Earned Income Program’s (EIPs), such as DpFunder® and DPNOW, allow homebuyers and others to earn income that may be used towards a down payment on a home, closing costs, paying down debt, increasing cash reserves, etc.

Per the regulations set forth in the Fannie Mae Seller Guide for Single Family, the Freddie Mac Single Family Guide, and The HUD 4155.1 Handbook (revised), an EIP’s such as DpFunder® and DPNOW, meets the criteria for verifiable down payment funds. Specifically, the funds received through the program are earned income and are placed in a depository account prior to the settlement date. These funds are verified through the depository via a Letter of Account Verification or Request for Verification of Deposit - Form 1006 (VOD).

An EIP program is not a “non-profit gift program” and is not subject to the IRS Ruling 2006-27. The DpFunder® and DPNOW EIP’s may be used on any conventional, FHA, or sub-prime loan that allows income to be used toward the down payment.

So why can “earned income” be used towards the down payment? Simply put, earned income is deposited in the purchaser’s account, prior to settlement, and is verified in writing by the depository institution. Fannie Mae and Freddie Mac underwriting and purchasing guidelines allow these funds to be used towards down payment, closing costs, or cash reserves.

** DpFunder® and DPNOW are Earned Income Program’s (EIP) that meet the guidelines for agency-eligible loans. Furthermore, DpFunder complies with all Federal and state regulations including the Real Estate Settlement Procedures Act (RESPA). The program has been reviewed and vetted by a Washington, D.C. law firm with a national practice specializing in compliance, regulatory, transactional and litigation matters related to real estate and mortgage finance.**

Fannie Mae Seller Guide Excerpt
X, Chapter 6: Assets and Funds for Closing (07/03/00)
The lender must verify that the borrower has sufficient cash deposits and other assets to complete the mortgage transaction, and also must confirm the level of reserves the borrower will have after closing. Generally, the borrower must have enough assets to cover the minimum required down payment that must come from his or her own funds (as discussed in Part VII, Section 104.07). However, funds received from other acceptable sources may be used to supplement the minimum down payment from the borrower’s funds, to pay the borrower’s share of the closing costs and prepaid items that have to be paid by the property purchaser, and to satisfy any financial reserve requirement.
VII, 104.07: Minimum Down Payment (06/30/02)
Generally, we require the borrower to use his or her savings or other liquid assets to make a minimum cash down payment of five percent. However, there are some mortgage products for which we require the borrower to pay a lesser amount from his or her own funds, as discussed in Section 113.01 (for Flexible 97 mortgages and Flexible 100 mortgages); Part VIII, Section 101.02 (for Fannie 3/2 mortgages); and Part VIII, Section 101.03 (for Fannie 97 mortgages).
Once our minimum down payment from the borrower’s own funds requirement has been satisfied, the remainder of a larger down payment may come from other acceptable sources—such as a gift (or grant), trade equity, rent credit, a disaster relief grant or loan, an individual development account, an employer, premium proceeds from a mortgage revenue bond, etc. In some instances, we permit a borrower to obtain the entire down payment from these sources. See Part X, Chapter 6, for a full discussion of all acceptable sources of funds for the down payment and any exceptions to our requirement for the borrower to make at least five percent of the down payment from his or her own funds.
X, 603: Sources of Borrower’s Funds (01/31/06)
The lender must obtain documentation for all sources for the funds that the borrower uses to make the down payment and to pay closing costs. Since a borrower who is not a U.S. citizen may maintain assets outside of the United States or may not invest his or her assets with financial institutions in the United States, a lender may consider funds that a non-U.S. citizen borrower recently deposited in a U. S. depository institution as an acceptable source of funds—as long as there is evidence that the funds were transferred from the country from which the borrower immigrated and it can be established that the funds were the borrower’s before the date of the transfer. In this case, the sources of all funds used for closing should be verified just as they would for a borrower who is a U.S. citizen.
Typical sources of funds for a borrower’s down payment, closing costs, and financial reserves are discussed in the following Sections.
X, 603.04: Trust Accounts (06/30/02)
Funds disbursed from a borrower’s trust account are an acceptable source of the down payment, closing costs, and financial reserves if the borrower has immediate access to them. The lender should request the trust manager or trustee to verify the value of the trust account and to confirm the conditions under which the borrower has access to the funds. The lender also must document the effect (if any) that the withdrawal of funds from the account will have on any trust income that is used in qualifying the borrower for the mortgage.
X, 603.25: Anticipated Savings (06/30/02)
The lender may preliminarily qualify the borrower on the basis that his or her anticipated savings will be sufficient to meet the funds needed for closing. The use of “anticipated savings” does not relieve the lender of the responsibility for verifying that the savings are actually accumulated by the borrower before loan closing. The estimate for “anticipated savings” that the borrower can be expected to save over the time remaining until loan closing must be realistically developed. For example, if the borrower has no previous history of a consistent savings pattern or the ability to reduce or eliminate unnecessary expenses, it is not realistic to estimate that all of his or her pay over a two-month or three-month period can (or will) be directed entirely to savings. To determine the potential funds that are available for savings, the lender should reduce the borrower’s expected “after tax” income for the period by his or her existing housing expenses, monthly debt expenses (based on data from the credit report), and expected living expenses (food, transportation, etc.) for that same period.
X, 603.02: Checking and Savings Accounts (06/30/02)
Funds held in a checking or a savings account may be used for the down payment, closing costs, and financial reserves. The lender should use either a Request for Verification of Deposit (Form 1006 or 1006(S)) or the borrower’s bank statements for the most recent two months to verify checking and savings accounts. The lender must investigate any indications of borrowed funds—such as a recently opened account, a recently received large deposit, or an account balance that is considerably greater than the average balance over the previous few months. When there is a recently opened account or a large increase in an existing account, the source of funds must be explained by the borrower and verified by the lender. Unverified funds are not acceptable sources for the down payment or closing costs unless they satisfy our requirements for borrowed funds (as discussed in Section 603.15).

