Are down payment-assistance programs cash-back fraud?
July 15, 2008
In the midst of the mortgage crisis, rising interest rates and tighter lending and the disappearance of 100% financing, one lending option remains for credit worthy borrowers who lack the money for a down-payment. 
Down-payment assistance programs like
have offered Phoenix area home buyers….an opportunity to obtain mortgage loans with the help of non-profit organizations and charity assistance groups that contribute the down-payment for buyers to obtain FHA loans.
However,
Are down payment-assistance programs cash-back fraud?
As, Federal regulators are closely examining lending practices there is increasing scrutiny of these programs as questions arise if the down-payment is actually a contribution or kick-back from the seller. Here’s why.
The buyer is including an extra amount (usually 3%-5%) in the price of the loan which is insured by FHA which insures all loans involving down-payment assistance. The money then is a credit funneled from the seller to the non-profit organization to the buyer as a down-payment.
This practice, which has been described as a ‘loophole’ in FHA guidelines that allows down -payments from charities.
Now that sub-prime loans require much higher down-payments, this has become a very popular strategy to get risky loans approved with little money down that are still insured by FHA. Thus, Wall Street buyers of loans can more comfortably buy the debt as any default would be insured by the FHA.
The current housing-reform bill calls for eliminating this practice while other proposals call for allowing such down-payment assistance with more restrictions.
As Craig Anderson, of the Arizona Republic pointed out this has been a “lifeline” for Phoenix area borrowers which has allowed many credit-worthy home buyers to buy homes and aid support to a struggling market.
If you are interested in working with some experts in FHA programs that support down-payment assistance programs before legislation may change the rules, …
here are the names of some mortgage experts:
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Copyright © 2008 By James Wexler, All Rights Reserved. *Are down payment-assistance programs cash-back fraud?*
Contact James Wexler (480) 221-8080 for all your Phoenix | Scottsdale area Real Estate needs
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3 Responses to “Are down payment-assistance programs cash-back fraud?”
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I am very leary of banks giving cash assistance on downpayments. It is a fine line that I think many lenders are too willing to cross.
I have to disagree, FHA and DPA programs are an awesome way to help lower income and asset borrowers experience the dream of homeownership. As long as all parties are in agreeance with the contract what’s to lose? In this market, and “outside the box” ways to help get rid of this inventory is a blessing.
Downpayment assistance with a non-profit DPA is not too different than if I were to get assistance from a family member. Unfortunatley I dont have a family member able to be so generous. Non-profit downpayment assistance (DPA) is not any riskier than DPA gifts from family members or the government. Default claim rates for homeowners with an FHA loan after three years: no downpayment assistance is 3%, family/government assistance is 5%, DPA is 6%. Sadly to say DPA right now is at risk…Click on the link and participate in the next Virtual Town Hall sponsored by Nehemiah Corporation of America. Hear how local housing professionals are taking action to save DPA. Add your voice. Be heard.
http://www.dpagroundswell.org/events/index.cfm…