On October 24, 2023, the U.S. Department of Housing and Urban Development (“HUD”) published, for public comment, a Federal Register Notice (“Proposed Notice”) to implement changes to the Federal housing Administration’s (“FHA”) Home Equity Conversion Mortgage (“HECM”) for Purchase program. The Proposed Notice expands the list of acceptable funding sources and permits additional interested party contributions to satisfy the borrower’s monetary investment requirement. Under the Proposed Notice, the FHA would also remove existing restrictions that prohibit the borrower from accepting cash from a seller or another person or entity that financially benefits from the HECM for Purchase transaction. HUD is seeking comment from interested members of the public on the Proposed Notice. The period for public comment ends on November 24, 2023.
The HECM for Purchase program allows mortgagees to originate HECM for Purchase transactions to purchase a 1-to-4 family dwelling unit, one unit of which will serve as the borrower’s principal residence. The program requires borrowers to contribute substantial liquid assets to meet the negotiated contract sales price for the property plus standard origination fees and charges.
In 2009, the FHA published Mortgage Letter 2009-11 (“ML 2009-11”) which prohibited certain funding sources for the investment:
- sweat equity;
- trade equity;
- rent credit; and
- cash or its equivalent, in whole or in part, received from the seller or any other person or entity that financially benefits from the HECM for Purchase transaction, or any third party or entity that is reimbursed, directly or indirectly, by the seller or any other person or entity that financially benefits from the HECM for Purchase transaction.
In addition, ML 2009-11 prohibited seller contributions (or “seller concessions”) in any HECM for Purchase transaction. “Seller concessions” are the use of “loan points, interest rate buy-downs, closing cost down payment assistance, builder incentives, gifts or personal property given by the seller, or any other party involved in the transaction.” These limits are meant to redirect expenses customarily paid by the seller or other interest parties to the borrower.
In 2017, the FHA codified the requirements for the HECM for Purchase program, and other program changes, and also codified three permitted funding sources for the borrower’s required money investment (the “Final Rule”):
- Cash on hand;
- Cash from the sale or liquidation of the borrower’s assets; and
- HECM proceeds.
The Final Rule also changed the funding source restrictions to permit interested party contributions to pay for:
- fees required to be paid by the seller under state or local law;
- fees that are customarily paid by the seller in the locality of the subject property; and
- purchase of the Home Warranty policy by the seller.
The Proposed Notice
The Proposed Notice would permit interested parties to contribute up to six percent of the sales price and expand the list of permitted interested party contributions.
Under the Proposed Notice, an “interested party contribution” would be defined to mean a payment by an interested party or combination of parties, toward the borrower’s origination fees, other closing costs including any items paid outside of closing, prepaid items, and discount points. “Interested Parties” refers to sellers, real estate agents, builders, developers, mortgagees, third-party originators, or other parties with an interest in the transaction.
Under the Proposed Notice, the six percent limit on interest party contributions may be applied towards but may not exceed the cost of:
- origination fees;
- other closing costs paid outside of closing (e.g., credit report and appraisal);
- prepaid items;
- discount points;
- interested party payment for permanent and temporary interest rate buydowns; and
- payment of the initial mortgage insurance premium.
Additionally, the Proposed Notice would also permit the following additional funding sources to satisfy the borrower’s monetary investment:
- premium pricing;
- disaster relief grants; and
- employer assistance.
This would be the first time that premium pricing is permitted for use in the HECM for Purchase program. Under the Proposed Notice, borrowers would be able to receive a credit from the mortgagee or third-party originator to reduce their closing costs in exchange for a certain initial mortgage interest rate.
Premium pricing credits from the mortgagee or third-party originator would be excluded from the six percent limit if the mortgagee or third-party originator is not the seller, real estate agent, builder, or developer. The interested party contributions for the various fees permitted under 24 C.F.R. § 206.44(c)(1) will also be excluded from the six percent interested party contribution limit. The FHA will also exclude the satisfaction of a Property Assessed Clean Energy (“PACE”) lien or obligation against the property by the property seller from the definition of an interested party contribution in the HECM for Purchase program.
The Proposed Notice is an effort by the FHA to more closely align the HECM for Purchase program with its forward mortgage programs. If implemented, the Proposed Notice would likely make it easier for borrowers to meet their monetary investment requirement by expanding the list of funding sources and permitting interested party contributions. Lenders participating in the HECM for Purchase program should review the Proposed Notice and consider submitting a comment.