Freddie Mac Single-Family Seller Guide Excerpt
26.1: Borrower Funds (09/09/02)
All funds paid by the Borrower in connection with the property purchase or Mortgage financing must be from cash or other equity.
26.2: Cash (06/10/05)
“Cash” is considered to be any of the following:
1. Funds on deposit in the Borrower’s checking, savings, money market or certificate of deposit account or other depository account
2. A gift that is from a Related Person of the Borrower, that does not have to be repaid and is documented according to Section 37.20. A gift of Equity from a Related Person is allowed provided it meets the requirements of this Section and Section 37.20. If a gift from a Related Person is used with a Mortgage with a loan-to-value (LTV) ratio greater than 80%, the gift is permitted only if the Borrower has made a down payment of at least 5% from other sources of cash or other Equity unless provided for otherwise in this Single-Family Seller/Servicer Guide (Guide).
3. A gift or grant from An Agency that does not have to be repaid, is given pursuant to an established program and meets the requirements of Section 37.20 provided the agency is not an interested party (as described in Section 25.3) and the funds were not obtained from an interested party either directly or through a third party. This source of gift does not require a 5% down payment from other sources of cash or other Equity.
4. Proceeds of a loan fully secured by the Borrower’s owned assets
5. Proceeds from the sale of the Borrower’s assets
6. A cash deposit toward the purchase, the source of which is verifiable
7. Funds disbursed from a trust if documented according to Section 37.20.

8. Funds on deposit in an Individual Development Account (IDA) meeting the requirements of Sections 26.6 and 37.20 and matching funds provided by An Agency
9. Funds on deposit in a Community Savings System that are deposited by the Borrower and documented according to Section 37.20

10. Pooled funds on deposit from Related Persons who reside with the Borrower meeting the requirements of Section 26.4, if they are verified and documented according to Section 37.20

