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Can Disaster Relief Grants Be Used As Money To Close An FHA Loan?

Can disaster relief grants be used as money to close an FHA mortgage loan?

In the wake of the many natural disasters in 2017, many home owners in Texas, California, Puerto Rico, and other affected areas want to know what their options are to recover, rehab, repair, or replace their homes.

FHA loan rules require the lender to verify the source of all funds used as a down payment on FHA mortgage loans; down payment money (also known as a Minimum Required Investment or MRI) cannot come from unsecured loans, gifts with an expectation of repayment, or other unapproved sources.

The FHA loan handbook, HUD 4000.1, have rules for down payments that are sourced in whole or in part by disaster relief grants. But what does the FHA consider to be such a grant? According to page 242 of HUD 4000.1, a disaster relief grant is defined as follows:

“Disaster Relief Grants refer to grants from a Governmental Entity that provide immediate housing assistance to individuals displaced due to a natural disaster. Disaster relief grants may be used for the Borrower’s MRI”.

This section also adds, “The Mortgagee must verify and document the Borrower’s receipt of the grant and terms of use. Any grant of the Borrower’s MRI must also comply with the additional requirements set forth in Source Requirements for the Borrower’s MRI.”

And those requirements include the following guidelines, applicable to all source funds for closing related to the down payment/MRI:

• The seller of the home cannot provide down payment funds
• No other “person or Entity who financially benefits from the transaction” even indirectly cannot provide down payment funds
• No one who is or will be reimbursed, directly or indirectly, by any party associated with any of the above.

There may be some confusion on this issue since the down payment is not the only money needed at closing time. FHA loan rules are clear that the down payment is to be considered a totally separate expense from all other closing costs. That’s why a seller or related party may provide certain funds to close but NOT money to be used as the down payment.

From HUD 4000.1:

“While additional funds to close may be provided by one of these sources if permitted under the relevant source of funds requirements above, none of the Borrower’s MRI may come from these sources. The Mortgagee must document permissible sources for the full MRI in accordance with special requirements noted above.”

Note that “one of these sources” refers to the list above (seller, entity who financially benefits from the transaction, etc.). Speak to a loan officer if you are unsure how these rules affect your transaction