No, because the funds are given back to the gift organization by the seller after the close. It’s legal because the program is operated by a 501(c)3 non-profit charitable organization, which is eligible to provide “gift” funds for the down payment under FHA guidelines (just like a family member could). The funding for the program is then provided after the close by the seller, so the program is reimbursed. They can’t get the funds from the seller before closing, or it would be considered a direct seller contribution to the down payment, expressly forbidden under FHA guidelines.
It’s definitely an unintended loophole, but one the FHA hasn’t been able to get legislated closed (and given current economic conditions, since it’s one of the few ways to get a 0 down, I don’t see politicians having the stomach to expressly close it in the near future). The FHA has, however, managed to exclude a LOT of these gift programs for violation of IRS rules regarding 501(c)3 charitable organizations (excessive fees, salaries, etc). The Nehemiah program, however, is still operational.
