Down Payment Assistance...Legalized Money Laundering

Do you want to know how complicated the loan business? Well, the concept of charitable down payment assistance programs provides a glimpse. First, on a purchase transaction, banks will allow sellers to pay for the borrower's closing costs but not any part of their down payments. This creates an interesting dilemma and opportunity for loans where the down payment is fairly minimal like with FHA (3% down payment).

Now, let's bring in charitable down payment assistance programs. What these programs allow is for seller's to contribute toward the down payment by first laundering it through this non profit. Because the seller gives the money to the non profit, and then the same non profit provided the final payment (minus their fee of course) then suddenly a transaction that wasn't kosher becomes totally legitimate.

Lending regulations generally prohibit a seller from directly providing a buyer with a down payment, however. At the same time, there have long been government and charitable programs which provide down payment money to struggling first-time buyers that lenders can accept.

During the past decade, organizations that mirror the sanctioned charitable down payment giving have increased, but with a twist: Home sellers are able to make a contribution to the non-profit, which in turn provides down payment money to the buyer of the seller's home.

This is wink wink nod nod at its most extreme. The banks have essentially created a rule and then created another one to subvert it. Of course, the irony is that the only reason this is legal and some drug dealer doing much the same thing isn't is because the fees collected by these down payment assistance places winds up going to worthwhile causes.

The worst part about this is that all of these stunts to make things appear to be something they are not also turns the purchase price into something it isn't. For instance, if a seller agrees to sell their property for 175k and contribute up to 3k for closing costs, then in reality the seller agreed to sell the place for 172k. Of course, the purchase price will be listed at 175k for comparison to other properties.When we are dealing with small amounts like closing cost contributions the manipulation is not very tangible. What if a seller agrees to contribute three percent for down payment though by laundering the money through a charitable program? Then, the true value of the property has been inflated by 3%. If enough transactions happen this way in an area, you would have a manipulated increase in property value.