Honesty is the best policy when getting a mortgage. Watch out for anyone who asks you to withhold information from the lender.

Some home buyers might be tempted, for example, to fudge the facts about the source of their down-payment money. A lender will assume that the down payment comes from savings. If the money comes as a gift or a grant, that fact has to be disclosed -- even if it means the borrower has to pay a higher interest rate or shell out for mortgage insurance.

This issue can come up when the buyer receives money from a down-payment assistance program. Here's how these programs work:

In most cases, the home buyer wants to get a Federal Housing Administration-insured mortgage, which requires a down payment of at least 3 percent. But the buyer hasn't saved that much money. Buyers are prohibited from receiving down-payment money directly from sellers, but buyers can receive down-payment money as gifts from nonprofit agencies. So the seller contributes the down payment (plus a fee) to a nonprofit agency. Then, at closing, the nonprofit gives the down payment to the buyer.

These procedures comply with the letter of the regulations that govern FHA-insured loans. The transaction is recorded on the HUD-1 settlement statement, a form that the federal Department of Housing and Urban Development requires for virtually all home mortgages. And the buyer never has the cash -- the nonprofit transfers the money directly to the settlement agent at closing.

In early autumn, a down-payment assistance program was advertising a way to give money to buyers without disclosing the transaction on the loan paperwork.

The e-mail advertisement, sent Sept. 22 by an entity called the SNAP program to mortgage brokers and real-estate investors, reads in part, "Now your buyers will never come up short." In the e-mail's list of the SNAP program's features, the first is, "Does NOT appear on the HUD-1." Another feature: "We set up a bank account in buyer's name."

The HUD-1 specifies the closing costs, interest rate and amount of down payment, among other things. Federal law requires disclosing side deals on the HUD-1.

"Any money that flows back and forth needs to be disclosed," says Bob Moulton, president of Long Island-based Americana Mortgage. Without making a judgment about the SNAP program, of which he has no direct knowledge, Moulton says the federal guidelines are clear: "If it's a full-documentation loan, everything needs to be properly disclosed. You need to provide the underwriter with a gift letter and we need to attach a statement to demonstrate that the donor has the financial wherewithal to give the money to the recipient."

It's a federal crime to make a false statement on a loan application, says Stephen Brandt, executive vice president for Countrywide Home Loans, "whether you're altering the source of the down payment, overstating your income, or improperly disclosing how long you've been employed."

Brandt is speaking generally and not about SNAP. Borrowers who falsify loan applications can be subject to criminal penalties. More likely, "there's always the risk of the mortgage company calling the loan due, which can create a real challenge for the borrower.

"The thing is, now more so than ever before, borrowers have options," Brandt continues. "Typically a borrower can find a loan option that allows for financing without having to be deceptive." Where borrowers often get into trouble, he says, "is allowing somebody to persuade them to make a false statement."

SNAP's e-mail refers recipients to the program's Web site, www.snapprogram.com, which now is blank save for the name and phone number of the Franklin Foundation. The foundation, based in Gaithersburg, Md., is a nonprofit down-payment assistance program. Its executive director is Scott Nash, who is denoted as the sender of the e-mail touting the SNAP program.

The Franklin Foundation offers a better-known product called the Key Grant, which operates like dozens of other down-payment assistance programs.

Nash did not respond to phone calls and e-mails. He did speak briefly to Kenneth Harney, a syndicated real-estate columnist who broke the story about the SNAP program. Nash told Harney that SNAP was "being put on hold." SNAP stands for "Sell Now Assistance Program."

SNAP's hiatus comes as cold comfort to Scott Syphax, president of The Nehemiah Program, the nonprofit that invented the down-payment assistance industry. He worries that the government will regulate the industry out of existence if the feds think too many nonprofits are cutting corners, enabling buyers to get unaffordable loans for inflated home values.

It incenses Syphax to hear that the SNAP program was advertising that the transaction doesn't appear on the HUD-1, and that the program sets up a bank account in the borrower's name. "You're clearly attempting to fool the underwriter and the lender as to where the down payment came from," he fumes. "If any down-payment assistance provider puts money in your account or gives you a check to put money in your account, they're clearly attempting to circumvent existing law."

