The real estate blog.

If you’re looking for a no money down loan for financing a mortgage, the gift money loophole still exists. An article by Forbes discusses the practice when it comes to FHA loans -

You probably thought nothing-down mortgage loans disappeared in the wake of the American subprime lending crisis, which has ensnarled much of the world in a credit crunch.

They didn’t. Even more surprising, many Americans can still buy homes with nothing down thanks in large part to the federal government and a legal loophole that lets builders and bankers ensure a steady stream of asset-challenged borrowers for taxpayer-insured loans.

FHA allows gift funds from certain sources to be used by borrowers to cover the down payment. The upfront mortgage insurance premium (MIP) is automatically

added to the loan. Closing costs can be rolled into the loan as well through seller paid concessions. This is a strategy builders in Colorado used for some time and now it’s being utilized all over the country.

Gift funds are also allowed by Fannie/Freddie through the same non-profits involved with the FHA program. A colleague shared with me that information from a builder in San Diego. Conforming loans now require a 5% down payment, but gift funds from the seller/builder can mitigate that expense.

Private sellers having a difficult time getting qualified buyers can also utilize this strategy to help with financing.

The FHA tried to eliminate the gift program through non-profits, but ended up being challenged in court and lost.

The FHA tried and failed to unilaterally prohibit the seller-funded loans last year. After it issued a decree that the practice’s end was nigh, Sacramento-based Nehemiah, a market leader in seller-backed financing, challenged the agency’s ban and won. The judge ruled against the Department of Housing and Urban Development ’s policy shift for failing to provide follow protocol in announcing the change.

The Forbes article cites a statistic that gift funded loans tend to be more than comparable loans for similar properties. This is true. However, it’s also true that any loan with seller paid closing costs involved is going to be higher than one that doesn’t have these fees rolled into the loan. Some of the rise in house prices in recent years is due simply to fees and gifted down payments being rolled into the loan, but appraisers take that into account on comparables for resale homes. New homes don’t carry the same consideration.

I think it’s foolish for anyone to buy a home if they don’t have savings in reserve to cover unexpected expenses or financial problems. However, if one wants to conserve resources and pay the extra fees to take part in a non-profit gift program, it can be a useful strategy to lower out of pocket costs. Though 100% loans, except for VA, are officially gone, the non-profit gift program is a way to secure mortgage financing without the down payment. Sellers and buyers should both be aware of these programs.