www.hudclips.org 


U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D. C. 20410-8000

OFFICE OF THE ASSISTANT SECRETARY FOR
HOUSING-FEDERAL HOUSING COMMISSIONER
May 22, 1989
Mortgage Letter 89-16
TO:  ALL APPROVED MORTGAGEES
SUBJECT:  Providing Housing Through Local Government Participation
 
     In an effort to provide both homeownership opportunities to
families and much needed redevelopment to their cities and towns, a
number of communities are searching for means to assist principally
first-time homebuyers to purchase their own home.  Since many first-
time homebuyers can manage the monthly mortgage payments but have not
been able to save enough money to cover their downpayment, the
assistance typically takes the form of providing all or part of the
purchaser's required investment (downpayment) in the property.
 
     One of the avenues to accomplish providing all or a portion of
the downpayment has been the issuance of tax-exempt bonds by the
local government to finance construction of housing units which are
subsequently leased under a lease/purchase program by the local
government.  Some or all of the rent monies collected by the local
government are then earmarked for a future downpayment when the
tenant exercises the right to purchase the unit.  In other programs,
tax-exempt bonds are used by the local government to construct the
units which are subsequently sold to homebuyers without the lease
portion of the program.  In these types of programs, the local
governments have chosen to subsidize the downpayments and no lease is
necessary.
 
     Effective immediately, HUD will permit a Federal, state or local
government agency or instrumentality, which is a seller of a
property, to provide a gift of funds (typically in the form of a
credit or a grant)  to the purchaser who is seeking an insured
mortgage.  This exception to the existing prohibition set forth in
HUD Handbook 4155.1 REV-2, Paragraph 3-29 D is only for government
agencies or instrumentalities where the funds are raised by the
efforts of the agency through such actions as the issuance of tax-
exempt bonds, savings created by the agency in constructing the
units, and funds accumulated from lease payments.  Transactions in
which a builder or other party funds the downpayment through the
local community in order to sell a house would merely be a
circumvention of the existing prohibition and not allowed.
Therefore, the key ingredients in any such program are the
involvement of a governmental agency and the methods it uses to
generate the funds it is providing to the purchasers.  The agency's
involvement can take the form of direct participation or written
confirmation from the agency establishing a formal link to a non-
profit entity that will operate as an instrumentality of that agency.
_____________________________________________________________________
 
                                  2
 
     The Department of Housing and Urban Development applauds the
twin endeavors of community redevelopment through homeownership
opportunities and is ready to work with any local government to
obtain these worthy goals.
 
     If you have questions regarding this matter, please get in touch
with your local HUD Office.
 
                                   Sincerely,
 
                                   James E. Schoenberger
                                   General Deputy Assistant Secretary
 
_____________________________________________________________________