The Annual Percentage Rate (APR) is one of the most misunderstood numbers there is on the mortgage documentation. Additionally it is the most easily abused and even though it is supposed to exist to protect shoppers can be so misconstrued as to actually harm the shopper. Be that as it may here are fees that must be included in the calculations for APR in the state of Georgia.

The APR is the total cost of the loan over the life of the loan averaged with the base interest rate. For example if you have an interest rate or 4.5% and closing costs of $5000 on a $100,000 loan the .5% APR qualified closing costs would result in an APR of 4.923% while $10,000 in APR qualified closing costs on the same loan would result in an APR of 5.333%

The way this can be abused or manipulated is by charging a higher base rate and shifting the rate commission to cover some of the closing costs. Not that this is necessarily a bad thing but it gives a hint as to how this figure can be manipulated.

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In 2008 the Federal Housing Administration, in a move to try and get permission from congress to insure 100% home loans, were able to get most private third party down payment assistance programs eliminated from the process. Government and civic organizations are still able to operate but some of the largest DPA companies are out of the business of helping home owners with their required contribution to the loan process.

Since that date the only way to get down payment assistance is from generally higher priced government assistance programs or from a gift from a family member or employer. According to the HUD Handbook, chapter 2-10(C):

“Gift Funds.An outright gift of the cash investment is acceptable if the donor is the borrower’s relative, the borrower’s employer or labor union, a charitable organization, a governmental agency or public entity that has a program to provide homeownership assistance to low- and moderate-income families or first-time homebuyers, or a close friend with a clearly defined and documented interest in the borrower.”

There is much more to it than simply having the funds available. Not only does the gift money have to exist. The paper trail, evidence of the donor’s ability to give and proof of the relationship also has to be verified.

Gift funds must come with a “Gift Letter” which meets the requirements of HUD and must include the following 10 items:

1 ) The dollar amount
2 ) Name of the donor
3 ) The donor’s signature
4 ) The donor’s address
5 ) The donor’s telephone number
6 ) Relationship to the borrower
7 ) The borrower must be named
8 ) The borrower’s signature(s)
9 ) The letter must state that no repayment is required
10 ) Include language asserting that the funds were not made available to the donor from any person or entity with an interest in the sale of the property.

What the FHA underwriter will look to see is if there is any way any of the funds could have possibly come from an interested third party who would benefit from the sale. This group would include a builder, agent, seller, or other beneficiary of the proceeds of the sale.

Many donors do not appreciate the fact they will need to show where the funds came out of their account by providing a withdrawal slip specifically showing the donor’s account number. Even then the underwriter may ask for a copy of the bank statement from the donor with their name printed on it. According to HUD the minimum requirements are, “a copy of the donor’s withdrawal slip or canceled check, along with the borrower’s deposit slip or bank statement showing the deposit to the borrower’s account.”

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In the event the gift funds being provided are given in the form of a cashier’s check the?documentation?should include, “evidence that the funds used to purchase the cashier’s check came from the donor. A withdrawal slip, specifically showing the donor’s account number from which the funds were obtained, would be sufficient evidence, along with a copy of the cashier’s check.”

Gift funds can only be used toward down payment and closing costs. If there are any payment reserves required those cannot be provided by gift funds and must come from the borrower’s own funds as evidenced by the documentation provided to the underwriter for the approval process.

Donors generally must be a family member, a friend with a valid interest in the borrower, a credit union, or a current employer. There is no limit to the amount of the gift and the donor can borrow the gift so long as it has not come in any manner from any party to the sale or beneficiary of the proceeds of the sale.

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