Can a nonprofit or government entity who is the seller of a property provide gift funds?

The lender may only permit the Borrower’s Minimum Required Investment (MRI) to be provided by a source permissible under Section 203(b)(9)(C) of the National Housing Act, which means the funds for the Borrower’s MRI must not come from: 
(1) the seller of the property; 
(2) any other person or Entity who financially benefits from the transaction; or 
(3) anyone who is or will be reimbursed, directly or indirectly, by any party included in (1) or (2) above.  

HUD does not interpret Section 203(b)(9)(C) of the National Housing Act to prohibit Governmental Entities from providing the Borrower’s MRI where the Governmental Entity is originating the insured mortgage through one of its homeownership programs.   The lender must document that the Governmental Entity incurred prior to or at closing an enforceable legal liability or obligation to fund the Borrower’s MRI. It is not sufficient to document that the Governmental Entity has agreed to reimburse the lender for the use of funds legally belonging to the lender to fund the Borrower’s MRI.

The lender must obtain: 
• a canceled check, evidence of wire transfer or other draw request showing that prior to or at the time of closing the Governmental Entity had authorized a draw of the funds provided towards the Borrower’s MRI from the Governmental Entity’s account; or 
• a letter from the Governmental Entity, signed by an authorized official, establishing that the funds provided towards the Borrower’s MRI were funds legally belonging to the Governmental Entity at or before closing. Examples of acceptable  language is available in Handbook 4000.1 II.A.4.d.ii.(C). 
While the lender is not required to document the actual transfer of funds in satisfaction of the obligation or liability, the failure of the Governmental Entity to satisfy the obligation or liability may result in a determination that the funds were provided by a prohibited source. 

For additional information see Handbook 4000.1 II.A.4.d.ii.  or II.A.5.c.ii. available at https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.


Topic Number: KA-04209