Down Payment Gifts

I read on Knowledgeplex recently that HUD is taking another stab at banning the down payment assistance “gifts” that Sacramento-based Nehemiah Corp. pioneered.

It’s an interesting practice that I had never known about before.  Someone wants to buy a particular house but doesn’t have enough money for a down payment.  She goes to a lender who works with Nehemiah (or one of the other nonprofits that offers this sort of down payment assistance).  The lender applies to Nehemiah for the down payment grant, and the money for the down payment grant (plus a handling fee) is supplied by the seller, who factors those costs into the final price of the house.  So effectively this homebuyer pays more for her house, and carries a higher mortgage payment, than she would if she had other resources for a down payment. 

Seems like the buyer ends up in a risky position by essentially having paid above market price (significantly more than the seller would have accepted from a buyer with her own down payment), which may be no big deal in a fast-rising market, but could make things much worse in a declining market; some folks argue that such buyers are indeed defaulting at higher rates. 

Should the practice be banned, even though perhaps some buyers find such gifts to be their only route to home ownership?  I don’t know enough about the practice to pass definitive judgment, but my gut reaction is that it’s sketchy, just as it’s sketchy to allow predatory mortgage loans for sub-prime borrowers who don’t qualify for market-rate terms. Sure, there will be plenty of success stories for people who just needed a chance, but at what cost to those who get in over their heads?

Fortunately, there are some forms of down payment assistance that don’t come out of the seller’s pocket and drive up the home price.  Like matched savings accounts (IDAs), as I’ve often mentioned in this blog. Also, in New England, the Federal Home Loan Bank in Boston funds an Equity Builder Program offering generous down payment assistance grants through some of its member banks.  In the latest round, three Berkshire County banks — Williamstown Savings Bank, Legacy Banks, and Greylock Federal Credit Union – were approved for the program.  Now each of those banks is eligible for up to $100,000 to be distributed in down payment assistance if they can line up enough income-eligible homebuyers for those gifts before the funds get all used up by other banks around New England.  This is a terrific opportunity for families that are ready for home ownership but don’t have sufficient down payment resources.

Our asset development partnership has started doing outreach to help make sure that plenty of interested low- to moderate-income families in Berkshire County become aware of this resource.