URIAH HEAP WOULD LOVE DAPS (DOWN PAYMENT ASSISTANCE PROGRAMS). OR SHOULD WE CALL THEM SELLER-FINANCING KICKBACKS?

The Author found an interesting post on the website Calculated Risk. The post talks about changes in FHA (Federal Housing Administration) rules that will end a suspect practice in mortgage financing. The practice, known euphemistically as Down Payment Assistance programs (DAP), is a loophole that allows sellers to kickback 2-3% of the purchase price to the buyer, giving the buyer enough cash to make the required FHA down payment of 3% of the purchase price.

An article in today’s Washington Post, “FHA Down Payment Rule To Ban Seller Financing” describes the current practice of laundering the money through “charities”.

Almost 200 charities nationwide -- one of the largest is AmeriDream in Gaithersburg -- have participated in such arrangements. But the Internal Revenue Service and other government entities have raised concerns, particularly after the GAO study found that borrowers receiving assistance from the charities were more than twice as likely to default or become delinquent than other FHA borrowers were.

In a ruling last year, the IRS went so far as to call the seller-financed programs "scams," accusing the charities of inflating home prices.

“CHARITIES” CREATED AS A LOOPHOLE FHA PROHIBITION ON SELLER FINANCING.

Current FHA rules do not allow sellers to kickback any of the purchase price to the buyers to make the down payment. But in the 1990s “charities” were devised that would take the kickback from the purchase price and then gift it to the buyers. Oh, yeah, the charities would often charge a hefty service fee.

The net effect of the transaction is that the sellers inflate the sales price of the home 2-3% to cover the kickback and the home buyer effectively finances the entire purchase price of the house. The other net effect is the high rate of DAP home buyer defaults.

FHA BUYERS CAN STILL GET ASSISTANCE.

This new FHA rule will still allow FHA purchasers to accept down payment assistance from families, friends, employers governmental entities and legitimate charities.

THERE IS NOTHING IF NOT BIG IMAGINATION IN THE DESERT OF THE REAL!