FHA Insured Loan - Down Payment Grants

Down Payment Grants

Down payment assistance and community redevelopment programs offer affordable housing opportunities to first-time homebuyers, low- and moderate-income individuals, and families who wish to achieve homeownership. Grant types include seller funded programs, the Grant America Program and others, as well as programs that are funded by the federal government, such as the American Dream Down Payment Initiative, or local governments, often using mortgage revenue bond funds.

On May 27, 2006, the IRS issued Revenue Ruling 2006-27, categorizing the non-profit seller funded down payment assistance programs (DPA programs) as "scams." The IRS ruled that organizations such as AmeriDream and Partners in Charity are no longer eligible for non-profit status and are not acting as "charitable organizations" as defined by the IRS. This ruling was based largely on the circular nature of the cash flows, in which the seller pays the charity a "fee" after closing. Many believe that the "grant" is really being rolled into the price of the home. According to the Government Accountability Office, there are higher default and foreclosure rates for these mortgages.

On October 31, 2007, the Department of Housing and Urban Development adopted new regulations to ban so-called "seller-funded" down payment programs. The new regulations state that all organizations providing down payment assistance reimbursed by the property seller "before, during, or after" that sale must cease providing grants on FHA loans by October 30, 2007, with the exception of the Nehemiah Corporation. Nehemiah is the beneficiary of a lawsuit settlement with Department of Housing and Urban Development in April 1998. The terms of that settlement will allow Nehemiah to operate until April 1, 2008. Ameridream was granted an extension to the new regulations until February 29, 2008.

Several similarly operated government grant programs were introduced in response to the IRS Revenue Ruling in May 2006. Their governmental status made them exempt from the IRS Ruling, but they are still affected by the HUD Rule Change. One such organization was The Grant America Program, which was conducted by the Penobscot Indian Nation and had been available to all homebuyers in all fifty states.