FHA issues Mortgagee Letter 2019-06 related to Borrower’s Minimum Required Investment

• April 23, 2019
• Marissa Blundell

On April 18, 2019, the Federal Housing Administration (FHA) issued Mortgagee Letter 2019-06 which clarifies source requirements for a borrower’s Minimum Required Investment (MRI). In addition, the letter sets forth new documentation requirements which apply when the MRI includes funds from a government entity. The new documentation requirements are effective with case numbers assigned on or after April 18, 2019.

“MRI” refers to a Borrower’s required contribution in cash or its equivalent, and represents at least 3.5 percent of the adjusted value of the property. A Borrower’s MRI must be from a permissible source. No portion of a Borrower’s MRI may be provided by the seller of the property; or any other person or Entity who financially benefits from the transaction (directly or indirectly); or anyone who is or will be reimbursed, directly or indirectly, by any prohibited party. Despite these restrictions, MRI funds may be provided by family members, and by governmental entities, when acting in their governmental capacity and where the Mortgage is being originated as part of a governmental entity homeownership program.

Where any portion of the Borrower’s MRI is provided by a person or entity other than the Borrower, the Mortgagee must also obtain documentation to support the permissible nature of the source of those funds. Although FHA’s current handbook requires Mortgagees to confirm that a governmental entity is operating in its governmental capacity, except for requiring a source of funds letter, the handbook does not specify the necessary documentation that demonstrates support for such a conclusion.

Required Documentation for Governmental Entity Funds Included in Borrower’s MRI

With this letter, FHA clarifies Mortgagees must document that the Borrower’s MRI was provided by the governmental entity, as either a gift or through secondary financing, by obtaining the following required documentation.  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. The Mortgagee must document that prior to or at closing the governmental entity incurred an enforceable legal liability or obligation to fund the Borrower’s MRI in its governmental capacity.

1) Grant of Governmental Authority to Entity

For federal, state or local government agencies, mortgages must obtain a copy of documentation from a jurisdiction in which the property is located, which granted governmental authority to the entity;

2) Governmental Entity Attorney’s Written Legal Opinion

A written legal opinion (signed and dated within 2 years of the closing of the transaction) must be obtained from the attorney representing the entity and must indicate both of the following elements:

i.              the attorney has reviewed its downpayment assistance program; and

ii.            either

• the governmental entity is considered within the jurisdiction in which the property is located to be either a federal, or local government or agency or instrumentality thereof, as provided in Section 528 of the National Housing Act and further clarified in the handbook; or

• the governmental entity is a federally recognized Indian Tribe operating on tribal land in which the property is located or to enrolled members of the tribe; or

• the governmental entity is a Federal Home Loan Bank;

3) Evidence of the Provision of the Downpayment Assistance

Actual provision of the downpayment assistance by the governmental entity must be documented by collecting either:

• a letter from the governmental entity, signed by an authorized government official, establishing that the funds provided towards the Borrower’s MRI were provided in the governmental entity’s governmental capacity in the jurisdiction in which the property is located consistent with its downpayment assistance program and that the provision of such funds is not contingent upon any future transfer of the insured Mortgage to a specific entity, and a canceled check, evidence of wire transfer or other draw request showing that prior to or at the time of closing the governmental entity had authorized a draw of the funds provided towards the Borrower’s MRI from the governmental entity’s account;  or

• a letter from the governmental entity, signed by an authorized official, establishing that the funds provided towards the Borrower’s MRI were funds legally belonging to the governmental entity and were provided in the governmental entity’s governmental capacity in the jurisdiction in which the Property is located or for the federally recognized Indian Tribe’s enrolled member, consistent with its downpayment assistance program, at or before closing. The letter must make clear that the provision of the downpayment assistance is not contingent upon any future transfer of the insured Mortgage. Where such a letter from the governmental entity is submitted, the precise language of the letter may vary, but must demonstrate that the funds provided for the Borrower’s MRI legally belonged to the governmental entity at or before closing, by stating:

◾the governmental entity has, at or before closing, incurred a legally enforceable liability as a result of its agreement to provide the funds towards the Borrower’s MRI;

◾the governmental entity has, at or before closing, incurred a legally enforceable obligation to provide the funds towards the Borrower’s MRI; or

◾the governmental entity has, at or before closing, authorized a draw on its account to provide the funds towards the Borrower’s MRI

Mortgagees must either document the actual transfer of funds in satisfaction of the obligation or liability by the governmental entity prior to the submission of the Mortgage for insurance or obtain documentation of the satisfaction of the obligation or liability by the governmental entity after submission and maintain such documentation in the Mortgagee’s files.

Failure of Mortgagees to demonstrate the downpayment assistance provider has transferred the funds, failure of the governmental entity to satisfy the obligation or liability, or any demand for reimbursement or indemnification for such funds by the governmental entity may call into question whether FHA requirements have been met and result in a determination that the funds were, in fact, provided by a prohibited source. The full text of this Mortgagee Letter is available here: https://www.hud.gov/sites/dfiles/OCHCO/documents/19-06hsgml.pdf

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