Mortgagee letter 00-08 has all the information nonprofit agencies need to get started. Also, 01-30, and 02-01 contain important information for nonprofit agencies.

What is net development? - (Top)

Net development cost is a calculation applied to HUD properties sold at a discount of 10 percent or more. It applies to government entities and qualified nonprofit organizations that have been pre-approved by FHA to purchase HUD homes. Nonprofit organizations and government entities must pass on the discount received from HUD to increase homeownership opportunities for low- and moderate-income families and individuals. Appendix A of 01-30 provides a detailed list of the costs allowed in the net development cost calculation.

Do the net development guidelines apply to all HUD homes? - (Top)

Net development guidelines apply to all HUD homes purchased at a discount. Appendix A of 01-30AppA provides a detailed list of the costs allowed in the net development cost calculation. Additionally, 02-01 also states: "With the issuance of this Mortgagee Letter, the nonprofit will be required to include in their annual reports information on all REO properties purchased at a discount - 10% or higher. These reports are due each February to the Homeownership Center Director and provide information about the nonprofit's program accomplishments over the past calendar year (See 00-08Att3). Previously, only nonprofits that purchased REO properties at a 30% discount were required to submit this annual report. Properties purchased under an Asset Control Area (ACA) agreement must be included in the report, but listed separately from other purchases."

Does a nonprofit agency need to maintain an office? - (Top)

To ensure that all approved nonprofits have adequate space for employees and records, FHA requires the submission of photographs and floor plans for the agency's facilities with the application and recertification packages. This new requirement is identical to the requirement for lenders seeking FHA approval. See 02-01 for more information on office requirements.

What are the experience requirements to obtain HUD approval? - (Top)

Nonprofit agencies must meet strict housing development experience requirements. The nonprofit must have a minimum of two consecutive years, within the last five years, of housing development experience. Housing development experience is defined as acquisition, rehabilitation and sale to low-to-moderate income persons. Hiring of experienced personnel does not relieve the nonprofit of the experience requirement. Organizations that do not meet this experience requirement may be able to obtain limited approval if they have at least 1 full year of housing development experience and one year of other related housing provider experience. To be considered, the organizations "other related housing experience" must demonstrate that the organization has the financial and administrative capacity to purchase, rehabilitate and resell homes to low-to-moderate income families. See 02-01 for more information on experience requirements.

Can a nonprofit hire a for-profit consultant or developer to run its affordable housing program? - (Top)

Nonprofit agencies must have the administrative capacity to develop and carry out their FHA-approved homeownership plans in a timely and successful manner. Nonprofits that obtain consultant services to help implement their homeownership programs are not relieved from this requirement. The nonprofits operations must be independent of the influence, control, or direction of the consultant or any other outside party, particularly those seeking to derive profit or gain from a proposed project (such as, but not limited to, landowners, real estate brokers, bankers, contractors, builders, or consultants). For a complete discussion of this topic please see 02-01.

Does a nonprofit seeking approval from HUD need to have an IRS 501(c) (3) certificate? - (Top)

Eligible nonprofits must have two years 501(c)(3) IRS tax-exempt status. The nonprofit must submit to FHA their IRS letter of determination to prove their status. In addition, nonprofits must certify compliance with IRS regulations that require nonprofits to notify the IRS of any substantial and material changes in the nonprofits character, purpose, or methods of operation [IRS Reg. 1.501(a)-1(a)(2)601.201(h)(3)(ii)]. Finally, nonprofits may not assume the name and employer identification number (EIN) of another dormant or defunct nonprofit. See 02-01 for more information on IRS 501(c)(3) requirements.

What are the reporting and record keeping requirements that a nonprofit must meet? - (Top)

02-01 has information on the reporting requirements, record keeping and quality control plans that nonprofits must meet in order to remain in compliance. Nonprofits also have to recertify every two years. 2000-08 and 2002-01 have information in recertification procedures. Annual paper reports are no longer required.

Does FHA provide training for nonprofit agencies? - (Top)

HUD does provide periodic training for nonprofit agencies. Visit FHA's Training and Events calendar for any upcoming training opportunities.

How is a low-to-moderate income buyer defined? - (Top)

A low-to-moderate income buyer is a purchaser whose income does not exceed the defined percent of the median income, when adjusted for family size, for the area in which the property is located. (See 01-30 Appendix C). The land use restriction addendum requires that all resales of discounted HUD Homes by HUD-approved nonprofit agencies must be to persons at or below 115% of area median income limits, adjusted for family size. Nonprofit agencies must address this requirement in their affordable housing plan. (See 00-08 and 02-01)

How can a nonprofit agency determine the income limits for a particular geographical area? - (Top)

Income limits are posted on the web at the HUD USER website.

