On Monday, October 1, 2007, the U.S. Department of Housing and Urban Development ("HUD") published its final rule (attached herein) governing seller-funded downpayment assistance gifts in connection with Federal Housing Administration ("FHA") mortgage loan transactions.
Generally, under current FHA rules and guidelines, in order for a mortgage to be eligible for FHA insurance, a borrower is required to make a 3% minimum investment in the transaction, which may be derived from certain permissible sources. This rule, which takes effect October 31, 2007, establishes that a borrower is prohibited from receiving certain seller-funded downpayment assistance in order to meet this 3% requirement. Notably, the rule prohibits downpayment assistance that "consists, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale: (i) the seller, or any other person or entity that financially benefits from the transactions; or (ii) any third party or entity that is reimbursed directly or indirectly by the seller, or any other person or entity that financially benefits from the transaction." 72 Fed. Reg. 56002, 56007 (Oct. 1, 2007).
In the preamble to the final rule, HUD emphasizes that the rule does not eliminate all privately-funded downpayment assistance. Instead, a borrower may receive downpayment assistance in an FHA transaction from, for example, family members, the borrower's employer, state or local governments, labor organizations, or charitable organizations that do not rely upon a party with a financial interest in the transaction for downpayment assistance. Moreover, while this rule prevents sellers from funding downpayments in their own home sale transactions, HUD states that the rule is not intended to preclude sellers from contributing to charitable organizations that provide downpayment assistance, as long as the contributions are unrelated to any properties sold by the seller.
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