April 28, 2019
The Department of Housing and Urban Development and the FHA have issued a Mortgagee Letter announcing changes to the rules for down payment assistance.
FHA loan program rules permit the borrower to get assistance with the minimum required down payment-this assistance can come in the form of gift funds from family or friends, money from employers, or even down payment assistance programs.
Government entities are permitted to provide such down payment help, too.
In all cases, the down payment assistance must meet FHA loan requirements. Gifts cannot be loans in disguise; there must be no expectation of repayment of a gift of down payment funds.
And now, thanks to revisions to the rules governing these issues in HUD 4000.1, government entities must meet certain requirements when providing down payment funds.
Mortgagee Letter 19-06 states, “It has come to FHA’s attention that certain Governmental Entities may be acting beyond the scope of any inherent or granted governmental authority in providing funds towards the Borrower’s MRI in circumstances that would violate Handbook 4000.1, the National Housing Act, and is contrary to established law.”
“In reviewing its current documentation requirements for Mortgagees, FHA has determined that those requirements should be clarified to provide Mortgagees with specific guidance regarding documentation that will give greater assurances that the standards for providing the MRI have been satisfied by the Governmental Entity”.
According to the mortgagee letter, “In accordance with the Prohibited Sources of Minimum Cash Investment Under the National Housing Act –Interpretive Rule, HUD does not interpret Section 203(b)(9)(C) of the National Housing Act to prohibit Governmental Entities, when acting in their governmental capacity, from providing the Borrower’s MRI where the Mortgage is being originated as part of a Governmental Entity homeownership program”.
But when a government entity provides down payment funds, it must now conform to certain changes in HUD 4000.1 which include a requirement that the lender must document that a government entity providing down payment assistance “as either a gift or through Secondary Financing,” is done in a manner that complies with federal laws including the National Housing Act.
“The Mortgagee must document that the Governmental Entity incurred prior to or at closing an enforceable legal liability or obligation to fund the Borrower’s MRI in its governmental capacity. It is not sufficient to document that the Governmental Entity has agreed to reimburse the Mortgagee for the use of funds legally belonging to the Mortgagee to fund the Borrower’s MRI.”
Borrowers getting down payment help through a government agency should be prepared for this additional layer of scrutiny on such funds and anticipate needing further documentation in such cases.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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