Seller-funded down-payment assistance programs are set to be eliminated as part of broader housing legislation that Congress expects to pass by the end of the week, according to a report in the Washington Post.

Under these programs, third-party nonprofit organizations such as Neimiah and Futures provide home buyers with money to be used at closing in FHA transactions. They are then reimbursed by home sellers who also pay administration fees for the nonprofit’s services. More than half a million people have bought homes with down-payment assistance in the past ten years.

As conventional mortgage lenders have moved away from no-money-down loan products, real estate investors have increasingly turned towards FHA down-payment assistance programs as a way to get their properties sold. By offering to contribute towards the buyer’s costs through an assistance program, investors still could successfully market their homes to potential buyers with little or no money to put down – oftentimes raising the price of the house to cover the amount of assistance being provided to the buyer.

Consequently, assistance programs have become much more popular in recent months.

But the popularity of the programs has come at a price: buyers who receive seller-funded down-payment assistance have ended up in foreclosure at nearly three times the rate of buyers who put down their own money.

The FHA has said that these programs represent the single biggest threat to the Administration’s solvency, and has tried for years to eliminate them. A ruling last year by the Department of Housing and Urban Development forbidding assistance programs was put on temporary hold, and HUD has been recently moving again to prohibit down-payment assistance altogether.

Now it seems that Congress may beat them to the punch.

It is more likely than not that the days of down-payment assistance are limited. Investors who have relied on these programs in the past to market and sell their properties should be aware and adapt accordingly.

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