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New HUD downpayment rules may hamper national programs

Citing increased default risk, the U.S. Department of Housing and Urban Development (HUD) is moving to restrict entities that provide downpayment assistance for Federal Housing Administration (FHA) loans.


Effective April 18, HUD is requiring new documentation for borrowers who are receiving funds from another entity to fulfill their downpayment. FHA rules require borrowers to provide a minimum downpayment of 3.5 percent of a home’s purchase price. The new guideline, set forth in Mortgagee Letter 19-06, specifically calls out groups that contribute to that minimum downpayment.

Downpayment help from outside entities, such as family members and government agencies, is common, featuring in about 40 percent of FHA mortgages. Although government agencies, per FHA rules, are allowed to offer downpayment assistance, HUD is reasserting a requirement that such agencies may only do so within their jurisdiction.

“It has come to FHA’s attention that certain Governmental Entities may be acting beyond the scope of any inherent or granted governmental authority in providing funds towards the Borrower’s [downpayment] in circumstances that would violate … the National Housing Act, and is contrary to established law,” the mortgagee letter stated.

Now, government-affiliated entities must provide documentation that the properties to be financed comply with jurisdictional guidelines.

As worded, the new guidelines won’t have much impact to local and state finance programs, which often provide downpayment aid to area residents. The move, however, will hamper national downpayment-assistance programs, many of which cater to minority borrowers. One such group, a federally chartered tribal entity known as the Cedar Band Corp., has already vowed to fight the new regulation in court, claiming that it discriminates against Native Americans. Cedar Band Corp. officially filed a lawsuit against HUD in Utah on Monday.

“Aside from its discriminatory effect, this new policy fails to do anything to reduce risk associated with FHA-insured mortgages,” said Paul Terry, CEO of the Cedar Band Corp. “HUD is using that claim as a smokescreen to obscure its real intent, and it’s consumers who will suffer.”

HUD has recently been proactive in enacting measures to fight increasing credit risk. Last month, the department updated FHA manual-underwriting standards to flag loans involving borrowers with lower credit scores and higher debt-to-income ratios.


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