U. S. Department of Housing and Urban Development
Washington, D.C. 20410-8000
August 7, 2000
MORTGAGEE LETTER 00-28
TO: ALL APPROVED MORTGAGEES
SUBJECT: Gift Documentation, Mortgage Forms and other Credit
Policy and Appraisal Issues
This Mortgagee Letter is to advise lenders on several
important credit policy issues. Unless otherwise noted, these
policies are effective immediately.
Gift Transfer Documentation
As part of HUD's recently announced initiatives to address
predatory lending practices targeted at FHA borrowers, it has
revised its procedures for verifying the transfer of gift funds
from private individual donors to homebuyers, as well as the
required contents of the gift letter itself. These reforms are
intended to ensure to the greatest extent possible that the gift
funds were in fact the donor's own and are not derived from an
unacceptable source. The donor must be able to furnish
conclusive evidence that the funds given to the homebuyer came
from the donor's own funds and, thus, were not provided directly
or indirectly by the seller, real estate agent, builder, or any
other entity with an interest in the sales transaction.
The gift letter, as always, must specify the dollar amount
given, be signed by the donor and the borrower, state that no
repayment is required, and show the donor's name, address,
telephone number, and relationship to the borrower. It now must
also contain language asserting that the funds given to the
homebuyer were not made available to the donor from any person or
entity with an interest in the sale of the property including the
seller, real estate agent or broker, builder, loan officer, or
any entity associated with them.
In addition to the existing instructions regarding gift
funds outlined in the mortgage credit analysis handbook (HUD
4155.1 REV-4, Chg. 1), the verification process described below
must be met.
If the gift funds are in the homebuyer's account:
The lender must document the transfer of the funds from the
donor to the homebuyer by obtaining a copy of the canceled
check or other withdrawal document showing the withdrawal is
from the donor's personal account, along with the homebuyer's
deposit slip or bank statement that shows the deposit.
If the gift funds are to be provided at closing
If the transfer of the gift funds is by certified check made
on the donor's account, the lender must obtain a bank
statement showing the withdrawal from the donor's personal
account as well as a copy of the certified check.
If the donor purchased a cashier's check, money order,
official check or any other type of bank check as a means of
transferring the gift funds, then the donor must provide a
withdrawal document or canceled check for the amount of the
gift showing the funds came from the donor's personal account.
If the donor borrowed the gift funds and, thus, cannot provide
the documentation from his or her bank or other savings
account, the donor must provide evidence that those funds were
borrowed from an acceptable source, i.e., not from a party to
the transaction including the mortgage lender. "Cash on hand"
is not an acceptable source of the donor's gift funds.
Regardless of when the gift funds are made available to the
homebuyer, the lender must be able to determine that the gift
funds were not ultimately provided from an unacceptable source
and were indeed the donor's own funds. When the transfer occurs
at closing, the lender remains responsible for obtaining
verification the closing agent received funds from the donor for
the amount of the purported gift.
When FHA reviews the performance of a lender on loans where
gift funds were provided for the downpayment, it must be able to
trace the gift funds from the donor to the homebuyer. In cases
in which irregularities occurred with respect to the gift as a
result of a lender not complying with the Department's
requirements there may be grounds for administrative action and
the lender may be referred to the Mortgagee Review Board for the
imposition of administrative sanctions or civil money penalties.
If the loan application was underwritten by a FHA-approved
automated underwriting system and the gifts funds are already in
the homebuyer's account, then the documentation requirements
stated in the appropriate user guide are to be met. This revised
process for gift transfer verification is effective for all
initial loan applications signed on or after 30 days from the
date of this mortgagee letter.
Mortgage Forms
Fannie Mae and Freddie Mac recently announced changes to
their standard mortgage forms, last amended in 1990. Use of the
newly revised forms becomes mandatory for all Fannie Mae and
Freddie Mac mortgages on January 1, 2001. The introductory
section of the Fannie Mae/Freddie Mac mortgage form has been
changed in the new revision, however, use of the new language is
not yet required. As a result, the instructions in HUD Handbook
4165.1 (requiring use of the introductory language and non-
uniform covenants from the "most recent approved" Fannie Mae
mortgage, along with uniform covenants from the FHA Model
Mortgage form in Handbook 4165.1) may be confusing, as lenders
may be uncertain what language is the "most recent approved"
Fannie Mae language.
FHA is currently in the process of reviewing the Fannie Mae
revisions, and evaluating what amendments will need to be made to
Handbook 4165.1 with respect to FHA-insured mortgages. Until
that review process is completed, lenders are advised to continue
using the introductory language and non-uniform covenants from
the 1990 Fannie Mae forms, along with the uniform covenants from
the FHA Model Mortgage form. Lenders will be advised of any
changes to FHA requirements as soon as the review process is
completed. Reverse mortgages under FHA's Home Equity Conversion
Mortgage (HECM) are not affected by these revisions.
