Charitable Organization Gift Donors

Written By: Stacey Sprain,
Certified Ambassador Loan Processor (CALP)

Last week’s article discussed secondary financing requirements when the source of borrower downpayment or cost assistance comes in the form of a lien which is attached to the subject property at the time of settlement. This week I want to expand a bit further about guidelines and requirements associated with actual gift funds and specifically, gift funds provided by charitable organizations.

As mentioned in my article last week, when funds for a borrower’s downpayment and/or costs are provided in the form of a second or subordinate lien, the funds are considered as secondary financing and are subject only to secondary financing guidelines, not the guidelines associated with gift funds. However, when funds for a borrower’s downpayment and/or costs are provided in any other form not involving a lien, they are subject to gift guidelines and documentation requirements.

As copied from HUD Handbook 4155.1 Chapter 2, paragraph 2-10c:

Gift Funds. An outright gift of the cash investment is acceptable if the donor is the borrower’s relative, the borrower's employer or labor union, a charitable organization, a governmental agency or public entity 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 and documented interest in the borrower. The gift donor 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 from these sources are considered inducements to purchase and must be subtracted from the sales price. No repayment of the gift may be expected or implied. (As a rule, we are not concerned with how the donor obtains the gift funds provided they are not derived in any manner from a party to the sales transaction. Donors may borrow gift funds from any other acceptable source provided the mortgage borrowers are not obligors to any note to secure money borrowed to give the gift.) This rule also applies to properties of which the seller is a government agency selling foreclosed properties, such as the Veterans Administration or Rural Housing Services. Only family members may provide equity credit as a gift on a property being sold to other family members. These restrictions on gifts and equity credit may be waived by the jurisdictional HOC provided that the seller is contributing to or operating an acceptable affordable housing program.

What’s most important to note is that HUD considers it as the lenders responsibility to review and determine that the gift donor is eligible to be giving the gift funds in the first place. To accomplish this, there are a number of things you can research to make such a determination when the donor is noted to be a charitable organization.

1. You can search at www.irs.gov to verify the organizations tax-exempt 501c status.

2. You can read up on the organization’s website to gather sufficient information. Questions you’ll be searching for answers to: #1- who is involved on the board of directors of the agency? Are there any members with interest in the real estate transaction such as a relationship with the realtor, seller or builder? #2- How does this agency obtain it’s funding? #3- What is the application process for persons who wish to apply for homebuyer funds for downpayment or costs? #4- What are the approval requirements for the applicants? #5- What are the actual terms associated with the type of gift funding being offered? Are there income and/or purchase price limits?

You’ll be looking to verify that the organization is established for a minimum period, they have a clear history of providing resources and funding for potential homebuyers, that they are active in the areas of housing and community development on a regular basis and aren’t brand new to offering funding for downpayment and costs. It’s important to watch for charitable organizations who have “restructured their storefronts” upon the undoing of seller-funded downpayment assistance. There are many out there who have lined themselves up in partnership with builders who are providing some or all of the funding behind them to move their inventories.

Most lenders require review and approval of any non-profit organizations involved with “gift giving” because of the liability and responsibility given them by HUD. I recently heard from insiders that HUD is cracking down on the reviewing of these types of transactions and is catching entities who are tied to the realtors, sellers, and builders involved in the transactions they are providing gift funds for. These are risky transactions nowadays with folks running out of options for down payments in a challenging market.

You will need to make sure that your file includes the documentation set forth by HUD to meet gift requirements. You can find such requirements in HUD Handbook 4155.1 Chapter 2, Paragraph 2-10c.

A few other resources you may be interested to review on this topic:
• HOC Reference Guide, Chapter 2 section 2-11
• Mortgagee Letter 2006-13
• HUD/FHA Non-Profit Program FAQ

About the Writer. As one of NAMP's volunteer writers, Stacey Sprain is currently a NAMP member in good standing and is a NAMP Certified Ambassador Loan Processor (CALP). If you would like to become a volunteer writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)