IRS Rules Downpayment Assistance Programs Essentially Illegal

This is a big deal and a bit of blow for those who need to use the looser debt to income ratio and income guidelines that FHA allows.

I was a little surprised to learn that about 1/3 of all FHA loans use these types of programs. The best known include Ameridream, Nehiamiah and Neighborhood gold. I agree that it's always been a joke that these "non-profit" organizations take a big fee and exist only to be a loophole for these buyers to obtain the best financing possible in ways they otherwise couldn't. On the other hand, I've seen them help my buyers buy a home for sale in columbus.

In a nutshell, the seller pays around 3% of the contract price to buyers for their downpayment and around $500 of that goes to the program. the Buyers are get around not being able to have a Gift for downpayment and the seller sells their house.

IRS Revenue Ruling Restricts Nonprofit Downpayment Assistance Programs Funded by Property Sellers

On May 4, 2006, the Internal Revenue Service released Revenue Ruling 2006-27 which will eliminate the 501(c)(3) status of a large number of nonprofits who receive funding from property sellers in providing downpayment assistance to FHA borrowers.

FHA regulations require that nonprofits providing a downpayment gift have an IRS 501(c)(3) exempt status. Due to the ruling, the IRS has indicated that it is investigating 185 organizations that provide downpayment assistance.

Nonprofits that receive funding from parties interested in a home sale, and who receive payments from home sellers correlated with the amount of down payment assistance, are most vulnerable to losing their tax-exempt status.

Conversations with FHA have indicated that they will insure loans with DAP assistance provided that the homebuyer has entered into a contract of sale (including any amendments to purchase price) on or before the date the IRS officially announces that the charitable organization's tax-exempt status is terminated. FHA will recognize the gift--if made to the homebuyer and properly documented--as an acceptable source of the downpayment.

FHA seems to believe this policy avoids harm to any homebuyer who, in good faith, has a contract of sales and anticipates receiving a gift for the downpayment from such a charitable organization.

Currently, about one third of FHA single-family purchase loans have the type of downpayment assistance that the ruling may affect. Such downpayment assistance programs have served FHA's primary clientele: first-time homebuyers, low- and moderate-income families, and minorities.

The IRS ruling makes passing the flexible downpayment provisions of H.R. 5121, "The Expanding American Homeownership Act of 2006," more urgent if FHA is going to continue to provide these targeted populations with affordable financing.