11. For purchase transactions, proceeds from an unsecured loan meeting the requirements of Section 26.6.1 that is an Employer Assisted Homeownership (EAH) Benefit meeting the requirements of Section 26.6.2. If an unsecured loan is used with a mortgage with a loan-to-value (LTV) ratio greater than 80%, the unsecured loan is permitted only if the Borrower has made a down payment of at least 5% from other sources of cash or other Equity unless provided for otherwise in this Guide.
FHA / HUD 4155.1 (rev.) Excerpt
P. Commission from Sale. If the borrower is a licensed real estate agent entitled to a real estate commission from the sale of the property being purchased, that amount may be used for the cash investment with no adjustment to the maximum mortgage required. A family member entitled to the commission also may provide gift funds to the homebuyer.
1-9: CASH INVESTMENT (07/91)
The applicant must make a cash investment in the property at least equal to the difference between the total cost of acquisition and the amount of the mortgage to be insured. The total acquisition cost is the total cost to the buyer, including the sales price, cost of any required repairs, alterations or additions, plus total closing costs. Total acquisition cost does not include non-realty items, prepaid expenses, seller concessions, including seller-paid closing costs, and excessive seller contributions.
A. Source. Generally, this cash investment must be from:
1) the applicant’s own assets, or
2) gifts from a relative, employer, longstanding friend not involved in the transaction, government agency, charitable organization, or
3) loans secured against marketable assets owned by the applicant other than the subject property, or
4) secured loans from a State or local government agency (subject to HUD approval), or
5) sweat equity.

B. Mortgagor’s Certification. No part of the minimum investment can be borrowed as an unsecured loan, except for applications under Section 203(i) or borrowers at least 60 years old applying under Section 203(b). In all other cases, mortgagors are required to certify that they do not and will not have any unpaid contractual obligation remaining as a result of their cash payment.

Asset Verification. Our documentation requirements for verifying a borrower’s assets to close include obtaining verification of deposits (VODs) backed up with the most recent bank statements, or, if using the alternate documentation procedures, original bank statements covering the most recent three month period; these requirements are further described in paragraph 3-1F of the mortgage credit handbook.

Conclusion

DpFunder is a qualified earned income program (EIP) that benefits both the seller and buyer in a real estate transaction. Simply put, sellers can gain the benefit of adding value to the property much like a home warranty; making the home seller quicker and attracting more qualified buyers. Since the key to the DpFunder program is the sale of a multi-year membership in the Owners Alliance (www.ownersalliance.org), the buyer also benefits as the membership conveys with the property at settlement.

The Owners Alliance provides a valuable basket of goods and services to the homeowner at substantial discounts. It also provides access to service providers, contractors, utility providers, and local governments. The Alliance provides members with a voice in Washington, DC and works to protect homeowner rights.

The DpFunder program meets the underwriting guidelines for Fannie Mae, Freddie Mac, FHA/HUD, and all published Federal housing regulations. DpFunder also works with most sub-prime loan programs.

The program is significantly different from non-profit down payment assistance programs (DPA’s). DpFunder is a for-profit entity that pays its dealers a taxable commission for selling a membership. These funds are “earned income” and can be used as the dealer wishes. The program provides a process for wiring these funds from the dealer’s account to the closing table as a service to our commissioned dealers. This service is provided as a courtesy as many of our dealers choose to sell a membership to the owner of the home they are purchasing.

Provided by Global Direct Sales at (301) 869-2900.
Edited by John Wyatt, CMB
Marketer of the DpFunder Program

Comparing Earned Income Programs with Other Programs?

Consider This:

It is every loan originator’s responsibility to ensure that the down payment program they have selected meets all federal and state regulatory guidelines. We have reviewed several competitor’s programs and have found that many are simply undisclosed seller concessions. If the program does not 1) convey an equitable item of value (e.g., Owners Alliance membership) and 2) is not clearly disclosed on the HUD-1 it could be illegal and may constitute mortgage fraud. Earned Income Programs like DpFunder and DPNOW meet both of these requirements and all federal and state regulatory requirements.

Per the Fannie Mae Seller Guide for Single Family, the Freddie Mac Single Family Guide, and The HUD 4155.1 Handbook (revised), the Earned Income Program meets the criteria for verifiable down payment funds. Specifically, the funds received through the program are earned income and are placed in a depository account prior to the settlement date. These funds are verified through the depository via a Verification of Deposit (VOD). The DpFunder program and DPNOW Program is not a “non-profit gift program” and is not subject to IRS Ruling 2006-27. The Earned Income Program may be used in conjunction with conventional, Alt-A, or sub-prime loan products.

