It looks like FHA is planning to beef up its falling reserves by requiring borrowers to come up with a bigger down payment. Can you see your home ownership dream fading away? Well, don't let it! Yes, FHA is likely to require 5% down instead of 3.5% in the near future. HUD Secretary Shaun Donovon says that's a virtual certainty. But what about deserving sorts who really need some help? What if you know you could pay your mortgage but could never save a down payment while paying rent and other obligations? Is there hope for you?
Yes, Virginia, there is a down payment assistance program. Many state, local, and charity-based programs exist to provide down payment help to those who meet income or other guidelines. And HUD's Web site has links to all of them.
Home ownership assistance takes many forms. Some organizations offer interest-free loans for your down payment, and some of these don't have to be repaid until you sell your home. Others offer grants, or subsidize your mortgage interest, or help you with closing costs. If you are a member of certain professions, like teachers, first responders, or nurses, your state may have special home ownership assistance for you. And HUD offers the Good Neighbor Next Door plan, which allows you to purchase a HUD home with a 50% discount and only $100 down!
USDA loans can finance 100% of your purchase price, if you live in a designated "rural development" area.
What today's FHA changes mean is that you will have to do more homework and jump through more hoops to get into your first home. But the resources are still there. So, buying your first home won't be as easy as it used to be. But it won't be impossible either.
Some of you lucky folks have people wanting to give you money to help you out with your down payment. But how does the lender feel about that? It depends.
First, gifts can't be from just anyone. Sellers, real estate agents, or anyone else who benefits from the sale can't "give" you down payment money. Most lenders will allow gifts only from relatives. You may have to document your relationship and also provide a letter from the donor stating that the money is in fact a gift and not a loan.
Second, unless you are getting an FHA loan, some of the down payment is going to have to come from your own pocket. It's well-documented in lending that having some "skin in the game" makes a borrower far less likely to bail on a mortgage. How much "skin" you'll need depends on the lender, how strong your credit is, and how much money you will have in the bank when the purchase has been completed (this is called "reserves").
Are there other ways a relative can help? Absolutely, but it depends on how much your family loves you or how good you are at conning them out of their money. For example, there is the option of co-signing. I don't recommend it unless you really don't care about your relationship to your family member. Because life happens, and if something happens to you it also happens to your co-signor.
Another option is having your family member add you to one of his or her accounts. Wait a few months so your name is on the statements and pull the down payment from that account. You get the advantages of gifting without the disadvantages of documenting.
Finally, consider that your mom-in-shining-armor could end up with an unexpected gift herself--a tax bill. It's best to consult a tax planner before making this kind of move to be sure that everyone knows the repercussions of the purchase, including gift taxes.
Countless renters became successful homeowners in the past because of two programs: FHA mortgages and down payment assistance like the Nehemiah program. The US Department of Housing and Urban Development (HUD) allowed FHA loans to be made with very small down payments (2-3%), charging borrowers insurance to cover their default risk. The program remained solvent for decades and has largely been considered a resounding success. Borrowers who couldn't save even the tiny FHA minimum down payment could sometimes receive help through down payment assistance or community homebuyer programs, allowing them to buy a home with no down payment. And many more families became homeowners through these programs.Unfortunately, recent trends are showing that down payment assistance can have unintended results. For example, HUD discovered in a recent study that borrowers with no money of their own invested in a property are many times more likely to walk away from their homes and their mortgages than others with similar financial situations. And for the first time in its history, FHA's insurance premiums collected from borrowers will not be enough to cover its losses from mortgage defaults--meaning perhaps a taxpayer bailout is in the future.
HUD would like to change its guidelines to prohibit down payment assistance and not allow FHA mortgages in which the buyer has not made a down payment using his / her own funds. So what does that mean to those considering a home purchase today? Urgency. If you are considering a home purchase and think you might qualify for down payment assistance you may have very little time to close that deal. So STOP reading this blog and START your online search for a lender NOW. You can thank me later when you have time.
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Specializing in Bad Credit Mortgages… Because Life Doesn’t Always Turn Out Like You Planned. A sick child, a few late bills, or an unexpected expense can easily get you off track and your credit may suffer, but we don't think you should miss out on the opportunities available to everyone else.
Gina Pogol
About the Author:
Gina Pogol writes for an online media company about mortgage and finance. In addition to a decade in mortgage lending, she formerly consulted for Experian and other credit bureaus, and worked as a tax accountant for Deloitte. She has a BS in Financial Management from the University of Nevada.
