The Impending End of Ameridream

Have we ever discussed down payment assistance? I’ve explained the program so many times in person that I can’t recall if I’ve ever set the metaphorical pen to paper about the subject. Well let’s just assume for the sake of this post that I haven’t; here’s a quick run-down.

When the market (and the economy) was hot a few years back and the mortgage industry was a thriving, risk-taking, happy-go-lucky thing, there were loan programs that provided 100% financing. A buyer could purchase a property with no money down and wouldn’t even be on the hook for closing costs if he or she could get the seller to agree to pay them. 100% programs were among the first to be cut when things started to sour and mortgage companies began to go belly-up.

The government sponsors what’s called an FHA loan, that allows buyers to purchase a house with only 3% of purchase price down, and this 3% can be gifted to the buyer. This is not a new program at all, but during the boom, there was little reason to use FHA loans and they kind of went out of fashion for a few years. Now that 100% is gone, the FHA loan is the new black, if you know what I mean.

Down payment assistance programs like Ameridream (which is the most well known of the programs, but Nehemiah is another) are a kind of work-around that turns FHA into a 100% loan. FHA stipulates that although 3% down can be gifted to the buyer, it cannot be gifted by the seller (too close to home). So a non-profit organization called Ameridream was created that allows people to donate money to them and they, in turn, gift that money to buyers for their down payments. It allows a seller, if they agree to it, to donate the 3% down payment to Ameridream (plus a $500 service fee) in the name of the buyer of their house and then Ameridream will gift that money back to the buyer, who can then buy the house. I know, it sounds shady, but it’s been taken to court lots of times, and had so far stood up to the scrutiny.

Unfortunately, that has come to an end, at least for the time being. The housing bill that The President recently signed made these down payment assistance programs illegal as of October 1, 2008. The idea is that these loans where people don’t have any money to put down, are much more likely to be defaulted on, thus costing the government more money to pay back the mortgage companies (FHA loans are loans that are made by banks, but insured by the government).

So here’s what it comes down to: if you want to buy a house with no money down, you better do it soon. And by soon I mean like next week. Until this ruling is overturned or appealed, you’re going to need at least 3% of the purchase price of the house you want to buy saved up, or you’re going to be out of luck.