Written By: Stacey Sprain
If you were active in the industry just a few years back you likely recall the days of easier lending when property values were high enough to jack up purchase prices to incorporate the use of your favorite downpayment assistance program like Nehemiah or Ameridream so that buyers had a source of funds for their required downpayment. Those days were plentiful until HUD stepped into battle to eliminate the use of seller-funded downpayment assistance programs. There was the back and forth tennis match in the high courts until HUD finally won the battle and seller-funded downpayment assistance was ruled an ineligible source of funds for a buyer’s downpayment.
Things tightened and got tougher after that and have gradually been tightening ever since. Now we’re back to good old fashioned lending where we have to document acceptable sources of downpayment funds from buyer’s own savings, gift funds from a relative, allowable assistance from local government agencies or approved non-profit organizations in the forms of grants, gifts or secondary financing. And then there’s employer housing assistance funds. It’s the latter of the list that is currently hitting the radar at HUD as I’ve confirmed recently with top HUD officials.
Allow me to put a warning out there to all lenders- be careful when a file with employer housing assistance hits your desk. Make sure you do your due diligence to track the source of funds for these situations because if you don’t, you might end up getting a call from HUD that involves one of the most threatening and nasty words in lending- SANCTIONS. That’s right folks. Employer housing assistance programs are now becoming a store front for seller-funded downpayment assistance.
There are a few things you need to do when you run across a loan structured with downpayment coming from an employer housing assistance program.
1. If the program has a website, get on it and review every detail with a fine tooth comb. Make sure it’s clear who the employer is, make sure your borrower is an employee of the employer and be sure to thoroughly question any employer housing assistance program that contains or involves a group of employers.
2. Review the paperwork thoroughly. Make sure you read through every detail including the fine print. Do the funds require repayment in any form? Do the funds involve a lien or forgivable lien? Is the borrower going to be taxed on the funds he/she receives? Generally if the gift involves the employee being taxed on the monies, it’s not considered an outright gift and doesn’t meet HUD’s guideline requirements for gift funds. Is it clear that the employer is involved in the transaction or is there someone else claiming to represent the employer? Is the representative or designated agent for the employer representing another company? Is that company a non-profit organization or for profit business? Is that business or company registered and in good standing with the state in which they are doing business? Who holds ownership is that business? Is/are the owners in anyway involved and are they related to other areas of the transaction? Who appears to benefit most from the transaction? If it’s not the employee then something’s off and you should follow your gut.
3. Make sure somebody “shows you the money.” Where will the funds that the borrower will be using for downpayment be coming from? Are they coming directly from the employer? If they are not, you need to make darn sure that the employer is actually and truly providing the funds in one way or another because if the employer is not directly moving the monies that the program claims are being provided from the employer you’ve got a red flag problem in front of you.
4. Make sure it’s crystal clear how many real estate agents are involved in the transaction and in what capacity each is involved. Are the real estate commissions typical for the area or are they higher for some reason that doesn’t make sense? Does the amount of commission make sense with the sales price of the property? Are there commissions being paid out for services that are overpriced and unrealistic? Does the buyer clearly understand the terms of the contract? What information did the buyer receive directly from his or her employer? Does the buyer have a clear understanding of how his or her employer is involved? How long has the buyer’s employer been offering the employer assisted housing plan? How many other employees have benefited from the employer’s housing assistance program? Does the
5. Take a hard look at the employer. Is it a large corporation where it would make sense they participate in an employee housing assistance program and does it make sense that they would have the resources to provide such funding for all of their employees or is it a small mom and pop shop with few employees where it doesn’t make sense they’d have the resources to provide such funding? Is it typical that an employer of that nature would be able to offer an employee housing assistance plan and the funds for it?
6. Make sure you request and see a copy of an example of a HUD I Settlement Statement that demonstrates how fees and commissions are listed. This is where you will catch payouts of real estate commissions that don’t make sense with the deal. Make sure it’s crystal clear where the funds for the employer housing assistance program are coming from.
The bottom line is that you need to do your homework when an employer housing assistance program is included as the source of funds in your loan transaction. This new trend might be a very complex and cleverly disguised form of seller funded downpayment assistance which we all know is not acceptable in real estate transactions.
If your company is contacted to join a “network” as an approved lender or partner you need to stand back and take a hard look at who you’d be partnered up with and why you’re being asked to do so. If it’s not as simple as the employer providing funds for a bona-fide employer housing assistance program, you’d best stay clear of it. If your gut is telling you one thing but the representative for the employer housing assistance program is telling you something quite different, stand back. If you’re not sure whether or not the program in front of you is a legitimate acceptable source of funds for your borrower, take it top your company’s risk or quality control department and have them take a look at it. If all else fails and you’re not able to come to a conclusion on your own or don’t have higher resources, contact HUD directly to find out if the program is on their radar.
There are lenders out there right now who may be sanctioned in the very near future for allowing hundreds of these transactions to close with the use of these cleverly disguised employer housing assistance programs as the source of funds for downpayment. Let’s hope you’re not employed by or that you become one of them.
About The Author
Stacey Sprain - As an NAMP® staff writer, Ms. Stacey Sprain is currently a NAMP® member in good standing, and is a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution. If you would like to become a volunteer writer for us, please email us at: firstname.lastname@example.org.