On April 18, 2019 the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2019-06 setting forth new documentation requirements for down payment assistance provided by government entities to be used in connection with Federal Housing Administration (FHA) insured mortgage loans. Significantly, the new requirements are effective for case numbers assigned on or after April 18, 2019.
The new requirements apply when funds from a government entity will be used to pay a portion or all of the borrowers 3.5% minimum required investment (MRI) in the home purchase transaction. FHA mortgagees must document that the borrower’s MRI was provided by a government entity as either a gift or through secondary financing in a manner consistent with the National Housing Act and HUD Handbook 4000.1. Specifically, the new documentation requirements provide in part that mortgagees must obtain:
- For federal, state or local government agencies, a copy of documentation from a jurisdiction in which the property is located, which granted governmental authority to the entity;
- A legal opinion signed and dated within two years of closing of the transaction by attorneys for the governmental entity stating:
- The attorney has reviewed the governmental entity’s down payment assistance program; and
- The governmental entity is considered within the jurisdiction in which the property is located to be either a federal, state (as defined in Section 201(d) of the National Housing Act (12 U.S.C. §1707(d)), or local government or agency or instrumentality thereof, as provided in Section 528 of the National Housing Act (12 U.S.C §1735f-6), and 24 CFR 203.32(b) and further clarified in the Handbook 4000.1;
- 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;
- Evidence that the down payment assistance is being provided by the governmental entity 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 down payment 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 down payment assistance program, at or before closing. The letter must make clear that the provision of the down payment assistance is not contingent upon any future transfer of the insured mortgage.
The new requirements further specify that 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.
The immediate effective date of the new requirements will affect many transactions in progress, and in various cases may require a change of down payment assistance programs or other changes for the transaction to move forward. Government housing finance agencies and other government agencies that provide down payment assistance will need to assess the effect of the new requirements on their respective programs.
The new requirements will be incorporated into HUD Handbook 4000.1.