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Sometimes a potential buyer can make a house payment easily but cannot purchase a home because they do not have the funds for the down payment. Many local and state agencies run bond programs to generate funds to help individuals and families with that down payment. These programs are sometimes referred to as a down payment gift assistance program, sometimes called a down payment grant program.
 Most agencies are income sensitive, but you may be surprised by the high level of acceptable income. The income level is especially high if you have children or dependents. Most agencies also have purchase limits, but they are adjusted to the income qualifications level.
How Downpayment Gift Assistance Programs Work
There are several things a seller can do to help the buyer purchase a home. Sellers can help buyers pay closing costs by giving a portion of their proceeds back to the buyer at closing. The amount of seller assistance that's allowed depends on the type of loan the buyer is getting.
For instance, sellers are not allowed to give home buyers down payment funds. That's where gift assistance programs step in, providing a "work around" of those laws.
First, the seller enrolls their house in a suitable program and contributes an amount equal to the assistance their buyer will receive at closing--plus a fee.
Next, after closing, the down payment funds are wired from the gift assistance program to the closing agent. The seller has no part in the transfer of funds.
Here's what HUD says about the programs:
"HUD does not approve gift programs administered by charitable organizations and, thus, will not offer a formal approval of your program. Mortgage lenders are responsible for assuring that the gift to the home buyer from the charitable organization meets the instructions described in HUD Handbook 4155.1 REV-4, CHG-1 Paragraph 2-10(C) (e.g., no repayment implied, etc.). Those charitable organizations that comply with existing regulations and policy guidelines are permitted to give cash gifts to eligible home buyers and do not need prior FHA approval to do so."
So HUD does not issue formal approvals for gift programs--it puts the burden of working with a legitimate program on the lender. The major programs all appear to comply with HUD's requirements. Your lender can verify that the program you choose is one that is acceptable.
Program guidelines may differ slightly, but they all offer the same basic services.
- Home buyers must qualify for a loan that allows gift funds.
- There are no minimum or maximum income requirements for buyers, but there may be top limits set on the sales price of homes.
- Typical assistance seems to range from 1% to 7%.
- Funds can be used for the down payment and for closing costs.
- Gift funds can be used for new or existing homes.
- Unused funds must be returned to the gift program.
- Assistance programs cannot be used to refinance a house or to make home improvements.
- Sellers cannot use the gift as a charitable contribution, but it may be deductible as a selling expense. Talk to a tax professional.
Your lender can help you choose a down payment assistance program and explain how your offer to purchase should be worded to ensure compliance with its underwriting guidelines.
If you are able to obtain down payment assistance, you may receive a lower interest rate. The drawback is that it often takes quite a bit of work with extra paperwork and mandatory education classes. Our advice, find a realtor or mortgage professional who is familiar with both the local and state agencies and their policies.
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