The days of buying homes with no money down through the FHA may be going away if the heads of the FHA have their way. Today a home buyer can get 97% financing through the FHA, the other 3% a charitable organization (which is basically a loophole where the seller donates 3% to the charity and the charity gives it to the buyer for the downpayment), and the closing costs can be paid for by the seller as well. It all adds up to a buyer getting into a home with no money down.
About a third of FHA home purchases have been taking advantage of this loophole in the recent past. The FHA officials want it done away with because they say folks who buy homes with no money down are significantly more likely to foreclose later.
Here is an excerpt interesting article on the subject over at the WSJ online:
FHA Commissioner Brian Montgomery said Monday that the government-backed loans made to borrowers who receive down-payment assistance go into foreclosure at three times the rate of loans in which borrowers pay for their own down payment. Loans with seller-assisted down payments make up about 35% of the FHA’s loan portfolio, up from only 5% in 2001.
After a recent evaluation, the FHA estimates it will incur an additional $4.6 billion in unanticipated long-term losses, primarily due to loans involving seller-funded down-payment gifts.
“We are concerned about this business, because the substantial losses affect FHA’s bottom line and FHA’s ability to serve American citizens who need access to prime-rate home loans,” Mr. Montgomery said during a speech at the National Press Club.