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U. S. Department of Housing and Urban Development
Washington, D.C. 20410-8000

 
October 23, 1996
 
OFFICE OF THE ASSISTANT SECRETARY
FOR HOUSING-FEDERAL HOUSING COMMISSIONER
 
MORTGAGEE LETTER 96-58
 
TO:  ALL APPROVED MORTGAGEES
 
SUBJECT:  Single Family Loan Production - Secondary Financing from
          Family Members
 
     Effective immediately, FHA will permit family members (as defined
below) to lend on a secured or unsecured basis 100 percent of the home
buyer's required cash investment which may include the downpayment,
closing costs, prepaid expenses and discount points.
 
     This change is in response to new legislation that amends the
cash investment requirement of Section 203(b)(9) of the National
Housing Act.  That section requires that the borrower provide at least
3 percent of the cost of acquisition.  Funds loaned to the mortgagor
could not be counted for this purpose without special authorization by
Congress.  The legislation will now permit family members to choose
whether to help with the costs of acquiring a home in the form of a
gift or a loan.
 
     FHA does not usually treat discount points as part of the costs
of acquisition and the new legislation does not appear to require FHA
to permit the family member loan to include discount points, but FHA
has decided to permit it as a matter of administrative policy and the
regulatory restriction in 24 CFR 203.32(a) is waived.  This regulatory
waiver will increase the usefulness of family member loans as a means
of encouraging homeownership.
 
     The following conditions apply:
Secondary Financing Terms and Conditions:
o    The maximum mortgage calculation process remains the same.
     Closing costs, but not prepaid expenses or discount points, may
     still be added to the lesser of the appraised value or sales
     price in determining the maximum mortgage.  However, ff the
     lender pays a portion of the closing costs through a premium
     interest rate, the amount of closing costs paid by the lender in
     this manner may not be included in calculating the mortgage
     amount.
 
o    The combined amount of financing 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.  While the
     family member may lend 100 percent of the cash investment
     requirements, cash back to the homebuyer (beyond refund of any
     earnest money deposit) at closing is not acceptable.
o    If periodic payments of the secondary financing are required, the
     combined payments may not exceed the borrower's reasonable
     ability to pay.  The secondary financing payments are to be
     included in the total debt payment-to-income ratio, i.e., the
     "back end" ratio, for qualifying purposes.
 
o    The second lien may not provide for a balloon payment within five
     years from the date of execution.
 
o    If the family member providing the secondary financing borrows
     those funds, the source may not be any entity with an identity-of-
     interest in the sale of the property, including the seller,
     builder, loan officer, real estate agent, etc.  Mortgage
     companies that have retail banking affiliates may have that
     entity make a loan to the family member providing the secondary
     financing for the home purchase.  However, the lending
     institution may not make such financing available under terms and
     conditions more favorable than to other borrowers, i.e., there
     may not be any special considerations provided in connection
     between making of the mortgage and lending funds to family
     members to be used as secondary financing for the purchase of the
     home.
 
o    An executed copy of the document outlining the terms of the
     secondary financing must be maintained in the lenders file.
 
Family Member Defined:
 
     For this program, "family member" includes a child, parent, or
     grandparent of the mortgagor or mortgagor's spouse.  Included in
     this definition are legally adopted sons or daughters (and a
     child who is a member of an individual's household if placed with
     such individual by an authorized agency for legal adoption by
     that individual), and foster children.  The term "child" means a
     son, stepson, daughter, or stepdaughter.
 
If you have any questions regarding these instructions, contact your
local FHA office.
 
Sincerely,
 

Nicolas P. Retsinas
Assistant Secretary for Housing-
Federal Housing Commissioner