The cash investment in the property must equal the difference between the amount of the guaranteed mortgage and the total cost to acquire the property, including such items as prepaid expenses. Verification of the source and adequacy of the borrower’s funds to close is required prior to the issuance of a firm commitment. Acceptable sources of down payment include:
| 2. | Savings and checking accounts. |
| 7. | Sale of personal property. |
| 8. | Savings bonds and other similar certificates. |
| 10. | IRAs and Keogh accounts. |
| 12. | Private savings clubs. |
| a. | Amount. The borrower’s cash investment in the property must equal the difference between the amount of the loan, excluding the one percent guarantee fee, and the total cost to acquire the property, including prepaid expenses and other settlement costs paid by the borrower. Exhibit 5-2 provides an example of determining the borrower’s cash investment when the borrower pays the normal borrower’s closing costs and prepaids: |
Exhibit 5-2: Determining Borrower’s Investment
|
Appraised Value:
|
$120,000
|
Sales Price or Construction Cost:
|
$110,000
|
Allowable Closing Costs:
|
$ 4,000
|
Prepaid Expenses:
|
$ 2,700
|
FHA Mortgage Limit:
|
$ 95,000
|
|
A. Section 184 mortgage limit:
|
$95,000
x 150%
= $142,500
|
B. Loan-to-value cap based on appraised value:
|
$120,000
x 97.75%
= $117,300
|
C. Loan-to-value cap based on acquisition cost:
|
|
|
Sales Price or Construction cost plus closing:
|
$110,000
+ $4,000
= $114,000
|
Acquisition cost:
|
$114,000
|
Loan-to-value ratio based on acquisition cost:
|
$114,000
x 97.75%
= $111,435
|
Maximum mortgage amount (lowest of A, B, or C): (without the loan guarantee fee)
|
$111,435
|
Borrower’s Investment:
|
|
|
Sales or Construction Price:
|
$110,000
|
Allowable Closing Costs:
|
$ 4,000
|
Prepaid expenses:
|
$ 2,700
|
Total Cost to Acquire Property:
|
$116,700
|
Less Maximum Mortgage Amount:
|
$111,435
|
Equals Borrower’s Investment:
(without the loan guarantee fee)
|
$5,265
|
| b. | Settlement Items. The following items are not typically covered by the mortgage and are paid at settlement with borrower’s cash: |
| 1. | Pre-Paid Items collected at closing to cover accrued and unaccrued hazard premiums, taxes and interim interest, and similar fees and charges. |
| § | The lender must use a minimum of 15 days of interim interest in its estimate of prepaid items. A 365-day year is used when calculating interim (per diem) interest. |
| § | Prepaid expenses must be paid in cash (unless the lender funds the prepaid items by charging a premium interest rate). |
To reduce the burden on some borrowers whose loans were scheduled to close at the end of the month but did not due to unforeseen circumstances, lenders and borrowers may agree to credit the per diem interest to the borrower and have the mortgage payments begin the first of the succeeding month. However, this procedure is only permitted on those loans that close within the first seven calendar days of the month.
| 2. | Discount Points that are not eligible for inclusion in the mortgage. |
| 3. | Non-Realty or personal property items that the borrower agrees to pay for separately. This also includes any amount subtracted from the sales price in determining the maximum mortgage. |
| 4. | Non-Financed Closing Costs such as commitment fees for guaranteeing the rate or points, and fees such as any buyer-broker fees or any such allowable fee not previously included in calculating the minimum cash investment. |
| 5. | Repairs and Improvements to be paid by the borrower that are not eligible for inclusion in determining the maximum mortgage amount. |
From the total amount needed above to close the loan i.e. the borrower’s required cash investment, subtract any amounts already paid by the borrower (including the earnest money deposit) and any allowable fees paid outside of closing such as the appraisal and credit report fees.