In an effort to evolve their business model Nehemiah has created Liberty Grants. A program that provides grants of 2.25% of the sales price of a property for home buyers. Their is no fee to the seller and the buyer is required to use Lend America to originate their FHA loan. This grant may be used for closing costs but may not be used towards the buyers downpayment. Because home sellers are allowed to provide up to six percent of the sales price to the buyer for closing help, here at DPA News, we see a very limited application for this program.

The second product they announced is Liberty Grants Plus. In this program buyer’s receive six percent for downpayment and closing through a seller funded structure and the additional 2.25% grant. The seller funded model is under severe attack from the IRS and US Senate. Moreover, in most areas of the country, 8% is far too much for a buyer to use all of the funds and much of it will be returned to Nehemiah.

In both programs Nehemiah keeps a .25% of the sales price for processing. This fee is deducted from the 2.25% grant.

Earned Income Program is trademarked by industry founder DpFunder, a Gaithersburg, MD based company that created an ingenious direct marketing plan, whereby homebuyer’s can earn the income they need for a down-payment to purchase home.

Recent articles in “National Mortgage News” and “DPA News” have propelled DpFunder and other income programs to the leading edge of down payment solutions. Lenders are starting to clamor for a replacement to the seller-funded DPA and it appears that income programs are the logical choice. Time will tell, if these programs can ever acheive the level of success that the non-profits gained in the early part of this decade. The early signs are good, with several major lenders reviewing these programs and a handful have rolled out specific loan products with the programs built in to the product.

With the ongoing attacks on non-profit seller-funded DPA coming from all sides, new programs having been popping up like weeds. We did a quick review of some web sites and can give you a summary on the merits of these programs. They appear to be divided into two camps, the Income Programs and the Silent Loan Programs. The income programs have prospective homebuyers sign up as sales reps, to sell memberships into a homeownership association. The Silent Loan programs provide hidden loans to borrower’s that are then forgiven after collecting a “marketing fee” from the home seller.

Income Programs:

DpFunder
Amerifunder

In these programs, homebuyers are encouraged to become sales reps for a marketing company that is marketing and selling multi-year memberships in the Owners Alliance. The Owners Alliance is a national organization that provides discounts and savings to property owners across the nation. The benefits touted on their web site are an extensive list of various services and savings programs that, if bundled for three, five or ten years to a property, is well worth the fee being charged to the property seller. The property owner that purchases an Owners Alliance membership is charged based on the value of their property and they pay anywhere from four, six or eleven percent of the property value or sales price depending on the length of the membership (3, 5, or 10 years)

The seller of these memberships, in this case a homebuyer, receives a commission equal to three, five or ten percent of the property enrolled in the Alliance. Since this is earned income, the buyer can use this money for anything, downpayment, pay off old debt or simply pocket the money for future use like furniture, curtains or to have a safety net after closing. Overall, it appears little more complex than standard seller-funded DPA but concludes with similar results.

Silent Loan Programs:

Lender Solutions Inc.
Realty Solutions
Payout One
Federal Funding

Most of these programs lend money directly to the borrower who is purchasing a property and deposit the funds into the buyers account five days prior to closing. In Federal Funding’s case they call it a “grant” in their marketing presentation but call it a loan in their broker agreement. The loan provided to a borrower is usually not disclosed to the first trust lender or for use only on sub-prime loans that do not require seasoning of funds to show assets and for use as a downpayment. In several cases, the home seller is charged a marketing fee for “marketing services and facilitating the loan” in the transaction. None of the groups we looked at hold real estate licenses. This calls into question their ability to charge a fee for marketing real estate. Moreover, the loan to the borrower is forgiven at closing. In Federal Funding’s version, a fee is sent to the borrower from seller and there is a demand on the account to Federal Funding for collection of this fee.