Syphax says that mortgage brokers and real estate agents are always pressuring down-payment assistance providers to cut corners and shave fees. It's difficult, he says, for nonprofits without the track record or stability of Nehemiah to resist.

Told that he sounds disgusted, Syphax says, "I am, because I've been singing this song by myself for almost four years." This month, Syphax added a new verse to the old song: Nehemiah announced a code of conduct that it abides by, and asked other down-payment assistance providers to adopt similar standards. Nehemiah asked HUD, the federal housing department, to regulate the industry.

It's rare for an industry to request federal regulation, but at least two down-payment assistance programs have done so this year: Nehemiah and AmeriDream. The latter requested regulation in congressional testimony in March, when the House Financial Services Committee held hearings on a bill called the Zero Downpayment Act. (The bill wasn't enacted and probably will be introduced next year.)

AmeriDream's president, Ann Ashburn, suggested a partnership between down-payment charities and the federal government, "perhaps by ensuring a formal role for HUD-approved providers that demonstrate a clear, publicly minded commitment to our shared goal of increasing homeownership."

She advised that zero-down borrowers be required to demonstrate creditworthiness, and that they undergo pre- and post-home buyer counseling.

Nehemiah, too, wants some sort of formal relationship with HUD, but the housing department hasn't responded. A HUD spokesman didn't return an e-mail and phone call for this story.

Syphax says regulations and a code of standards are necessary because 30 percent of FHA borrowers get down-payment assistance. "It's not sort of a cottage activity anymore, but has become a major part of the home purchase world, especially for first-time and lower-income home buyers," Syphax says. "And in the absence of clear regulation, operational standards tend to drive down to the lowest common denominator, which usually is not in the best interest of the first-time home buyer that we all ostensibly seek to serve."

For home buyers, the biggest danger is that down-payment assistance will artificially inflate the home's price, so that the buyer borrows more than the house is worth. "What that leads to is a situation where the person walks into negative equity," Syphax says. With a mortgage done in accordance with Nehemiah's code of conduct, "the home buyer should walk into equity and not into instant non-equity."

Ashburn and Syphax say consumers should look for red flags and green flags when they deal with a down-payment assistance program:

Red flags

• "If the seller is told that they can deduct the cost of the down-payment assistance as a charitable contribution, that's a clear red flag," Syphax says. Ashburn adds: "A lot of people state that the contribution is deductible as a contribution to a charity, but let me tell you: It's not."
• "If they're trying to hide or conceal the transaction in any way, that's a red flag," Ashburn says.
• "If the down-payment assistance provider or anyone else in the transaction provides you personally with the down-payment assistance funds and asks you to deposit them into your bank account, that is a huge red flag," Syphax says. "It indicates they're attempting to fool the underwriters into showing that the funds were your funds."
• "If the seller is asked to re-sign documents in order to raise the purchase price, that is a red flag, and that's likewise for buyers," Syphax says. "If somebody comes back and tells you, 'We agreed on a purchase price of $100,000, but really we need to make it $105,000,' and the home buyer doesn't know what's going on but agrees to it, that ultimately harms the home buyer."
• Does the program pay kickbacks or referral fees to builders, real-estate agents or mortgage brokers? That's a bad sign, Syphax says. The organization is unlikely to go around blabbing about the practice, but you always can ask point-blank about the nonprofit's kickback policy and see what kind of reaction you elicit.
• Oftentimes, a builder, mortgage broker or real estate agent refers the buyer to a down-payment assistance program. Syphax says you should ask that person how he or she decides which down-payment provider to use. "And if the answer is based solely on cost, I would question whether the home buyer is best served by that recommendation."

Green flags

• Look for a down-payment assistance program that offers home-buying education. Most programs don't offer this, but a few do, including AmeriDream and Nehemiah. Both offer online courses.
• Similarly, ask what types of charitable activities the nonprofit does besides down-payment help to individuals. Some down-payment assistance providers operate community redevelopment programs, buying and fixing up abandoned houses, then selling them to low- and middle-income families. "If a down-payment provider is either just a mill for completing down-payment assistance transactions or merely a front for a for-profit corporation, then that should make some alarm bells ring in the ears of the prospective home buyer," Syphax says.
• Does the program provide materials in Spanish as well as English? If so, that's a sign of a thorough organization that's in the business for more than just a buck, Ashburn says.