The End of Downpayment Racketeering

Posted on 07/24/08 12:38 PM

Seller-funded down-payment assistance programs are likely to take a serious hit in the near future. Currently federal law requires that only a charity, family member or employer can gift a down payment to a buyer who uses mortgages insured by the Federal Housing Administration. That rule spawned a cottage industry of down payment “charities” that gave down payments to home buyers and were then reimbursed by the home seller, typically a home builder. For several years this practice helped homebuilders maintain their original pricing even as the market slowed.

However, if the monumental Housing Bill passes (and it looks very likely), such seller-funded downpayment programs will come to an end as of October. For a number of reasons this is good news for qualified/strong buyers:

The absence of down-payment assistance programs will reduce the number of qualified buyers – and thus tip the supply/demand ratio in their favor, bringing prices down.
In an effort to subsidize home buying, homebuilders will have to invent other incentives…or simply lower their prices

However, given the reluctance of homebuilders to drop their prices, I wouldn’t expect significant changes anytime soon. Also, bear in mind this applies to government-backed loans only and is essentially a new construction phenomenon. Areas that meet these requirements, such as some parts of Beaverton will likely notice more of a change, whereas life will go on as normal for new construction in the Pearl District – typically only approved for conventional financing.