New HUD Ruling for Seller Paid Down Payment Assistance

The Department of Housing and Urban Development (HUD) announced on October 1, 2007, its final ruling on seller paid down payment assistance. The new ruling identifies seller funded down payment assistance programs in a new home purchase as an unacceptable source of funds. Any transaction in which the seller makes a contribution to a third party, such as a non-profit Gift/Grant Program organization, and the entity then makes a contribution to a borrower for the purpose of down payment assistance, has been ruled unacceptable.

The effective date of this ruling is October 31, 2007. The only exception is the Nehemiah Down Payment Assistance Program which has been granted a six month extension through March 31, 2008. It is expected that the Federal Housing Administration (FHA) will release a Mortgagee Letter in the near future with specific instructions for brokers and lenders.

In the interim, Metro Mortgage Company is providing advance notification of this ruling to assist with the management of loans currently in the mortgage pipeline.

Important considerations of the new HUD ruling include:

• If the Sales Contract (including any amendments to the purchase price) is fully executed by all parties on or before October 30, 2007, you may continue to process and close the loan with a HUD approved seller paid Gift/Grand Program coupled with FHA financing.
• Loans that have already closed will be eligible for FHA endorsement through HUD.
• The only exception is Down Payment Assistance from the Nehemiah Program. For the Nehemiah Program, the sales contract must be fully executed by all parties (including any amendments to the purchase price) on, or before, March 30, 2008.

2. For loan applications with Sales Contract execution on or after October 31, 2007:

• Gift funds provided by any seller funded Down Payment Assistance Programs are now considered to be an unacceptable source of funds per HUD's ruling. These loans will not be able to obtain insurance or eligibility through HUD.
• Gift funds provided by the Nehemiah Program are acceptable provided that the Sales Contract is fully executed (including any amendments to the purchase price) on, or before, March 30, 2008. After March 30, 2008, funds from the Nehemiah Program will no longer be acceptable.

Two nonprofit organizations - Gaithersburg's AmeriDream and Sacramento's Nehemiah Corporation of America have sued the Department of Housing and Urban Development in an attempt to overturn this new ruling.

HUD believes these arrangements "represent a clear quid pro quo between the homebuyer's purchase of the property and the seller's payment to the charitable organization." They also noted the Government Accountability Office study which found that borrowers receiving assistance from the charities were more than twice as likely to default versus other FHA borrowers.

The nonprofit organizations believe their programs help many first-time, minority, single parent and low-income home buyers and said "the new rule is a bad piece of public policy." Their suits called the rule "arbitrary, capricious and contrary to the FHA's mission of insuring mortgages for those who can't get conventional loans.

HUD has vowed to vigorously defend itself and move forward with the new rule accordingly.

For more information or questions on this new rule, contact us at Metro Mortgage Company and we'll be happy to assist you.

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