On July 30, President Bush signed the Housing and Economic Recovery Act into law. The new bill contains wide sweeping changes for numerous housing related issues.
One of the changes of note, is the forbidding of FHA from insuring mortgages from which the down payment comes directly or indirectly form an interested third party (such as the seller). This will lead to the elimination of all down payment assistance programs, such as the Nehemiah Program and Ameridream, which currently use a seller donation to fund a borrower’s required down payment for FHA loans.
This change is to take effect October 1, 2008, meaning any borrower’s planning to use such a program will have until then to receive a loan commitment from a lender.
It has long been suspected that down payment assistance programs were on the chopping block and the new bill provided the forum for their demise. However, the day after the Housing Bill became law, there was a bill introduced to reform, and therefore, save the down payment assistance programs, but it is still unclear at this point whether that proposed legislation has any chance at success.
Under the guidelines of the new housing law, borrowers may only fund the require down payment from their own assets or gifts from immediate family members.
The following is a summary of some of the other provisions of the new law:
- Raises the required down payment amount for FHA to 3.5%, up from the current 3%
- Sets the new FHA loan limit as high as $625,500 in high cost areas
- Creates an FHA program to replace an estimated 400,000 homeowner’s troubled mortgages with fixed, government insured loans (borrowers must qualify by having a debt-to-income ratio of 31% or higher, a loan-to-value ratio of no more than 90%, and be able to prove that they can afford the loan, and lenders must agree to participate by allowing a sizable loss)
- Provides a tax credit of up to $7500 for first time homebuyers on homes purchased between April 9, 2008 and July 1, 2009.
- Provides both Fannie Mae and Freddie Mac with government assistance, as well as appointing the Federal Housing Finance Committee to regulate those entities
- Provides grants to local governments to buy and refurbish foreclosed properties