FHA Formally Announces Extension of Effective Date on DPA Restrictions

On April 25, 2019, FHA issued Mortgagee Letter 2019-07, formally announcing the previously-reported extension of the effective date of Mortgagee Letter 19-06, regarding documentation requirements for FHA loans with borrower downpayment assistance provided by a Governmental Entity.  

The guidance set forth in Mortgagee Letter 19-06 is set to apply to all loans with FHA case numbers assigned on or after July 23, 2019, rather than the originally published date of April 18, 2019.  FHA states that this extension will permit time for Governmental Entities to prepare the documentation described in this Mortgagee Letter.

On April 18, 2019, FHA issued FHA Info #19-11 and Mortgagee Letter 19-06, setting forth specific documentation requirements for FHA loans where a Governmental Entity is providing downpayment assistance (DPA) that is part of the borrower’s Minimum Required Investment (MRI).  Officially, these requirements clarify existing HUD policy, but as a practical matter, they significantly limit the ability of “Governmental Entities” to provide downpayment assistance that covers all or part of the borrower’s minimum required investment (MRI).  At least one legal challenge to the Mortgagee Letter was filed, which resulted in HUD agreeing to delay the effective date, which has now been formalized, as noted above.  The preliminary injunction hearing in connection with that suit is currently scheduled for July 16, 2019. 

All of the restrictions discussed below refer specifically to DPA that covers all or part of the borrower’s MRI, but some of the restrictions could have additional implications for other DPA as well.

The main changes announced in the Mortgagee Letter concern: 1) the geographic scope of the downpayment assistance that Governmental Entities can provide; 2) the documentation that a Mortgagee must collect in order to document that the DPA is from a permissible source; and 3) limitations on the ability of the Governmental Entity to recoup the funds that it uses to fund the DPA.

In terms of geographic scope, HUD will require Governmental Entities to be a federal, state, or local government, or an agency or instrumentality thereof, “within the jurisdiction in which the Property is located.”  HUD will further permit federally recognized Indian Tribes to provide DPA only when “operated on tribal land in which the Property is located or to enrolled members of the tribe.”  HUD has expressed informally for some time that a Governmental Entity must operate with the authorization of the jurisdiction in which it is providing DPA—this formalizes and expands that restriction.

The Mortgagee Letter requires a significant amount of additional documentation for DPA from Governmental Entities, beyond what was previously required by HUD Handbook 4000.1.  In particular, the Mortgagee must obtain:  documentation of governmental authority from the jurisdiction where the property is located (for federal, state, or local government agencies); a legal opinion from the Governmental Entity’s attorney confirming the entity’s status; and very specific evidence that the DPA is really being paid by the Governmental Entity, at or before closing.

Finally, the documentation requirements set forth in the Mortgagee Letter specify that the provision of DPA funds may not be “contingent upon any future transfer of the insured Mortgage to a specific entity.”