In a move that will probably destroy the down payment assistant programs that many homebuyers use, HUD has proposed that home buyers using government insured loans be prohibited from accepting down payment gifts that are indirectly funded by the seller.

The new proposal threatens the existence of programs such as the Nehemiah Corporation and Genesis that have given out millions of dollars in payment assistance to lower income home buyers.

According to the Wall Street Journal,

According to HUD, the overall foreclosure rate for FHA-mortgages used to purchase homes in 2004 was 3%, while such loans involving down-payment gifts from nonprofit groups had a foreclosure rate of 6.4%.

You can view the proposed rule change in last Fridays Federal Register. Comments are due July 10, 2007.

Here’s the summary:

SUMMARY: Through this proposed rule, HUD submits, for public comment, specific standards governing a mortgagor’s investment in property for which the mortgage is insured by the Federal Housing Administration (FHA). Specifically, this proposed rule would codify HUD’s longstanding practice, authorized by statute, of allowing a mortgagor’s investment to be derived from gifts by family members and certain organizations.
The standards would address a situation in which the mortgagor’s investment is derived from a gift, loan, or other payment that is provided by any donor, including an individual or an organization, and would also specify prohibited sources for a mortgagor’s investment. The proposed rule would establish that a prohibited source of downpayment
assistance is a payment that consists, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale: (1) The seller, or any other person or entity that financially benefits from the transaction; or (2) any third party or entity that is reimbursed directly or indirectly by any of the parties listed in clause (1).