Down With DAP’s: A Small Provision of a Big Bail-Out

Down payment assistance programs, or DAP’s as they are commonly referred to, were popular grant and loan programs designed to help low income Tampa home and condo buyers purchase a property with very little money down. Notice I said “were” â€" DAP’s have recently been all but outlawed with the reversal in underwriting guidelines.

DAP’s were touted by not-for-profit charities and other organizations as a way to make home ownership more affordable to first time home buyers and other low income residents throughout Florida and elsewhere. While it may sound perfectly acceptable for a charity to provide financial assistance to a poor family wishing to purchase a home, the “devil” is in the details. One of the primary underwriting rules associated with FHA and HUD homes is that a seller cannot provide down payment assistance to the buyer; only family members, government agencies and charities. This was to prevent sellers from increasing the cost of the home to cover the down payment assistance…which makes sense when you think about it.

Since DAP’s were a charity, they operated in a legal loop-hole where the seller would pay closing costs and the buyer would finance the down payment required to purchase FHA properties; resulting in a zero down-payment situation. Of course, it also resulted in zero equity for buyers and increased foreclosure rates on properties where buyers had little incentive to keep the home. Research from the Department of Housing and Urban Development indicates the rate of foreclosures is significantly higher than similar loans with a typical 3 percent down payment and closing costs.

In step the H.R. 3221, Housing Economic Recovery Act of 2008. One of the provisions contained in this bill requires the loophole to be closed â€" effectively dealing a death blow to DAP’s who work with FHA or HUD home sales. Critics point out this will negatively impact the ability of first time home buyers to afford new homes at a time when homes sales have fallen dramatically. Sellers could also be hurt since marginal buyers have one less resource available when it comes to purchasing Tampa real estate or condos for sale.

The bottom line is down payment assistance programs geared toward first time and low income home buyers are quickly becoming a thing of the past. Expect to see a return to FHA and HUD loans that require 3 to 5 percent down payment even for the lowest income brackets. Sellers wishing to attract low income or first time home buyers should acquaint themselves with other programs designed to assist buyers in affording a first home.