Image: Esperto community in Santa Clarita
Gus Ruelas  /  AP
At Lennar's Esperto community in Santa Clarita, north of Los Angeles, the incentives were tied to six, finished row-style townhomes priced in the mid-$300,000 range. Buyers have to be able to close before Sept. 11, said Urban, the Lennar salesman.
updated 8/27/2008 12:05:59 PM ET 2008-08-27T16:05:59

Homebuilders are always trying to sell their homes, but these days they have an extra incentive — beating the clock.

In a few weeks, a financing option used by almost 20 percent of new-home buyers to help scrape together a down payment is going away, making it tougher for many people to become homeowners.

It's a loophole in the Federal Housing Administration rules that let builders and other home sellers channel money through a charity to help homebuyers cover their down payment.

But lawmakers axed the programs — effective Oct. 1 — because almost 40 percent of FHA borrowers who went into foreclosure since October had down payment assistance.

For borrowers who don't have any money for a down payment there "is a big incentive to buy now versus later, when you most likely won't have that option for you," said Robert Curran, an analyst with Fitch Ratings. "It makes a lot of sense (for builders) to do a lot of promotions on that."

For builders, losing the down payment assistance programs comes at a tough time.

Despite many months of price cuts, free kitchen upgrades and the like, builders have seen business slow to a virtual crawl. Sales of new, single-family homes climbed 2.4 percent between June and July, yet they're down more than 35 percent versus July last year, the Commerce Department said Tuesday.

While some builders have dismissed the loss of down payment assistance, others are taking steps to alert would-be buyers that they should buy now while the programs remain available.

"We're trying to let everyone know, 'Hey this is going away,'" said Brent Urban, a salesman for Lennar Corp., referring to a sales promotion running for one of the builder's developments in Santa Clarita, Calif.

Pulte Homes Inc. and Hovnanian Enterprises Inc. are both urging to visitors to their Web sites to take advantage of the down payment assistance programs before they expire. Video: Realtor offers high performance perk

Another reason for their urgency is that the minimum down payment for an FHA-insured loan is scheduled to go up from 3 percent to 3.5 percent on Oct. 1. That means buyers will have to come up with an extra $1,153 to buy a $230,700 home, the median price of a new home last month.

While many builders are continuing to lobby for the down payment assistance programs to be reinstated, many have changed tactics and are promoting the temporary tax credit for first-time homebuyers, which was also part of the housing stimulus law passed last month.

But the clock is also ticking on this deal. The tax credit of up to $7,500 and expires in less than a year.

Pulte has begun offering all buyers a discount at least equal to the tax credit through Sept. 15.

Beazer Homes USA Inc. is promoting the new housing tax credit, and recently staged an online seminar about it for consumers.

Lennar Corp. has also started a promotion at some communities, offering a $7,500 discount for first-time buyers, no closing costs and no down payment. In addition to the down payment assistance programs, the builder is offering to cover a down payment of up to 3 percent.

At Lennar's Esperto community in Santa Clarita, north of Los Angeles, the incentives were tied to six, finished row-style townhomes priced in the mid-$300,000 range. Buyers have to be able to close before Sept. 11, said Urban, the Lennar salesman.

But D.R. Horton Inc. Chief Executive Donald Tomnitz recently complained the loss of down payment assistance programs would not be offset by the new tax credit.

That's partly because the tax credit has to be repaid over 15 years, and buyers won't see a nickel until after they file their tax returns.

So some builders are exploring ways to give buyers some of their tax savings before they file their taxes.

"If you can come up with some way to monazite it ahead of time, it could help to offset the loss of that down payment assistance," said Nishu Sood, a Deutsche Bank analyst.

Ultimately, however, it's going to remain difficult for a builder to fully overcome when a buyer simply doesn't have enough cash to make their down payment.

"You can offer lower rates, you can offer further incentives," Sood said, "but if a homebuyer is going to have trouble coming up with a down payment, that's difficult to offset."

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