HUD Issues Rules for Borrower Minimum Investment Funded by Government Entity
by: Michelle Peters
On May 10, 2013, HUD issued FHA Single Family Mortgagee Letter ML 2013-14: Mortgagee Letter Minimum Cash Investment and Secondary Financing Requirements – Acceptable Documentation for Funds Provided by Federal, State, or Governments, their Agencies or Instrumentalities (Government Entity).
The letter provides standards of required documentation that mortgagees must provide in order to prove eligibility for FHA mortgage insurance when the borrower’s Minimum Cash Investment is funded by a Government Entity. Also addressed in this Mortgagee Letter is guidance regarding circumstances where a Government Entity extends secondary financing which serves as the Minimum Cash Investment. All documentation requirements set forth will be effective as of July 1, 2013.
Background of topic:
All funds for a borrower’s Minimum Cash Investment that are required to close an FHA-insured mortgage must be documented as belonging to the borrower or having been provided by a permissible source. The Minimum Cash Investment is based on the appraised value of the property and must be equal to or greater than 3.5%. The seller or any person/entity in which benefits from the transaction cannot provide assistance with the Minimum Cash Investment. All mortgagees are responsible that compliance with these guidelines, found in section 203(b)(9)(A) and (C) of the NHA.
Based on the Interpretive Rule, Docket No. FR-5679-N-01 that was published by HUD on 12/5/2012 of section 203(b)(9) and (C), Government Entities (Federal, State, or local government and their agencies or instrumentalities) may provide funds directly toward the Minimum Cash Investment as part of homeownership programs. Funds from these sources will not prohibit FHA from originating homeownership program loans; these loans do meet the Minimum Cash Investment guidelines. FHA has streamlined the documentation process of Government Entities in FHA insured transactions.
Documentation that is acceptable:
The mortgagee must provide documentation to reflect that the Government Entity obtained an enforceable legal liability or obligation to fund the borrowers Minimum Cash Investment; this must be obtained prior to or at closing. Documenting the legal liability or obligation of funds will prove the permissible source of the required Minimum Cash Investment.
Documentation sources include, prior to or at closing:
- Cancelled check, evidence of wire transfer showing the Government Entity had authorized the draw of funds towards the borrower’s required Minimum Cash Investment from the Government Entity’s account, OR
- A letter signed by and authorized official within the Government Entity, confirming that the funds provided towards the borrower’s Minimum Cash Investment were derived from funds that legally belonged to the Government Entity at or before closing. If a letter is provided by the Government Entity, acceptable verbiage that establishes the funds legally belonged to the Government Entity would include:
- a statement reflecting a legally enforceable liability or a legally enforceable obligation has been incurred as a result of the agreement to provide funds towards the borrower’s Minimum Cash Investment, before or at closing; or
- a statement that the Government Entity has authorized a draw on its account in order to provide the funds towards the borrower’s Minimum Cash Investment.
If the funds are provided towards the transaction prior to closing, the mortgagee is not required to document the actual transfer of funds as long as the acceptable documentation has been obtained; if documented appropriately, HUD will consider the funds to have been legally belonging to the Government Entity. If the Government Entity has not satisfied that liability or obligation requirement, HUD may determine the funds were provided from a prohibited source.
The second part of this Mortgagee Letter is in regards to secondary financing on the behalf of Government Entities: FHA provides important recognition of the compliance with state and local laws regarding down payment assistance from Government Entity’s in the form of secondary financing. An FHA-approved mortgagee or FHA-approved non-profit may provide secondary financing on behalf of a Government Entity; the mortgagee or non-profit may not be a prohibited source. The Government Entity must be documented as providing the secondary financing prior to the submission of the primary mortgage to HUD via the Direct Endorsement Process for Insurance or the endorsement for insurance thru the Lender Insurance process.
FHA Single Family / Mortgagee Letter ML 2013-14 can be viewed in its entirety in AllRegs at the following link:
http://www.allregs.com/ao/main.aspx?did2=284e40fc12fe41be88770d7a0ac7a21c
About the Author:
Michelle is Vice President and Chief Information Officer at Bankers Advisory. She can be reached at michelle@bankersadvisory.com
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Michelle oversees the mortgage information security, vendor management, and pre-funding services, and manages the QC processing department. She received her associate's degree at the New England College of Finance and is a BA candidate at Bentley University.
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