Under current legislation, if homebuyers using Federal Housing Administration (FHA) loans cannot afford the required 3 percent down payment, they can get around it through a down payment assistance charity. However, a recent federal ruling banned the use of these programs with FHA loans. The effects of this decision could have both positive and negative repercussions for investors.
When the data regarding seller-funded down payment assistance charities was examined, the numbers showed that borrowers using these programs posed a high risk for the FHA.
“Of about 9,400 FHA loans, those that included down-payment assistance from not-for-profit groups went into default 20 percent of the time, [Colonial Savings, a Fort Worth-based company] said in September 2006. Without such assistance, the default rate was 9 percent,” according to the Fort Worth Star-Telegram.
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The fact that homeowners who used down payment assistance programs were twice as likely to default on their loans as those who did not fueled the FHA’s decision to ban the use of these charities in conjunction with their loans.
The new ruling could cause problems for investors looking to sell their property. “[Ann Ashburn, president of AmeriDream] said seller-funded down payment assistance has accounted for 30 to 50 percent of FHA purchase loans in recent years,” according to the Washington Post.
Assuming these numbers are accurate, many buyers using FHA loans may no longer be able to afford to purchase property. Because of the likely resultant shortage of economically viable buyers, the decision could slow the market in areas that rely heavily on FHA financing. The number of areas that rely on FHA loans has risen with the fall of subprime programs, so the hit may be harder than many think. The ruling went into effect Oct. 31, according to the Washington Post.
The outlook is better for investors looking to rent out properties. When lower-income buyers with no alternative forms of funding find themselves unable to obtain down payment assistance, the number of tenants searching for rental properties is likely to increase. Investors whose property is in an FHA-reliant area, and who do not have a pressing need to sell, would perhaps be wise to focus on renting for the time being.