What is "Identity of Interest"? - (Top)

"Identity of interest" is also known as "conflict of interest." It is a conflict of interest for a nonprofit to employ staff who also work for and receive financial benefits from a for-profit entity that is providing the nonprofit with services related to the nonprofit's affordable housing plan. Board members must serve on a voluntary basis, and may not be paid nor receive any compensation for any services they provide in the implementation of the nonprofit's affordable housing program. FHA will collect information on the job responsibilities of all Board members to ensure that their occupational activities and obligations do not conflict with the work of the nonprofit. HUD strictly prohibits the sale or lease of properties with FHA financing and/or discounted HUD homes to any of the nonprofit's officers, directors, elected or appointed officials, employees, or business associates, either during their tenure or for one year thereafter, or to any individual who is related by blood, marriage, or law to any of the above. (See Mortgagee Letter 02-01 for a discussion of this and related identity of interest issues.)

Is there a list of nonprofit program definitions available? - (Top)

See 01-30AttC Appendix C for a list of applicable definitions for nonprofit programs.

What kind of financial capacity issues should agencies be aware of? - (Top)

Nonprofit agencies must have the financial capacity to operate their homeownership programs. Nonprofits will be required, if applicable, to submit documentation with their application or recertification package so that FHA may assess each organization's financial stability in terms of cash balances, assets and liabilities, annual expenses, and cash flow from operations. (See 02-01 for a discussion of this and related financial capacity issues.)

Can a nonprofit agency provide "gift funds" to a buyer? - (Top)

Gifts to the eventual purchasers for downpayment, financing or closing costs and any other purchaser-related expenses associated with their purchase of the property are not allowable net development costs. Guidance on "gift funds" can be found in several places: Handbook 4155.1 REV-4, secondary financing section, 97-05, 01-30 and 02-02.

Does HUD approve "gift programs" administered by charitable organizations? - (Top)

HUD does not approve "gift programs" administered by charitable organizations and, thus, will not offer a formal approval of your program. Mortgage lenders are responsible for assuring that the gift to the homebuyer from the charitable organization meets the instructions described in Handbook 4155.1 REV-4 (e.g., no repayment implied, etc.). Those charitable organizations that comply with existing regulations and policy guidelines are permitted to give cash gifts to eligible homebuyers and do not need prior FHA approval to do so.

How can I learn more about secondary financing and downpayment assistance programs? - (Top)

FHA has long recognized the important role that nonprofit agencies may play in providing affordable housing opportunities. FHA's secondary financing webpage describes the approval process for secondary financing/downpayment assistance programs. See 94-02.

Why does my agency's approval letter have a limitation on it that restricts the number of HUD homes we can buy and or the number of FHA mortgages that we can have in force at any one time? - (Top)

HUD may restrict the activities of nonprofit agencies based upon the experience level of the nonprofit agency or on its past performance in the program. See 96-52 , 00-08, and 02-02. Also see HUD housing notice 94-74 and HUD Handbook 4310.5, REV-2 Chapter 10 Section 20 Paragraphs 2 and 3.

What is a "revitalization area"? - (Top)

Revitalization areas are HUD-designated neighborhoods in need of economic and community development where there is already a strong commitment by the local governments. HUD homes selected for the direct sales program are in designated revitalization areas. See the FHA revitalization webpage for more information.

What is the direct sales program? - (Top)

Nonprofit agencies may buy HUD homes directly from HUD without using the services of a real estate broker. See notice H94-74. Contact the Management and Marketing contractor that serves your state for information on direct sales procedures.

Can my nonprofit agency qualify as an approved Housing Counseling Agency? - (Top)

Your nonprofit agency may be able to qualify as a HUD-approved Housing Counseling Agency. Visit the housing counseling webpage or read our housing counseling FAQs.

Downpayment Assistance through Secondary Financing Providers (DAP) - (Top)

HUD has long recognized the important role that downpayment assistance through secondary financing plays in providing affordable housing opportunities. There are three categories of DAP assistance providers:

1) Nonprofit and Nonprofit Instrumentality of Government DAPs: FHA must approve nonprofit organizations and nonprofit instrumentalities of Government that provide downpayment assistance through secondary financing providers in the form of a lien in conjunction with an FHA first mortgage lien. FHA maintains a roster of approved nonprofits and nonprofit instrumentalities of Government that have been approved.