The lack of disclosure to lenders, the failure to hold real estate licenses and the forgiving of loans makes for a problematic program. This appears to be blatant fraud, which we confirmed with a top mortgage law firm in Washington, DC. According to our attorney, who represents Countrywide and Wells Fargo, “that is fraud.” This is compounded more when money is transferred from the seller to the buyer and it is done off the HUD-1.

The big difference between these programs and non-profit seller funded DPA’s is that these are all for profit entities and the buyer is receiving taxable income as opposed to a gift. In all of these new programs, the buyer receives a 1099 at the end of the year and has to pay income taxes on the funds.

The 2007 Appropriations Bill HR5527 was amended in the Senate to eliminate seller-funded dpa programs conducted by non-profits. The following language is proposed to be added to the National Housing Act:

“SEC. 323. The Federal Housing Administration is prohibited from insuring any mortgage under the National Housing Act in which the mortgagor receives downpayment assistance from an organization that solicits, collects, or receives funds from the seller of the property subject to the mortgage except that this prohibition would not apply to downpayment assistance programs qualified under section 501(c)(3) of the Internal Revenue Code of 1986. The Federal Housing Administration may insure a mortgage when downpayment assistance is provided by an organization described in section 501(c) of the Internal Revenue Code of 1986 that is exempt from taxation under subtitle A of such Code and that is operated in a manner consistent with Internal Revenue Service regulations.”

This late amendment clearly eliminates the Nehemiah type DPA programs. Further, any language allowing FHA to create “risk-based” pricing and 100%FHA was also deleted from the bill. If this bill passes as written in could spell the end for FHA. The number of FHA insured mortgages being produced has been declining since 2003. Fannie Mae and Freddie Mac have been extremely competitive in producing a range of 100% mortgage products. This has allowed the GSE’s to take the best borrowers away from FHA, leaving them with the riskiest piece.

FHA insured loans are “cross-collateralized” by having the best quality borrower’s pay slightly higher premiums, in order to subsidize lower quality borrower’s premiums. In 1994, the GSE’s started using “risked-based” pricing and created a wealth of competitive loan products. It wasn’t until 2003, that these products started really effecting the production of FHA. Since 2003, FHA has been in a steady decline.

If FHA doesn’t replace the volume lost to the GSE’s and sub-prime market, the insurance fund will not have enough new borrowers to cover existing loans. This could creat and insolvency issue and the taxpayers are ultimately responsible for picking up the tab. It remains to be seen, if elected officials will tolerate subsidizing huge losses from HUD.

Dana Whidbee , 42, told nonprofit groups such as AmeriDream Inc. that people like Robin Carteau were short on cash and needed money to reach their goal of homeownership. She provided agencies with Carteau’s Social Security number and birth date, and in return secured thousands of dollars for Carteau’s new house.

But officials say that Whidbee’s deeds were far from good and that her clients, such as Carteau, never existed.

Whidbee received nearly $900,000 in the scam , federal prosecutors said. Much of that money was later returned.

“She obtained these funds by applying for down payment monies from nonprofit companies, posing as an agent for eligible and legitimate home buyers,” wrote US Secret Service special agent Dean J. Tramontana in a court affidavit.

“In truth and in fact, there were no buyers, and Whidbee provided fictitious names and personal identifiers,” Tramontana said.

Whidbee pleaded guilty to one charge of wire fraud in December 2005. She was sentenced Tuesday in US District Court in Boston to two years’ imprisonment and two years’ probation, and was ordered to pay $93,000 in restitution.

According to court documents, Citizens Bank investigators filed suspicious-activity reports regarding Whidbee’s accounts in January 2005, noting that she received at least two wire transfers from AmeriDream Inc. totaling $46,000.

AmeriDream Inc., a Maryland-based national nonprofit, gives low-income buyers the ability to purchase affordable housing.

Whidbee told AmeriDream that she was representing two prospective buyers, Anne Schorne and Robin Carteau. As their settlement agent, Whidbee secured $20,000 for Schorne and $26,400 for Carteau and had AmeriDream transfer the funds into an account.

