Introduction
This topic contains information on grants and lender contributions, including:
- Donations From Entities - Grants
- Minimum Borrower Contribution Requirements
- Documentation Requirements
- Lender-funded Grants
- Lender Contributions
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
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the program under which the funds are made available allows such a use, and
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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).
LTV, CLTV, or HCLTV Ratio | Minimum Borrower Contribution Requirement from Borrower’s Own Funds | ||
---|---|---|---|
80% or less | One- to four-unit principal residence | A minimum borrower contribution from the borrower’s own funds is not required. All funds needed to complete the transaction can come from a grant. | |
Greater than 80% | One-unit principal residence | A minimum borrower contribution from the borrower’s own funds is not required. All funds needed to complete the transaction can come from a grant. | |
Two- to four-unit principal residence |
The borrower must make a 5% minimum borrower contribution from their own funds. After the minimum borrower contribution has been met, grants can be used to supplement the down payment, closing costs, reserves, and energy-related improvements. |
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.
✓ | Additional Requirements for Lender-funded Grants |
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The loan must be a HomeReady loan used for a purchase transaction. See Chapter B5-6, HomeReady Mortgage for additional information. | |
|
|
The lender must have a documented program that provides grants for low- to moderate-income borrowers, community development, equitable housing initiatives, or similar initiatives. |
Lender Contributions
The lender may provide the borrower with a contribution to fund borrower-paid closing costs and prepaid fees in the following cases:
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The lender credit is derived from premium pricing, as described in Premium Pricing in B2-1.5-02, Loan Eligibility.
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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.
Recent Related Announcements
The table below provides reference to recently issued Announcements that are related to this topic.
Announcement | Issue Date |
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Announcement SEL-2022-10 | December 14, 2022 |
Announcement SEL-2022-07 | August 03, 2022 |
Announcement SEL-2021-08 | September 01, 2021 |
Announcement SEL-2020-07 | December 16, 2020 |
Announcement SEL-2018-04 | May 01, 2018 |
Announcement SEL-2018-03 | April 03, 2018 |