| c. | Verification. The source and adequacy of all funds used for the borrower’s investment in the property must be verified. Paragraph 5.23c(16) of this guidebook discuss verification of the borrower’s funds to close the loan. |
| d. | Funds to Close. Acceptable sources of the borrower’s funds to close include: |
| 1. | Earnest Money Deposit. If the amount of the earnest money deposit exceeds two percent of the sales price or appears excessive based on the borrower’s history of accumulating savings, the lender must verify the deposit amount and the source of funds. |
Satisfactory documentation includes a copy of the borrower’s cancelled check. HUD will also accept a certification from the deposit holder acknowledging receipt of funds and separate evidence of the source of funds. Evidence of source of funds includes a verification of deposit or bank statement showing that the average balance at the time the deposit was made was sufficient to have included the earnest money deposit. Cash-on-hand is discussed below [see paragraph 5.9d(10)].
| 2. | Savings and Checking Accounts. A verification of deposit (VOD) obtained directly from the depository may be used to verify these accounts, along with the most recent bank statement or the originals or certified copies of the last two or three month bank statements. See paragraph 5.23c(16). If there is a large increase in an account, or the account was opened recently, an explanation and evidence of source of funds must be obtained by the lender. |
| § | An outright gift of the cash investment or of equity in the property is acceptable if the donor is: a relative of the borrower, the borrower’s employer or labor union, a charitable organization, a governmental agency or public entity (such as the IHA/TDHE or tribe) that has a program to provide homeownership assistance to low- and moderate-income families or first-time homebuyers, or a close friend with a clearly defined interest in the borrower. |
| § | No repayment of the gift may be expected or implied. A "gift letter" stating this is required. The gift letter must be signed by the donor and the borrower and must show the donor’s name, address, telephone number and relationship to the borrower. The lender must document the transfer of funds from the donor’s account to the borrower’s account. This may include obtaining a copy of the donor’s withdrawal slip or cancelled check, along with the borrower’s deposit slip or bank statement showing the deposit. If the funds are not deposited to the borrower’s account prior to closing, the lender must obtain verification that the closing agent received certified funds from the donor for the amount of the gift. |
| § | A gift from any other source is considered an inducement to purchase and requires a reduction in the sales price. Except for eligible donors as described above, the donor of the gift or equity credit may not be a person or entity with an interest in the sale of the property, such as the seller, real estate agent or broker, builder, or any entity associated with them. Gifts or credits from these sources must be treated as sales concessions, must be subtracted from the sales price, and may not be considered as assets to close. This includes foreclosed properties sold by a government agency. |
| § | Borrowers may borrow against any collateral authorized under federal, state, or tribal law that is sufficient to meet the amount of borrower investment required. Examples of various types of collateral are discussed below. |
| § | Funds can be borrowed for the required investment as long as satisfactory evidence is provided that these funds are fully secured by existing marketable assets, which are not the subject property. These assets may include: |
| § | A first or second mortgage on real estate (other than the property being purchased). |
| § | Personal property such as automobiles or boats. |
| § | Cash (but not funds required to close the subject transaction), notes, an interest in securities, royalties, or annuities. |
| § | Any other property that is transferable and whose value can be determined. |
Individuals with an interest in the subject transaction such as the seller, builder, contractor, real estate agent or broker, lender, etc. may not provide borrowed funds.
| § | An IHA/TDHE or Tribe may lend a Tribal member the monies for the cash investment. This loan may be a second mortgage against the subject property with a monthly mortgage payment. When a monthly payment is required, the combined financing (i.e., the Section 184 loan and the Tribal/TDHE/IHA/ loan) may not exceed 100 percent of the lesser of: |
| § | Contract price plus normal closing costs, prepaids and discount points. |
Cash back to the borrower is not acceptable (beyond refund of borrower’s own funds paid as earnest money deposit). The second mortgage must have equal monthly payments and may not contain any balloon provisions. This loan will be added to the borrower’s monthly debt. The Program ONAP will consider requests for waiver of this policy when other factors are present (i.e., very low ratios, borrower is making some of the cash investment, amount of the second mortgage is minimal).
| § | Unless the borrower provides satisfactory evidence that the borrowed funds do not require repayment (e.g., some thrift and retirement plans or various loans secured by deposited funds or a soft second mortgage from the tribe or IHA/TDHE), the monthly debt resulting from the loan must be included in the borrower’s qualifying ratios. |
Unacceptable borrowed funds include signature loans, cash advances on credit cards, and similar unsecured financing.
