A Glimpse at Charitable Down Payment Assistance Programs

Charitable Down Payment Assistance Programs: Friend or Faux?

Charitable organizations that offer down payment assistance programs have been under heat in general for the potential "loop hole" risks and other issues outlined by HUD, the IRS, and real estate professionals. Typically offering between 1 and 3%, charitable organization offering down payment assistance receive a contribution from participating seller while simultaneously giving the buyer a gift to be used as assistance for purchasing a home. Opposers point out the legal loop hole of getting around an FHA violation. Defenders' 'glass half full' perspective points out the numerous success stories of minority and low-income home buyers finally realizing their American dream. Here we attempt to give some insight to would-be buyers; outlining the pros and the cons. You be the judge.

(pros) Pros

• No income restrictions. From Merchant to Millionaire, anyone would be eligible.

• No property price restrictions beyond FHA guidelines

• Transaction process much quicker then government-sponsored down payment assistance programs because there is no subordinate loan involved.

• Program is not tied to funding since gift monies is received via the seller's "contribution"

• Unlike government purchase assistance programs, charitable down payment assistance programs will not put a lien on the property

• Does not require an "approved" lender. Any agent and lender can use this program for their clients.

• Gift funds can be used for down payment, closing costs, rate buy downs, and pre-paids.

• Can be used with any other down payment assistance programs as long as those programs accept gift funds.

• They are a competitive means of a getting house hold. In slow markets, these type of programs can inject some activity.
  

(contras) Cons

• Risk that seller will roll (amortize) their contribution into the sales price. Essentially, the buyer would be financing and paying for their own assistance. Think of it as the seller just adding their contribution to the sales price during the negotiating. If that's done enough you'll see an inventory of inflated prices.
  

• Some have been found to violate the intent of FHA regulations

• Legally, a seller cannot gift money to the buyer. A seller could get around this violation by feeding their money through a non-profit, who in turn gives it back to the buyer. If the transaction cannot be done without the seller making the "donation" then it clearly violating the true intent of FHA guidelines.

• They have unusually high default rates. I wonder if the same can be said about government-sponsored assistance programs that encourage or require the buyer being educated about the home buying process...
  

• FHA does not approve any down payment grant program. It is up to your lender to work with a reputable organization that follows FHA guidelines.

• Government-sponsored programs require at least 1% from the borrower's own funds for a reason. Charitable organizations that provide down payment assistance don't.
  

Though these are a legal means of assisting buyers, as to whether CFRC and LATMAP will endorse these programs remains to be seen. There are some issues that we have noticed which play with the legitimacy of these programs in the first place. For starters, most of the charitable down payment assistance programs I have come across seem to follow the same formula. PreferredProgram.org, HopeFundsProgram.org, HomeDownPayment.org among others all share the same cookie-cutter format. In fact, PreferredProgram.org and HopeFundsProgram.org are exactly the same. And HomeDownPayment.org is not even a website. Their whole website is really just a 10 page PDF document that shows how the program works and who to contact. That's it? Yes, that's it.

What also raises flags is that none of the programs I've ran across require or at least promote homeownership education. What merits a program true down payment assistance can be debated. However, in our circles of other non-profit organizations we understand homeownership education and down payment assistance programs to go hand in hand. A program would include something full-service; certified home counselors, workshops, formal partnerships with real estate professionals and lending institutions. And an organization will always have more than one service/program to offer. All the aforementioned programs I listed appear to be skeleton "non-profit" organizations that are really in the business to make profit through collecting fees. If I sound hesitant I have reason to be. Many of these charitable organizations that have popped up in recent years have had their charitable status revoked by the IRS.

I am not saying that these programs are evil, however I would question the motives for some. Nehemiah and AmeriDream are arguably the most popular charitable down payment assistance programs and have the best reputation. Nehemiah, for instance, lists several banks, corporations and organizations as its partners. Both organizations have established track records within community and a history of providing service - which is why I personally can only recommended those aforementioned programs for those seeking down payment assistance grants. And the fact remains, programs like these are enabling people, who otherwise would be priced out, to purchase homes. Like with anything that deals with purchasing a home, one has to do their due diligence.