2) Government Entity DAPs: No approval is required for Government entities that provide secondary financing in the form of a lien in conjunction with an FHA first mortgage lien. HUD does not maintain a list of Government entity DAP providers. Mortgage lenders are responsible for assuring that a Government entity DAP meets all appropriate FHA requirements, including those contained in letters 94-02 , 02-22, and Handbook 4155.1 Rev-5, Paragraph 1-13A.

3) Gift Programs: FHA does not approve downpayment assistance programs in the form of gifts administered by charitable organizations (i.e., nonprofits). Mortgage lenders are responsible for assuring that the gift from the charitable organization to the homebuyer meets the appropriate FHA requirements and that the transfer of funds is properly documented. See Handbook 4155.1 REV-5, CHG-1 Paragraph 2-10 (C) and letter 00-08 for further information. Charitable organizations that comply with existing regulations and policy guidelines are permitted to give cash gifts to eligible homebuyers and do not need prior FHA approval to do so. See Status of IRS Charitable Organizations below.

IRS Status of Charitable Organizations - (Top)

FHA-approved mortgagees that seek FHA mortgage insurance on loans secured by single family houses, on which downpayment assistance has been provided to the borrower in the form of gifts, are required to determine that the gifts are from sources acceptable to FHA. Please see paragraph 2-10 C of Handbook 4155.1 REV-5.

Letter 06-13, "Charitable Organizations Making Downpayment Gifts" advises mortgagees about how to determine whether a gift from a charitable organization can be used for all, or part, of the borrower's downpayment when the organization providing the gift for the downpayment loses or gives up its federal tax-exempt status.

Internal Revenue Service (IRS) has identified the organizations listed here as entities whose status have been revoked and are no longer federally tax-exempt. These organizations are not eligible to provide gift funds to FHA mortgagors. This list will be updated as the IRS reports on the status of tax-exempt charitable organizations in its IRS Bulletin publication.

Documents Required for Downpayment Assistance Provider (DAP) Status

Use this list to assemble the documents you need to successfully obtain FHA-approved DAP nonprofit status for your organization. Approval guidelines for DAP Programs can be found in Handbook 4155.1 Paragraph 1-13(c). For additional DAP insured mortgage approval guidelines please see 94-02 and 96-18. The list below is excerpted from these documents.

List of documents for approval

1. IRS "Letter of Determination" which verifies approval under Section 501(c)(3) as exempt from taxation under Section 501(a) of the Internal Revenue Code of 1986, as amended. To find out if your organization has tax-exempt status search the IRS Data Base for Tax-Exempt Organizations.



2. Certification signed by an authorized representative of the organization that the organization has voluntary Board of Directors;



3. Detailed description of the last two years experience as a housing provider of housing for low- and moderate-income persons; Hiring of experienced staff does not relieve the nonprofit of the experience requirements. For any nonprofit lacking the full two years experience as a housing provider, consideration may be given to previous experience in related community services.



4. Complete articles of incorporation and by-laws of the entity;



5. Corporate resolution delegating signature authority;



6. Outline of current and future housing objectives;



7. Marketing plan describing its methodology of renting the units or transferring properties to homeowners through credit qualifying assumptions or other means;



8. Total overview of how the program will work.



9. Statement clearly identifying the source of funds to be used for the assistance.



10. Copy of the documents to be used, such as the Deed of Trust and Promissory Note, with the appropriate language as required in letter 94-02.

Instrumentality of Government Additional Criteria for Approval

A nonprofit agency meeting the additional criteria for being considered as "instrumentality of government" may be permitted to provide secondary financing for as much as 100 percent of the borrower's required cash investment (subject to the restrictions 1 through 3 stated above). For a nonprofit agency to be considered an "instrumentality of government," it must meet criterion "A" and either "B1, B2 or B3:"

A. ESTABLISHMENT - Must have been established by a governmental body or with governmental approval or under special law to serve a particular public purpose or designated as an instrumentality by law (statute or court opinion), and

B1. ORGANIZATIONAL - Majority of governing board and/or principal CONTROL officers named or approved by governmental body/officials, or

B2. OPERATIONAL - Government body approves all major decisions CONTROL and/or expenditures, or

B3. FINANCIAL - Government body provides funds through CONTROL direct appropriations/grants/loans, with related controls applicable to all activities of entity

Submission of all the required exhibits above will prevent delays in the review process and will allow a determination to be made, in most cases, within 14 working days of the receipt of the package. The DAP program must be submitted and approved BEFORE any loans are originated under the program. There will be no exceptions to this policy.

