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One of the last ways for a homebuyer today to acquire a home with no money down may be a thing of the past very soon.  Down Payment assistance programs, once allowed by FHA, will be discontinued as of October 1, 2008.  Actually, most lenders stopped accepting loan submissions involving this program as of about the middle of September because the loans need time to close and then be insured by FHA and no lender wanted to be left holding the bag on an uninsurable loan.

The way Down Payment Assistance programs worked was this:  The seller agreed to donate 3% of the purchase price of the home to a non-profit group (such as Nehemiah, Genesis, etc...) plus a fee ranging from $300 - $500.  The non-profit group then "donated" the 3% to the buyer for their down payment.  Yes, we all knew the down payment was really provided by the seller for the buyer, but if the seller was willing to do it, and they buyer qualified for an FHA loan, then it was a great way to get buyers into homes. 

It has been especially useful recently, since virtually every other way for a borrower to get into a home with no money down has disappeared.  With the overabundance of homes on the market, and many of them bank-owned, even the banks were willing to donate the buyer's down payemnt to move the foreclosed homes off the market.  Personally, 80% of the purchases I have done in recent months involved down payment assistance from the seller.

Have the lending guidelines over the past few years been lax? Yes.  There were many mortgage loans that should not have been made--that's an extreme understatement.  Were FHA guidelines too lax?  In my opinion, no.  FHA loans have always been "make sense" loans.  If there are credit issues, explain and prove the reason for them.  If there was a hardship responsible for the credit issue, prove it.  If there were collections that should have been paid and weren't, pay them.  FHA loans were not subprime loans, they were common sense loans.

FHA borrowers are good borrowers who meet all the guidelines the government asks of them to insure their loans.  Is now really the time to restrict the pool of buyers even more by eliminating the last "no-down" program out there for non-veterans?

There is another bill, H.R. 6694, that if passed, will allow seller funded down payment assistance programs for certain borrowers.  Borrowers will have to have a minimum of a 620 fico score to qualify for down payment assistance and even at that, will have higher rates and higher mortgage insurance premiums.  Borrowers with 680 fico scores will qualify without higher rates.

H.R. 6694 seems to be the "happy medium" for banks and legislators today.  It will allow no money down programs for FHA borrowers, but put restrictions on it so that borrowers have some accountability for their actions.  Not a bad compromise in my opinion.