KENTUCKY FHA MORTGAGE – ACCEPTABLE DOCUMENTATION FOR DOWN PAYMENT FUNDS
PROVIDED BY FEDERAL, STATE OR LOCAL GOVERNMENTS
FHA recently released Mortgagee Letter 2013-14, requiring documentation that mortgagees must provide to demonstrate eligibility for FHA mortgage insurance of loans when a Federal, State, or local government, its agency or instrumentality, directly provides the borrower‘s required Minimum Cash Investment through secondary financing.
Acceptable forms of documentation include the following:
- A cancelled check, evidence of wire transfer or other draw request showing that prior to or at the time of closing the Government Entity had authorized a draw of the funds on its account provided towards the borrower’s required Minimum Cash Investment from the Government Entity’s account; or
- A letter from the Government Entity, signed by an authorized official, establishing that the funds provided towards the borrower’s required Minimum Cash Investment were funds legally belonging to the Government Entity at or before closing
Where a letter from the Government Entity is submitted, the precise language of the letter may vary because of differences in the funding and legal authority of each Government Entity. Examples of acceptable language, which would establish the funds were legally belonging to the Government Entity, would include the following:
- A statement that the Government Entity has, at or before closing, incurred alegally enforceable liability as a result of its agreement to provide the funds towards the borrower’s required Minimum Cash Investment;
- A statement that the Government Entity has, at or before closing, incurred alegally enforceable obligation to provide the funds towards the borrower’s required Minimum Cash Investment; or
- A statement that the Government Entity has, at or before closing, authorized a draw on its account to provide the funds towards the borrower’s required Minimum Cash Investment.
The mortgagee is not required to document the actual transfer of funds in satisfaction of the obligation or liability, which resulted from the funding of the borrower’s required Minimum Cash Investment by the Government Entity, before closing, provided the mortgagee has obtained documentation that a legally enforceable liability or obligation was incurred at or before closing. Where such documentation is provided establishing that a legally enforceable liability or obligation was incurred at or before closing, the funds provided at closing for down payment assistance will be considered by HUD to be funds legally belonging to the Government Entity. However, failure of the Government Entity to satisfy the obligation or liability may result in a determination that the funds were provided by a prohibited source.
Note, it is still required that you provide a Gift Letter for the borrower’s Cash to close, including the required Minimum Cash Investment, as described in HUD Handbook 4155.1 5.B.5. – a Gift Letter Requirement
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