Important note: Please make two copies of all documentation. Retain these in your files. You may be asked to resubmit some documentation and you will need these items for recertification.

Quality Control Plans - (Top)

The Quality Control Plan (QCP) must include periodic reports that identify for senior management areas of deficiency, including fraud or violations of HUD regulations and the non-profit agencies own policies and procedures, errors and omissions, and unacceptable patterns or trends. The QCP must describe in detail the nonprofit agency's review procedures, record keeping procedures and must outline the corrective actions to be initiated immediately when discrepancies are found.

The QCP should assure:

A) Records of Quality Control (QC) findings and actions taken are maintained
B) Periodic reports that identify deficiencies are provided to senior management
C) Prompt, effective corrective measures are taken by senior management and documented when deficiencies are identified
D) The nonprofit has a procedure to report any violation of law or regulation, any known false statement, fraud or program abuse to the HUD Office of the Inspector General or the appropriate Federal, State or Local law enforcement agency.

In addition, the following elements represent components of a QCP, but none of them is specifically required by HUD. However, nonprofit agencies are encouraged to include the following elements in their QCP.

E) Have an impartial third party entity conduct the QC reviews on the nonprofit agencies activities.
F) Identify the procedures for expanding the scope of the QC review when fraud or patterns of deficiency may exist.
G) Establish procedures to identify revisions in HUD guidelines and inform nonprofit personnel of revisions as they arise.
H) Hold nonprofit employees accountable for performance failures or errors.

Direct Sales Program Monitoring Reviews for Nonprofits - (Top)

Periodically, FHA will perform field reviews of nonprofit agencies as part of its ongoing quality control activities. Therefore, FHA may contact a nonprofit agency and request the following information, which may include, but is not limited to:

• Documentation regarding the nonprofit agency's progress in implementing its affordable housing program
• Access to properties which are under development, resold or leased or otherwise a part of the nonprofit agency's affordable housing program
• Access to the nonprofits office(s) to determine compliance with FHA 02-01, "Adequate Facilities".

All requests from FHA will be made in writing and FHA will give the nonprofit agency with the time to accommodate such requests. Failure to respond to a review request may result in removal from FHA's nonprofit roster. For further information on the nonprofit roster, due-process removal and re-instatement procedures, please see: 24 CFR Part 200 "Nonprofit Organization Participation in Certain FHA Single Family Activities; Placement and Removal Procedures; Final Rule."

Municipalities and FHA Mortgages - (Top)

Municipalities may be eligible to participate in the following single family programs:

1. Direct Sales Program, under which they may be eligible to purchase HUD properties at a discount, and
2. Section 203(k) and 203(b) programs, under which they may be eligible to participate as FHA mortgagors and
3. Downpayment Assistance Program

1) To participate in the direct sales program, a state or local government must submit a Form 1111. The request for participation in the program should be accompanied by a certification that the individual(s) who would potentially sign sales contracts have the authority to do so vested in them by the municipality. A letter from the municipality's legal counsel evidencing who has such a capacity should be provided.

The form and the certification of capacity should be mailed to the Homeownership Center for the geographical area that they intend to participate in.

If a municipality also wants the ability to participate as an FHA mortgagor, they must provide further documentation:

State and local government agencies involved in the provision of housing may obtain insured financing provided that the agency provides evidence from its legal counsel that it has the legal authority and capacity to become the mortgagor and that the state or local government is not in bankruptcy, and that there is no legal prohibition that would prevent the lender from obtaining a deficiency judgment (if permitted by state law for other types of mortgagors) on FHA's behalf in the event of foreclosure or deed-in-lieu of foreclosure. All of the above should be mailed to the Homeownership Center for the geographical area that they intend to participate in.

2) If a municipality only wants the ability to participate as an FHA mortgagor, but is not interested in purchasing properties under the Direct Sales Program, they must provide proof that they meet the following criteria: The agency must provide evidence from its legal counsel that it has the legal authority and capacity to become the mortgagor and that the state or local government is not in bankruptcy, and there is no legal prohibition that would prevent the lender from obtaining a deficiency judgment (if permitted by state law for other types of mortgagors) on FHA's behalf in the event of foreclosure or deed-in-lieu of foreclosure This certification should be mailed to the Nonprofit Approval Team at:

U.S. Dept of HUD
Nonprofit Team
33 N. Stone Avenue, Suite 700
Tucson, AZ 85701

If you have any questions, you may telephone the nonprofit team at (520) 670-6237 or please email us.