Advance Mortgage Payments Prohibited
We do not permit, as a condition for making a FHA insured
mortgage, a lender to collect from the borrower advance
payment(s) of the mortgage. Borrowers are not to be required to
write post-dated checks, give cash, or otherwise make mortgage
payments to the lender in advance of the borrowers mortgage
payment requirements under the security instruments.
Cash Reserves
Although cash reserves after closing are not required on FHA
insured mortgage transactions (except on 3- and 4-unit purchase
transactions), cash reserves are considered in the risk
assessment of all automated underwriting systems that we have so
far approved. Recently, we have observed lenders using
questionable assets for both cash to close and cash reserves when
submitting data to the various automated underwriting systems.
Often, the asset was either overvalued or unlikely to be
converted to cash without considerable effort.
In determining if an asset can be included as cash reserves
or cash to close, the lender must judge whether or not the asset
is liquid or readily converted to cash and can be done so absent
retirement or job termination. Assets such as 401(k)s, IRAs,
thrift savings plans, etc., may be included in the underwriting
analysis up to only 60 percent of value unless the borrower
provides credible evidence that a higher percentage may be
withdrawn after subtracting any federal income tax and any
withdrawal penalties.
Funds borrowed against these accounts may be used for loan
closing, but are not to be considered as cash reserves. "Assets"
such as equity in other properties and the proceeds from a cash-
out refinance are not to be considered as cash reserves.
Similarly, funds from gifts from any source are not to be
included as cash reserves. (We will revise our mortgage credit
analysis worksheet (HUD-92900-PUR) to reflect this policy in the
near future.)
Energy Efficient Mortgages (EEMs) and Automated Underwriting (AU)
Currently, no FHA-approved automated underwriting system
includes FHA's Energy Efficient Mortgages within its product
offerings. To accommodate lenders using automated underwriting
systems and funding EEM loans, if the lender obtains an "accept"
or "approve" on a mortgage loan application prior to adding the
energy efficient improvements, FHA will recognize the risk rating
from the AU system and permit the increased mortgage payments
without re-underwriting or rescoring provided that the lender's
Direct Endorsement underwriter attests that he or she has
reviewed the calculations associated with the energy efficient
improvements, and found the mortgage and the property to be in
compliance with FHA's underwriting instructions. This language
should appear in the remarks section of the mortgage credit
analysis worksheet or on a separate document in the case binder.
Acceptance of VA Appraisals:
In accordance with current Federal law, the Department will
accept single family (excluding condominiums) proposed
construction, under construction and newly constructed properties
one year old or less which were pre-approved by VA, and these
properties are eligible for high ratio (greater than 90 percent)
loans using FHA mortgage insurance.
VA and FHA appraisal procedures have substantially changed
since the agencies originally agreed to accept each others
appraisals. Now, FHA allows appraisers to be listed on the FHA
Roster of Appraisers only after passing an examination on FHA
requirements. FHA appraisers are also now monitored and their
appraisals are reviewed in a much different manner than
previously. For this reason, FHA will accept appraisals
originally done for VA only if the appraiser is on the FHA Roster
of Appraisers. This applies to appraisals performed at all
stages of construction.
In addition to the above requirement, in order to be
acceptable for FHA insurance, VA appraisals on existing
construction must include the FHA Valuation Condition form (HUD-
92564-VC) and the Homebuyer Summary (HUD-92564-HS). This also
includes properties that are appraised after construction as 100
percent complete but are a year or less old. The Valuation
Conditions form and the Homebuyer Summary are not required on
proposed construction or property which is under construction;
however, all other required documentation must be provided n the
FHA case binder.
Clarification to Mortgagee Letter 00-8
Attachment I of Mortgagee Letter 00-8 states that "nonprofit
agencies may also refinance existing indebtedness but may not use
FHA mortgage insurance to draw out equity." The intent of this
language was to preclude cash-back refinances when refinancing a
mortgage already insured by FHA. To clarify, the use of FHA
insurance for refinancing is not acceptable unless the existing
mortgage is currently FHA insured and may never result in drawing
out equity. Our policy is that nonprofit agencies may refinance
existing FHA indebtedness but may not use FHA mortgage insurance
to draw out equity.
If you have any questions regarding this mortgagee letter,
please contact your Homeownership Center in Atlanta (888) 696-
4687; Denver (800) 543-9378; Philadelphia
(800) 440-8647; or Santa Ana (888) 827-5605.
Sincerely,
William C. Apgar
Assistant Secretary for Housing-
Federal Housing Commissioner