender can ensure that the DPA is acceptable.
DPAs exist because underwriting guidelines for FHA, and most other mortgage programs, restrict sellers from giving buyers money for their downpayment. Many people think that the sellers are giving the money to the buyer but by working with a DPA they are following the underwriting guidelines for FHA. One important distinction is that the funds that are given to the buyer from the DPA are sent to the title company prior to the loan closing. The sellers then make a donation to the DPA after the loan closes out of the proceeds of the sale of their home. These funds are then added to the pool if funds the DPA has to make future gifts.
Most people can see the benefit to the buyers – they can purchase a home with little or no money out of pocket. But, what are the advantages for the seller – aren’t they losing money by donation 3 – 6% of the sales price to the DPA (plus a service fee)? Well, there are a few things to keep in mind.
In most markets, sellers price their homes knowing they need some room for negotiating. Buyers seldomly offer the full price when purchasing a home. Sellers will usually settle for a sales price below their asking price and/or offer other concessions to the buyers (e.g. Paying points, paying closing costs, etc.).When participating in the DPA sellers will accept an offer that is closer to the asking price than they would if they were not participating in the DPA. Therefore, they will still make about the same amount of money from the sale of their home. And, since there are now more people that can afford to purchase their home, they may be able to sell their house more quickly at a higher sales price. The buyers are protected against a sales price that is too high because the lender will order an appraisal on the property to make sure they are not lending money on a property that is worth less than what it is worth. It is truly a win-win situation.
Want to see if a DPA is right for you? Give me a call or send me an email. Or consult your own mortgage professional for a personal assessment.
NOTE: RULES REGARDING DPAs HAVE CHANGED.
CLICK HERE FOR AN IMPORTANT UPDATE
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