The $1,000 down payment program at Continental Home Loans is on borrowed time, but the Melville company's chief executive, Mike McHugh, knew it might have a short life.

The crux of the program - seller-funded down payments through housing nonprofits - will no longer be legal on loans backed by the Federal Housing Administration, which requires a minimum down payment. Starting Oct. 1, the new Housing and Economic Recovery Act bars such seller-financed help on FHA-insured loans and raises the minimum down payment to 3.5 percent of the price, from 2.25 percent to 3 percent, depending on the program.

"They're throwing it out without considering the benefits of the program," McHugh said. "Some people have done it poorly, and we all pay the price for programs done poorly."

The practice, usually done with guidance from lenders and housing advocates, has been controversial. To attract a buyer, the seller would "donate" funds to a housing nonprofit, which would then "grant" a down payment to the buyer in return for getting a real donation, usually $500, from the seller. Federal officials said this led to inflated sales prices and higher default rates because unqualified buyers got around the minimum down payment rule.

When FHA tried to shut down the widely used practice, it was sued by the nonprofits last year.

Under Continental's program, the buyer would come up with $1,000, and as a seller's incentive the homeowner would give the rest of the required down payment.

It's been a good run for Continental since the program's inception eight months ago. At least 100 deals have been closed as well as sales under other loan programs, McHugh said.

In the pipeline are 30 to 40 loans with a chance of being approved before the law's provision kicks in, McHugh said. He said e-mails and letters about the Oct. 1 deadline have been sent to interested buyers, sellers, agents and others in the program; the loans have to be approved by then, but the closings can take place later.

McHugh, who said the program sought qualified buyers, believes seller-funded help should be allowed, but with restrictions, including higher credit scores for buyers to limit risks.

Some lawmakers have filed bills to reinstate the practice on FHA loans. The day after the housing measure became law, Rep. Al Green (D-Texas) introduced a bill that would set up categories of buyers, based on credit scores. Those with scores below 679 would have to pay more insurance, but the amounts above normal insurance levels would be refunded after some years of on-time payments.

McHugh is optimistic that his $1,000-down program will return in some form. "There'll be something to take its place somewhere down the road," he said. "If it's done well, it can be a viable program."

Copyright 2008 Newsday, Inc.