Released: June 21, 2008

FHA targets downpayment ‘gift’ programs

Source: Kenneth Harney, Washington Post (Free Registration)

What’s wrong with down-payment “gift” programs in which all or most of a home buyer’s equity stake comes from the seller, funneled through a third party? And why is the federal government determined to ban them?

Here’s how these programs work: Say you want to buy a house, but you don’t have the cash for a down payment. You sign up with a third-party intermediary, typically a tax-exempt charitable organization that advertises its specialty. The seller of the house sends a contribution to the organization roughly equal to the money you need. The intermediary pockets a fee of $400 to $600 and passes along the balance for the down payment.

Although they’re rare in the nongovernment loan market, such deals have been common at the Federal Housing Administration, where they have accounted for more than one-third of total volume in recent years. Normally, FHA applicants are required to pay a minimum of 3 percent down. Using a seller-funded gift program, that can be cut to zero. 

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