However, family members [defined as a child (son, stepson, daughter, stepdaughter), parent, or grandparent, of the borrower or the borrower’s spouse] may lend on a secured or unsecured basis 100 percent of the buyer’s required investment including down payment, closing costs, prepaids and discount points.
The combined amount of financing (i.e. , the Section 184 loan and the family member loan) may not exceed 100 percent of the lesser of the property’s value or sales price, plus normal closing costs, prepaid expenses and discount points. Cash back to the borrower (beyond refund of the borrower’s own funds paid as an earnest money deposit) at closing is not acceptable.
If periodic payments of the family member’s secondary loan are required, the combined payments of the Section 184 loan and the family member’s financing may not exceed the borrower’s ability to pay. The secondary financing payment (if any) must be included in the borrower’s total debt-to-income ratio.
The secondary financing may not provide for a balloon payment within five years from the date of execution of the financing agreement. If the family member providing the secondary financing borrows those funds, the source may not be any entity with an interest in the sale of the property.
| 5. | Tribe/TDHE Down Payment/Buydown Assistance.Tribe/TDHE down payment or buydown assistance is acceptable (reference Gift Funds and Secured Funds above); however, there are some limitations on who can receive the assistance depending on the source of funds. The lender will want to ensure that the borrower is income eligible for the assistance to expedite the loan approval process and avoid submitting loan packages, which cannot be approved. The tribe/TDHE will generally provide assistance under one of the following categories: |
| § | Tribe/TDHE’s Own Funds. The tribe/TDHE may provide assistance from their own tribal funds to whomever they choose. In this case, the tribe/TDHE (donor) should provide a certification that the source of assistance is from their own funds and not provided from NAHASDA, HOME funds or any HUD source of funds. |
| § | Tribe/TDHE NAHASDA Funds.Assistance is generally limited to families with income at or below 80 percent of median income. |
| § | Up to 10 percent of the tribe/TDHE’s grant funds can be used for families whose income falls within 80 to 100 percent of median income. If the borrower falls within this category, the tribe/TDHE should provide a certification that they have not exceeded the 10 percent limit. |
| § | If the tribe/TDHE wishes to assist a borrower whose income exceeds 100 percent of the median income, the tribe/TDHE must obtain approval from HUD (reference NAHASDA Bulletin 98-15). A letter documenting this approval must be included in the file. This approval is required under Title II of NAHASDA. |
| § | Indian Home Funds. Recipients of these funds may not exceed the applicable income limits of the program. The tribe/TDHE should provide documentation verifying that the borrower’s income does not exceed these limits. |
| § | The tribe/TDHE can choose to structure the down payment assistance in whatever form they choose; i.e., gift with no repayment, soft second mortgage with a forgivable period of time, promissory note with repayment requirements, etc. The lender must obtain from the tribe the documentation regarding the applicable type of assistance. |
| § | For secured financing with a monthly payment requirement, please reference paragraph 5.9d(4) for additional information. |
| 6. | Sales Proceeds. The net proceeds from an arms-length sale of a currently owned property may be used for the cash investment on a new house. A certified true copy of the fully executed HUD-1 Settlement Statement must be provided as satisfactory evidence of the cash sales proceeds accruing to the borrower. If the property has not sold as of the time of underwriting, the borrower approval must be conditioned upon verifying the actual proceeds received by the borrower. The lender must document both the actual sale and the sufficiency of the net proceeds required for settlement. |
| 7. | Trade Equity. The borrower may agree to trade his or her property to the seller as part of the cash investment. The amount of the borrower’s equity contribution is determined by subtracting all liens against the property being traded plus any real estate commission due from the lesser of that property’s appraised value or sales/trade price. Evidence of ownership is also required. |
The appraisal must be a residential appraisal (conventional, HUD, or VA) and not more than six months old on the date of the trade. Additionally, if the property being traded has a HUD-FHA insured mortgage, HUD-FHA assumption processing requirements and restrictions apply.
