FHA Seller Funded Down Payment Assistance Going Away
August 1, 2008 by Tom Schreiner · 15 Comments
The housing bill that was signed this week included two major changes for FHA lending guidelines. The changes are scheduled to kick in on October 1, 2008.
The first change is the minimum down payment requirement. Currently FHA loans require 3% down. On a $200,000 purchase this would be $6,000. The housing bill will increase this minimum down to 3.5%. On that same $200,000 home, the down payment will now be be $7,000.
The second major change is the elimination of seller funded downpayment assistance. Currently the seller can contribute up to 6% to the buyer to cover their down payment and closing costs on an FHA loan. These funds are deducted from the sellers equity and credited to the buyer at closing with a non-profit intermediary. This has allowed buyers to take advantage of 100% financing.
One of the main reasons this is being eliminated is that FHA found the foreclosure rate to be about 80% higher on loans with down payment seller assistance verses FHA loans without. There was also concern about inflated property values as a result of the seller funded DPA programs.
Moving forward the max the seller can contribute to the buyers closings costs and pre-paid items is 3% of the purchase price which has always been allowed. The buyer will now be required to contribute the 3.5% for their the down payment. Down payment assistance from a non-profit, employer, church or family member is still allowable and always has been.
Despite these changes, FHA loans will continue to be a good option for first time home buyers.
Tom is a mortgage professional for the Get Home Denver Real Estate Team.
A native of the Chicago area Tom has lived in Colorado since 1984. A graduate of the University of Colorado, Boulder, in 1987 with a business degree in finance, Tom enjoys Colorado’s spectacular snowboarding, mountain biking and golf. You can reach Tom at 
I have not had the need to do a loan with DPA, but many co-workers have. I have no doubt that the default rate is higher. I would imagine that the default rate is directly proportionate with the amount of money that the home owner has invested in the home.
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Steve, Thanks for the comment. In Denver, well over 50% of the first time home buyer’s my team works with has used Down Payment Assistance programs. It will certainly be an issue we will need to overcome.
Even if the foreclosure rate is higher on DPA loans, the number is still minuscule compared to the subprime products.
Elimination of DPA is nothing more than HUD getting rid of a program they didn’t like, under the guise of helping the current problem with foreclosures.
Until someone can point me to a specific study to the contrary, I’m not buying that DPA caused or has exacerbated the problem.
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Charles, I tend to agree. The more I look into this, the more I wish the Govt. would stay out of it!
DPA in my opinion is not the problem. It is the lenders that do not make sure all the buyers ducks are in a row. With DPA the buyer can save their reserves in their account and use it if they run into a snag later. Doing away with DPA will not let this happen. I feel this is not a good thing doing away with DPA. Here is a website I have found that you can let your voice be heard.
http://www.DPAGroundSwell.org
Check it out, the more voices for DPA the better!!! Lets keep these programs aroudn
I also believe the DPA programs are being scapegoated. If DPA led to higher default rates, wouldn’t they have tried to eliminate all gifted DP’s? I don’t see them trying to stop parents from gifting the DP to their kids.
Everyone is saying that DPA programs lead to higher default rates. Give me the figures and then we can talk. Like John said, if DPA programs lead to higher default rates what about family members or grant programs from the counties.
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%. I got this off of a website.
Cherie, Agreed! A large percentage of our buyer business has used DPA programs over the last few years, and it will create a significant financing issue for many.
We work with volume homebuilders and I’m here to tell you… get ready for new home sales to be sliced in half (or more)PERMANENTLY as a huge %% of buyers are taken out of the pipeline. Builders who cater to first-time buyers are going to be devastated by this legistlation. Leave it to the government to screw up yet another program with unintended consequences. Should the government have its hand in this to begin with? We can argue that. But since DPAs have been around, an entire “housing industry” has grown up around them – and snagging them away will send that progress back 30 years. Sure, default rates are higher (2% vs. 1%)… but the VAST MAJORITY (98+%) of first-time buyers have no problem making their mortgage payment – hell, it’s usually way less than rent in those hot markets… but they have no savings (BECAUSE OF HIGH RENT – get it??) and find it impossible to come up with a downpayment, even if it’s only a few percent. AND, if those folks don’t get into a home that they own, they will continue to be unable to save BECAUSE OF HIGH RENT. Get it? So get ready for a prolonged national recession with a failed housing industry driving it.
Interesting article. I really like your blog overall. Really makes me think! Thanks!
I heard that seller funded DPA is going to be attached throught the congressional Mainstreet Stim. Package. Can any one confirm this? Rep Obey of Wisconsin has Chairs a committee that can sign the death warrant for DPA.
Anthony, I also have heard that is being lobbyed hard to get added to the bill.
I am following this closely, and will report back with new info here.
Thanks for stopping by!