The new program lets home buyers apply the tax-credit advance against the FHA's 3.5% down payment requirement only if the loan is handled through a state housing-finance agency; otherwise the tax advance may only be used to cover closing costs, to increase the down payment, or to buy down the mortgage's interest rate. The FHA already allows down payment assistance from family, employers, and governmental agencies, but generally bars it from sellers, mortgage writers, or others who would benefit financially from the transaction.
How will this affect FHA defaults? Businessweek has this tidbit (emphasis added):
First, the source of a downpayment can make a big difference. For FHA-backed mortgages made in fiscal 2000, the foreclosure rate was 5.95% when homebuyers made the downpayment -- but 7.9% when it came from the buyer's family and 15% when it came, indirectly, from the seller in a practice that is now banned. When downpayment assistance came from a government agency -- eg, a state housing finance agency -- the default rate was 13.1%, more than double the rate when homebuyers coughed up the downpayment themselves.Unlike normal times where government agencies have a limited budget which means few would be able to qualify (limiting the damage).. the funding here basically comes from the borrower and so there are no budgetary restrictions. This means that the monetization of the tax credit will have a much greater impact than I previously thought. If you thought inventory was low on the low end before just wait until this program is fully implemented. Buyers will be able to have zero down and have the sellers pay closing costs... Nothing like impulse buying a house. Clearly we have learned nothing from the housing bubble.