| 8. | Sale of Personal Property. If the borrower intends to sell personal property items (such as cars, recreational vehicles, stamp, coin, or baseball card collections) to obtain funds required for closing, in addition to conclusive evidence the items have been sold, the borrower must provide a satisfactory estimate of their worth. The estimated worth of the items being sold may be in the form of published value estimates, such as those issued by automobile dealers, philatelic or numismatic associations or a separate written appraisal by a qualified appraiser. Only the lesser of this estimate of value or the actual sales price less any obligation(s) secured by the personal property, is considered as assets to close. The assets received must be deposited and verified. See paragraph 5.23c(16). |
| 9. | Savings Bonds and Other Similar Certificates. Government-issued bonds are counted at original purchase price unless eligibility for redemption and redemption value are determined. Actual receipt of funds at redemption must be verified. |
| 10. | Cash on Hand. Cash on hand is an acceptable form of borrower cash for the Section 184 Program. At the time of application, the lender will verify the funds that must then be deposited with the lender or another financial institution. The asset verification process requires that the borrower explain how such funds were accumulated and the amount of time taken to do so. The lender must determine the reasonableness of the accumulation based on the borrower’s income stream, the time period of savings, spending habits, and history of using financial institutions. |
| 11. | Individual Retirement Accounts (IRAs) and Keogh Accounts. Only the net amount of IRAs and Keogh accounts, after subtracting federal income tax and withdrawal penalties, may be considered as assets to close. Evidence of redemption is required. |
| 12. | Stocks and bonds. When the borrower claims assets through the sale of stocks and bonds, the value of these securities must be verified from the stockbroker or by photocopies of the stock certificates along with a dated newspaper stock price list. Actual receipt of funds must be verified. |
| 13. | Private Savings Clubs. If a borrower claims that the cash to close the mortgage is from savings held with a private savings club, the borrower must be able to adequately document the accumulation of those assets with the club. There must exist account ledgers, receipts from the club, verification from the club treasurer as well as identification of the club that would permit the lender to re-verify information provided. The lender must be able to make a determination that it was reasonable for the borrower to have saved the dollars claimed and that there is no evidence these funds were borrowed with the expectation of repayment. |
| 14. | Sweat Equity. Labor performed or materials furnished by the borrower on the property being purchased may be considered as the equivalent of a cash investment to the extent of the estimated cost of the work or materials. (Sweat equity may be "gifted" subject to both the gift requirements and additional requirements shown below.) Additionally: |
| § | On existing construction, only the repairs or improvements listed on the appraisal or work plans or specifications are eligible for sweat equity. Any work completed or materials provided before the appraisal is made are not eligible. On proposed construction, the sales contract must indicate the work to be performed by the homebuyer during the construction. |
| § | The borrower’s labor may be considered as the equivalent of cash if the borrower can demonstrate his or her ability to complete the work in a satisfactory manner. The lender must document the contributory value of the labor through either the appraiser’s estimate or a cost estimating method. |
| § | Delayed work (on-site escrow), clean-up, debris removal and other general maintenance cannot be included as sweat equity. |
| § | There can be no cash back to the borrower in these transactions. |
| § | Sweat equity on a property other than the property being purchased is not acceptable. Compensation for work performed on other properties must be monetary and be properly documented and verified if the funds will be used to close the subject transaction. |
| § | If materials are furnished by the borrower evidence of the source of funds used to purchase and the market value of the materials must be provided. |
| § | Sweat equity cannot be used as a source of down payment funds on a single close loan. However, funds remaining after completion of the work can be used to pay down the mortgage. |
| 15. | Commission from Sale. If the borrower is entitled to a real estate commission from the sale of the property being purchased, that amount may be used as part of the cash investment. No adjustment to the maximum mortgage is required. |
| 16. | Rent Credit. That portion of the rental payment that exceeds the appraiser’s estimate of fair market rent may be considered accumulation of the borrower’s cash investment. The rent with option to purchase or other rent credit agreement and the appraiser’s estimate of market rent must be included in the loan package. |
If the sales agreement reveals that the renter has been living in the property (or one owned by the seller) rent-free, or that an agreement was made allowing the renter to occupy at a rental amount considerably below fair market in anticipation of eventual purchase of the property, this must be treated as an inducement to purchase with an appropriate reduction to the sales price when calculating the borrower’s acquisition cost. Exceptions may be granted in situations such as where a builder fails to deliver the property at an agreed-to time and then permits the borrower to occupy that or another unit for less than market rent temporarily until construction is complete. Program ONAP will give special consideration on IHA/TDHE or tribal assumptions of rental property.
