B3-4.3-06, Grants and Lender Contributions (12/14/2022)

Donations From Entities - Grants

Borrowers of a loan secured by a principal residence may use funds donated from acceptable entities for all or part of the down payment, closing costs, or financial reserves subject to the minimum borrower contribution requirements described below. These funds are referred to as a grant.

Grants must be funded by one of the following entities, provided they are not the property seller or other interested party in the transaction:

• a federal agency, state, county, or similar political subdivision of a state;
• any city, town, village, or borough of a state that
  • has a local government and that has been created by a special legislative act,
  • has been otherwise individually incorporated or chartered pursuant to state law, or
  • is recognized as such under the constitution or by the laws of the state in which it is located,
• a housing finance agency as defined in 24 C.F.R. §266.5;
• a nonprofit organization exempt from taxation under Section 501(c)(3) of the Internal Revenue Code;
• a regional Federal Home Loan Bank under one of its affordable housing programs;
• an employer where the borrower is an employee (see B3-4.3-08, Employer Assistance);
• an Indian tribe on the most current list published by the Secretary of the Interior pursuant to 25 U.S.C. §5131; or
• a lender (see Lender-funded Grants).

Down payment assistance may not be funded in any way through the first mortgage, such as through premium pricing.

Grant funds may also be applied towards energy-related improvements if

• the program under which the funds are made available allows such a use, and

• the minimum borrower contribution requirements are met.

Minimum Borrower Contribution Requirements

The following table describes the minimum borrower contribution requirements for transactions that contain grants (excluding lender-funded grants).

Documentation Requirements

The grant must be documented with a copy of the letter awarding the grant to the borrower or a copy of the legal agreement that specifies the terms and conditions of the grant. The document must include language indicating that repayment of the grant is not expected, and how the funds will be transferred to the borrower, lender, or closing agent.

The transfer of grants must be documented with a copy of the donor’s canceled check, a copy of the settlement statement showing receipt of the check, or similar evidence. The documentation must be included in the individual loan file.

Lender-funded Grants

A lender-funded grant is subject to the requirements described in this topic, but must also meet the requirements in the following table.

Lender Contributions

The lender may provide the borrower with a contribution to fund borrower-paid closing costs and prepaid fees in the following cases:

• The lender credit is derived from premium pricing, as described in Premium Pricing in B2-1.5-02, Loan Eligibility.

• The lender credit is sourced directly from lender funds with no expectation for repayment or financial obligation apart from the subject mortgage. Funds passed to the lender from a third party, for the purpose of providing a lender credit, are not eligible as a lender contribution.

The amount of the lender contribution should not exceed the amount of borrower-paid closing costs and prepaid fees and may not be used to fund any portion of the down payment or financial reserve requirements. Lender contributions are not considered grants.

When the lender is an interested party to a purchase transaction, any amount of a lender contribution not derived from premium pricing, must be considered as an IPC when calculating the maximum IPC limit for eligibility purposes.

Any excess lender credit required to be returned to the borrower in accordance with applicable regulatory requirements is considered an overpayment of fees and charges and may be applied as a principal curtailment or returned in cash to the borrower. See  B2-1.3-01, Purchase Transactions and B2-1.3-02, Limited Cash-Out Refinance Transactions for treatment of the overpayment of fees and charges.

Lenders may also provide borrowers with cash or cash-like incentives that do not need to be reflected on the settlement statement. See  B3-4.1-02, Interested Party Contributions (IPCs) for additional information.