Thank goodness for all those government studies. Where would we be without them? I wish that I had buckets of money to go pay people to find stuff out for me. That way I wouldn't have to think so much, I could spend most of my time just hanging out. But I think this time around the government got gypped.
The recent ruckus looks at down payment assistance for FHA loans, specifically when the seller provides the down payment assistance in concert with a nonprofit agency. This nonprofit agency exists to facilitate home ownership and to provide a vehicle by which sellers can legally give their buyers down payment funds. Or at least until the IRS said that structure was in essence a sham and they'll be examining such organizations much more closely.
Others say that FHA homes with seller-funded down payment assistance "jacks up" the price of the home, robs buyers of any initial home equity, adds another element of risk and such transactions perform more poorly than those without seller-assisted down payment funds.
True enough. But I don't see what all the stink is about. I'm not going to debate whether or not a seller can work with a nonprofit and whether that nonprofit is really, truly a nonprofit. Those things are decided by others, not me.
FHA loans historically have been more liberal in their underwriting criteria with one of those criteria being the source of funds to close on a deal. A borrower need only have 3 percent of her own funds in a transaction. But FHA takes it one step further than other loan programs by allowing the buyer to get a gift from a family member, a trade union or the borrower's employer, or a government agency specifically designed for such transactions and nonprofits
It's this last category that has certain people wagging fingers. That is when the seller is intimately involved.
The way some of these transactions are structured is that if a seller is motivated enough to sell his home and someone needs down payment assistance the seller often times increases the price of the home to cover the down payment gift.
On a $150,000 home, 3 percent down is $4,500. Instead of selling the house for $150,000 the seller increases the sales price by $4,500 to $154,500, gives $4,500 to the buyer (via the nonprofit) and the seller nets the same either way and the buyers get into a home with no money down.
The problem apparently is that the sales price of the home is artificial because the seller increased it by $4,500. I disagree with their conclusion. It's not the source of the down payment gift that's a problem.
All things being equal the single, solitary difference between a seller-funded down payment and one from a neutral nonprofit agency is the price of the home is increased 2 to 3 percent. So what? Suddenly the buyers are treading into dangerous territory? I don't think so.
Take that $150,000 FHA 30 year loan at 6.50 percent. The payment is $948. Now "jack up" the price by the astronomical 3 percent to $154,500 and the payment zooms to … $976. Big deal. That's twenty-eight bucks.
That's a large pizza and two beers, at least where I eat pizza it is. Per month.
Only now that pizza and two beers gets the buyer their very own home when they couldn't get one before. At least not if they went to a non-prime lender who would happily charge an even higher rate for a zero down loan.
Okay, so the home sold for 2 to 3 percent higher than others. Is that really such a big deal? This happens every day where the buyers want the sellers to help pay for their closing costs and during the negotiations the sales price is adjusted and the seller defrays some of the closing costs.
As long as the seller contributions are in line with lending guidelines and the property appraises I see no issue. Will equity appreciation occur more slowly? Of course it will. The buyers didn't put anything down and the home started out 2 to 3 percent higher than the one down the street.
But so what? Using this logic, every down payment assistance program should be banned if appreciation and equity position are factors.
No, I think if there are performance problems it's not due to the source of the funds, it's due to underwriting guidelines. Instead of banning seller-assisted down payments, why not make the loans harder to qualify for?
No down payment? Okay, but we'll ask that your debt ratios be 38 not 41. Sheesh, how easy is that to figure out?
What you have here is the government confusing coincidence with causality. Aside from the issue of whether or not certain organizations meet nonprofit status -- and I admit this is an important issue-- blaming poor performance on a seller-assisted transaction because of an increased sales price of 2 to 3 percent is ridiculous.
That's what I think.
