Though it is not legal for sellers to provide this money to buyers, people have been taking advantage of a loophole in the FHA rules since the early 1990s. Sellers can register their home with non-profit agencies, such as AmeriDream (http://www.ameridream.org/) and Nehemiah (http://www.nehemiahcorp.org/), and pay a "donation," plus a small fee. The buyer is then given a "gift" in the same amount to use for the down payment or closing costs.
The FHA has never officially condoned the practice, but after three studies indicated that the loans were riskier than those that didn't include down-payment gifts, they adopted a rule that prohibits these gifts. The rule, which went into effect on October 31, says the money can't come from the seller, directly or indirectly, or from "any other person or entity that financially benefits from the transaction."
Both AmeriDream and Nehemiah are suing the FHA to repeal the rule. In the meantime, both companies are allowed to continue giving the "gifts" until March 31.
Bottom line: gifts from friends or relatives are still okay, but make sure it's still legal before you accept an indirect "gift" from a seller.
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