The money ended up in Whidbee’s personal account. AmeriDream recalled the loans .

Police arrested Whidbee in March 2005 when she tried to close her accounts at a Citizens Bank in Watertown, according to the court documents.

Affordable housing advocates voiced outrage. “It’s shameful that someone would scam a system designed to help low-income people buy a home,” said Eric Gedstad , a spokesman for MassHousing, the Massachusetts Housing Finance Agency. “These nonprofit groups thought they were helping people achieve the dream of homeownership. Instead, they were duped into helping a dishonest woman who dreamed of stealing and getting away with it.”

Thomas Callahan , executive director of the Massachusetts Affordable Housing Alliance, said that some organizations are trying to take advantage of low-income home buyers and that Whidbee’s actions only further blur the process for genuine buyers and organizations alike.

“These types of examples make it hard for people to distinguish between what a legitimate program is and a scam,” Callahan said.

Whidbee spent at least $40,000 of the money she received from the fake applications, and the remaining money left in her bank accounts was returned to the companies, according to a press release from the US Department of Justice.

“We’re glad that justice has been served in this particular case,” said Philip H. Jones, a spokesman for AmeriDream.

HUD has issued Mortgagee Letter 2006-13, in response to overwhelming inquiries from mortgage lender’s around the country. The letter clarifies HUD’s position. To the relief of builders and lenders, HUD will continue to accept mortgages produced using seller-funded DPA, as long as the non-profit still holds its 501 (c)(3)exemption.

There are an estimated seven thousand FHA mortgages a month being produced using DPA. An immediate halt in accepting these loans, would have been devastating to the industry. In a rare move of common sense, HUD is allowing time for lenders to find alternative products before the IRS turns off the spigot completely. Since HUD can not stop the IRS from implementing its Revenue Ruling, they will live with a short delay in hopes of finding alternative programs that will fill this gap.

Monday the IRS announced that they canceled the tax-exempt status 41 credit credit counseling agencies. (link to BusinessWeek article)

First of all, this is old news: the IRS may have just made the announcement, but we’ve known about this for some time. It’s been in the Wikipedia entry on credit counseling almost from the beginning.

But there’s a misconception here that persists everywhere from AADMO’s press release (which I linked to yesterday) to Wikipedia (since I lost the edit war when trying to keep the article useful and non-biased). The AP article says the agencies in question represent “more than 40 percent of the revenue in a $1 billion industry.” That’s not the same thing as saying they represent half of the industry.

We’re talking about 41 agencies out of almost 1,000. Sure, those agencies represent almost half the industry’s revenue, but there are still 740 others who haven’t lost their nonprofit status.

Think of it this way; say your local Major League Baseball team has a total team salary of $47,000,000 (yeah, they’re never going to make the playoffs). Suppose they have a superstar who earns $22,000,000. That’s 47% of the team salary right there. Now supose that superstar is caught using steroids. Would it be fair to say “Half the team is on steroids!”?

No, the real statistic here is 5% of credit counseling agencies have lost their non-profit status. Not 50%. Not 40%. 5%.

The IRS commissioner suggested that consumers looking for credit counseling call “one of the 150 consumer counseling organizations approved by groups like the Better Business Bureau.” Good advice.

I’m not saying to avoid for-profits; just do your research and choose carefully. I have acquaintances in the for-profit counseling sector who think the non-profit credit counselors have an unfair competitive advantage. I don’t see it that way. If the non-profit is on the level, then they’re committing a lot of resources to education and community service, not to mention responding to IRS audits and EOUST scrutiny. (And lawsuits from bankruptcy lawyers, etc. etc. etc.) The only way a non-profit gets an unfair competitive advantage is if they don’t really do all of the non-profit community education work that goes into being a 501(c)3; hence the IRS revocations. Meanwhile the for-profit agency doesn’t have the same community or education obligations (and there’s nothing wrong with that; a lot of clients don’t want education, they just want a DMP), so those resources are freed up to pay taxes. That’s utterly simplistic and leaves out a lot of important issues (like accreditation, federal & state laws, etc.), but it’s my position.