Nationwide Home Mortgage Loan Company

Lendfast.com - Few people realize that the sole purpose of the Federal Housing Authority (FHA), when it was initially created in 1934, is to insure lenders and to promote home sales. Before FHA, first time home buyers would have to live with Mom and Dad until they saved up a 20% down payment on their first home. FHA revolutionized the housing market by insuring the loans that lenders made and allowing down payments as low as 3%!

In the spirit of helping first time home buyers get homes, FHA also allows gift funds to be given as down payments. For most conventional mortgages this is a no-no. Down payment funds must be sourced and seasoned, meaning the buyer must explain where it came from and that it was not borrowed.

 Not so with FHA though, home buyers can actually be given a gift for the entire down payment as long as this entity is not benefiting from the sale of the property. This one ambiguous rule lead to the beginning of an entire industry, down payment assistance programs.

These down payment assistance programs (DAP) like Amerisave and Nehemiah operate as non-profit organizations. Basically what happens is that the seller (who isn’t allowed to contribute to you) gives the DAP ( a non-profit) the down payment and the DAP gives it to you.

Of coarse the seller of the home incorporates this money into the selling price effectively having you finance your down payment. Since the money comes from the DAP and not the seller it’s completely legal.

Borrowers have been using this” loop-hole” to get 100% financing on homes for years. From 2000 through 2006, more than 650,000 buyers got their down payments through DAP’s. Three studies have been commissioned by FHA since 1999 documenting that these loans are riskier than the traditional 3% down payment loans.

In light of these studies FHA has changed the rule so that non-profit organizations can no longer contribute “gift money” to satisfy the down payment requirement. This rule will become effective October 31st, 2007, ironically in the midst of the largest housing slow-down since the depression.

FHA argues that when sellers inflate their home’s selling price for the DAP down payment it ultimately harms the housing market creating instability and inflated home values. Realtors, lenders and builders vehemently disagree arguing that during that this system helps home sales particularly now in the wake of the housing fiasco. Many people in these industries feel that FHA has lost sight of it’s true existence which is to put good people in good homes.

We at lendfast.com tend to agree with FHA on this one. The country is swallowing a bitter pill as medicine for our reckless lending behavior in the past. The market will eventually correct itself and when it does having smarter lending practices in place is good business.

We look for FHA to counter in the near future with new programs that allow for borrowers to get into homes with less than the required 3% down payment or to offer 100% programs that have a little higher threshold to qualify for. As long as FHA continues to find a way to put good people in good homes our housing market will continue to be the best in the world.

Tags: Editorials/Articles, federal housing authority, FHA Mortgages, first time home buyers, payment assistance programs

This entry was posted on: Saturday, June 7th, 2008
Other Categories: Mortgage Crisis Blog
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