The US Department of Housing and and Urban Development (we all know them as HUD) has passed down a new law concerning downpayment assistance for FHA loans. Effect 10/31/2007, sellers can no longer be looked to for help.

In the past, buyers have been able to receive money from a seller as downpayment assistance for their loan. (Usually stemming from the buyer not having enough money to put down which means they cannot qualify for the loan) With this “help” from the seller always came a catch. To make up for the seller’s bottom line being reduced, the seller would usually then bump up the sales price to make up the difference. HUD sees this as a problem because it artificially inflates the value of the home.

Another problem was seen with downpayment assistance programs that would take money from the seller, subtract a fee from the amount, and then give the money to the buyer. Again, home values were being artificially inflated and other parties were benefiting at the determent of the buyer. As a result, HUD has been seeing a higher default rate from these types of loans, compared to non-FHA loans.

Now this does not mean that all downpayment assistance is disallowed. In fact, HUD had made a point that assistance can be given by family members, employers, and any other party that does not have a financial interest in the transaction. Also, builders and sellers can give assistance, but only if it reduces the cost of the mortgage. So for instance, a seller can give a buyer $5000 as a gift, but the seller cannot turn around and raise the purchase price by $5000 to make up loss. This is the true definition of a gift. Who ever heard of getting a gift at Christmas from mom and dad, only to have them ask you for a check for the cost of your shiny new toy.

Hopefully this will help sellers and buyers be more realistic about the purchase price, and cut down on the number of defaults. Only time will tell. Just understand that the rules have tightened up a bit and the government is cracking down on known abuses.

Click here to read the entire rule as published by HUD.