As of October 1, 2008 the FHA will no longer insure loans using Third Party Down Payment Assistance Programs.
You will still be able to get help from a family member or church, but the programs where the seller was actually asked to foot the bill are going away. These have names like Ameridream and Neimiah. There has been a LOT of discussion about how this action will help or hurt the housing industry. Now these programs were created with the idea that they would "help" people who wouldn't otherwise be able to afford a home get into one. Now I believe in helping people, but I don't believe in helping people get into something that will later become a disaster - like a foreclosure.
These programs emphasize the fact that you need "No Money Down" to buy a house. I believe saving up to buy a house is a good idea. Now it shouldn't have to be some huge unattainable amount - but save something and pay your own way. A house is a wonderful way to build savings through home equity and helps develop personal pride. Too many people, however, are living paycheck to paycheck and if something goes wrong, they have no safety net to take care of their home. Developing a "Savings Habit" before buying a house is a good thing.
When I sold my mother's house last February, I was so excited for the couple who bought the house. My husband and I had worked SO HARD to make the house looked good, we put in a new HVAC unit, and we had fixed everything we could tell was wrong with it. The couple had never owned a house before and they had three children. Each child was going to have their own room and the kids were very excited as well. I felt they loved the home and would take good care of it. I know that sounds a little emotional, but my mother had loved that home and I wanted its new owner to have that same feeling for it.
This couple was living paycheck to paycheck. How do I know this? They asked me to pay ALL the closing costs. I knew they were getting their down payment from a down payment assistance program because the loan approval said so. Also, they had only put down $500 in earnest money and when I asked for another $500, they had to wait 2 weeks until they got paid to put down the rest.
In the negotiations, we raised the sales price by $5000, which means they needed to raise their mortgage amount by 5K more and needed to qualify for $45 per month more in house payment. They had to get a special letter from their employer saying they could rely on overtime to qualify for the payment. They were stretched to the limit -like so many people are when they buy a house.
But, they were able to get in the house of their dreams and everyone was SO HAPPY. They were talking about getting new furniture and the bar-be-ques that they would have, how the garden would look, and the happy memories they would make with their family.
Last month I got a letter from the tax assessor's office saying the taxes would be going up $1900 for the year since my mother wasn't living in the house on January 1st. I tried to fight it, but that was the rule. Since the mortgage payment includes 1/12th of the tax amount each month, that means their mortgage payment was going up $160 per month. Plus, they hadn't been escrowing the extra $160 from February to August so they were going to be even shorter at tax time.
If you are living paycheck to paycheck, how do you handle an increase of $160 per month on your mortgage payment? That is not $160 for a refrigerator or more house, it is "just because of some rule". This is similiar to the rate increases that people have seen on their adjustable rate loans - a raise in your payment and nothing to show for it. Now, I am worried that this couple with their three kids won't be able to pay the increased mortgage payments and will default on the mortgage and ultimately loose the house. I'm seeing the happiness of closing day turning into frustration and despair.
The foreclosure rate for loans with down payment assistance is higher than regular loans where people have to save for a down payment. Does every mortgage like this end in foreclosure CERTAINLY NOT. Not everyone has a terrible situation happen in the first year. Many people would work a second job to be able to afford the payment and keep their house. But if you are will to do those things to keep from going INTO foreclosure wouldn't it be better to do them in the beginning to work toward buying the house. Having a savings account safety net sure would make things easier.
Sometimes downpayment assistance is not a good thing. MAny of our short sales and pre-foreclosures were buyer assisted loans of the last few years.
That is just my opinion, but I think it is relevent.
I too believe that saving for a house is a good thing. If you have nothing invested in the home then nothing is on the line.
During the 2006 and 2007 years, only 10% of my business used a DPA program for the buyers. Our average home price is only about $140k, so it made some sense to help pay $6-8k of costs because the home was probably going to appraise just fine.
It worked better, of course, when the seller's had reduced the price and had some "room" from the original list price. Anyway, I think it will allow us to work with stronger buyers the next few years. There may be less buyers, but certainly a greater chance than the national average of 75% should close.