Seller Down Payment Assistance Outlawed

The Bush administration had pushed for risk-based pricing as part of a larger "FHA modernization" package that, in various proposals put forward by lawmakers in recent years, would also have reduced or eliminated FHA's 3 percent minimum down payment requirement.
Instead, Congress ended up raising minimum down payment requirements for FHA-backed loans to 3.5 percent. Also, beginning in October, home buyers will no longer be able to rely on nonprofits that funnel money from homebuilders into seller-funded down payment assistance programs, as HR 3221 finalizes HUD's long quest to end the practice.
HUD claimed the practice artificially inflates home prices and triples the likelihood of default. HUD's attempt to end the practice through an administrative proceeding was thwarted by legal challenges filed by nonprofits that operate assistance programs.
Now that Congress and the Bush administration have agreed to ban the practice through legislation, that battle appears to be over, and home builders expect to see the pool of eligible buyers shrink.
According to HUD, seller-funded down-payment assistance was used on more than 35 percent of all home purchase loans insured by FHA in fiscal year 2007, compared to less than 2 percent seven years earlier.
Home builder Lennar Corp. relied on down-payment assistance for one in three mortgages it originated in the second quarter, the Wall Street Journal reported. Housing research firm Zelman & Associates estimates that eliminating seller-funded down-payment assistance could reduce the homebuyer pool by 10 percent nationwide, and by up to 25 percent in lower-priced markets where they are used more often, the Journal said.