The Department of Housing and Urban Development has updated its policy on the Good Neighbor Next Door program, which offers homes at a major discount to qualifying borrowers. According to HUD, the program “offers HUD owned single family (one-unit) homes to eligible participants at a 50% discount” to “law enforcement officers, teachers and firefighters/emergency medical technicians and who meet all other requirements of the program”.
The HUD Good Neighbor Next Door program is available to those who want to purchase using an FHA insured mortgage.
Recently the FHA and HUD have issued guidance about the Good Neighbor Next Door Program, which includes clarification on the mortgage insurance premium for the loan. According to FHA Mortgagee Letter 2013-20, “The purpose of this Mortgagee Letter is to:
- Clarify that the mortgage insurance premium shall be based on the first mortgage only; and
- Clarify the process for submitting requests for an interruption in the owner-occupancy term.”
Under the terms of the program, the borrower gets a mortgage for the discounted amount, but is also required to sign a second mortgage for the amount of the discount which is not payable as long as the borrower meets the occupancy requirements (36 months) of the program.
According to the HUD official site, “HUD requires you to sign a Second Mortgage and Note on the discounted amount. No interest or payments are required on this ‘silent second’ mortgage if you live in the home for the entire 36 month occupancy period. You may be required to pay a pro-rata portion of the discount to HUD should you fail to fulfill the three year occupancy requirement.”
The clarification in the FHA Mortgagee Letter includes the following:
“The note and second mortgage, mandatory under the GNND program, are not to be included in the upfront and annual Mortgage Insurance Premium (MIP) associated with the purchase of a GNND property. The upfront and annual MIP should be based on the average outstanding principal obligation of the first mortgage.”
That means that the borrower is responsible for MIP only on the amount of the “first mortgage” rather than being held accountable for MIP payments based on the entire value of the loan based on the first and “second” mortgages combined. For more information speak to a loan officer or contact the FHA directly at 1-800 CALL FHA.
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