Wednesday, 30th of July 2008 at 03:00:29 PMYesterday I reported on the summary of the HB, which included:
- Seller-funded down payment assistance programs – codifies existing FHA proposal to prohibit the use of down payment assistance programs funded by those who have a financial interest in the sale; does not prohibit other assistance programs provided by nonprofits funded by other sources, churches, employers, or family members. This prohibition does not go into effect until October 1, 2008.
Today, I’m going to dive into this a bit more since it is a hot topic with several buyers/sellers/agents.
Background
The whole reason behind this part of the House Bill is in it’s basic form, these type of loans have a higher risk then lender like. That means that borrows of this program tend to go into default (foreclosed on) more often than other loans and the interest rate isn’t necessarily high enough to help off set that risk. Fannie Mae/Freddie Mac tends to underwrite (loan) on these loans and are in a bad situation when the borrower stops making payments.
Government Solution
As complicated as governments like to make things, this one is pretty simple and direct. The seller can no longer contribute toward buyer’s closing costs. However, that does not prevent churches, employers or family members from contributing to help the buyer.
Government Reasoning
If the buyer is getting the money from the seller, then there is no real stake in the money, the buyer will often think of it as just a price reduction in the selling price of the home and won’t consider it a loss if they default. If the buyer has to go to their church, employer, or family to ask for help, there is a stake in that money, an investment that they will work hard to protect it since they will be facing the church, employer, and family on a regular basis. These loans also tend not to default for this reason.
Negative Side-effect
My blog wasn’t even done drying on the World Wide Web when I already learned of a “work-around” to this HB (which I might point out isn’t even law yet). Supposedly there is a ‘company’ that will work with the buyer to sell something back to the seller for a high-mark up price of the down payment. In essence, becoming the employee of the seller and getting the down-payment from their employer. Okay, I knew there would be some creative solutions to this law, but that was quick and creative.
I consider this to be a negative side-effect of HB3221 because it is creating a solution that goes against the intent of the Bill instead of with it. Buyers still will not have a stake in the down-payment, and be at high risk of defaulting. Correct?
Intended Effect
I suspect the government (purely speculative on my part) is lining up to have employers offer as a benefit a down-payment savings plan for their employees. One in which they not only help them to save for the down-payment but one that they contribute to. Say a dollar for dollar matching program. Or you can do the same with the church, or the church can build a special community type fund for it’s members.
Prediction of what will happen
The uninteded effect will happen, the IRS will jump in and add 5 pages to (an already inflacted) tax law that will define employer in this situation as someone that has employeed the buyer for a period of 3 months prior and 3 months afterwards.
Alternatives
I sencerely hope that we will see more community orientated programs. Ones like the one reported by Heather Barr, called the Home In 5. This is such a popular program, that shortly after the funds were released, Shailesh Ghimire reported they there were all but gone. I suspect that the county will be expanding this program in the future because of the popularity and the demand of it. Does this help the buyer feel like there is a stake in the money. Probably not since it is more of a loan, but it is a good alternative to the DPA programs out there.
What you should do as a Buyer?
As a buyer, if you need help with the down payment and you can buy before October 1, do it, take advantage of it while it is availible. If you will be buying after October 1, then start working on getting the help, talk to your family about it now, approach your church and your employer. Being prepared will help you. Also speak to lenders, start learning about which programs will work for you and what you can do to improve your chances of getting a loan. Start saving money, even if you don’t need it for a down-payment, there are costs to moving into a new home that you just can’t know about until after you move, having some cash on hand is good just in case.
And if you are a seller?
Be aware of the financing options out there and be prepared to work with them. The homes that are selling at the top end of the market are offering financing options for the buyers. Carrybacks, wrappers, dpa, closing costs, cars/boats, all sorts of things. The more you know, the better prepared you are to help that interested buy achieve their goal of buying your house.
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