5501.5: Interested party contributions (07/06/17)

© Freddie Mac Single-Family Seller Servicer Guide

(a) Types of interested party contributions and eligibility requirements

Freddie Mac will purchase Mortgages that include interested party contributions under the terms of the Purchase Documents and this section.Interested parties include, but are not limited to:

• Builder
• Developer
• Seller of the property
• Real estate agent

Interested party contributions may include either financing and/or sales concessions. Freddie Mac considers the following to be interested party contributions:

• Funds from the Seller, originating lender, an employer, a municipality, a non-profit organization and a Related Person, are subject to the interested party contributions requirements if the contributing party is affiliated with any of the interested parties as stated in the paragraph above, except as stated below for gifts from a Related Person and lender credit.
• Funds from an interested party that flow through a third-party organization or a non-profit agency to the Borrower
• Funds from an interested party, including a third-party organization or a non-profit agency, used to pay costs associated with the Mortgage transaction on the Borrower's behalf
• Funds that are donated to a third party, which in turn provides the funds to pay some or all of the Borrower's Closing Costs

Gift funds or gift of equity from a Related Person who is also the seller of the subject property is not subject to the requirements of this section, provided that:

• The donor has no affiliation with the builder, real estate agent or any other interested party to the transaction, and
• All of the requirements pertaining to gift funds or gift of equity from a Related Person as stated in Section 5501.3 are met

When a Seller or originating lender is affiliated with an interested party to the transaction, a lender credit is not considered an interested party contribution when it is derived from an increase in the interest rate.

Mortgages with abatements (that are funds provided to a lender or third party by an interested party to pay or reimburse in whole or in part a certain number of monthly payments of principal, interest, taxes, insurance and/or other assessments on the Borrower's behalf in excess of Prepaid/Escrows associated with the Mortgage closing) are not eligible for sale to Freddie Mac.

The payment of no more than 12 months of homeowners association dues by an interested party is not considered an abatement but is considered an interested party contribution, subject to the requirements of this section. The funds for the payment of the homeowners association dues must be collected at closing and transferred directly to the homeowners association, as documented on the Settlement/Closing Disclosure Statement.

(b) Financing concessions

Financing concessions are funds that originate from an interested party to the transaction, as described in Section 5501.5(a), that are used to:

• Reduce permanently the interest rate on the Mortgage
• Fund a buydown plan to temporarily subsidize the Borrower's monthly payment on the Mortgage (see Section 4204.4)
• Make contributions in any way related to the Borrower's Closing Costs, including up to 12 months of homeowners association dues

Based on "value," as defined in Section 4203.1, the maximum permitted financing concessions are as follows:

The amount of any financing concessions in excess of the limitations set forth above will be considered a sales concession.

Funds paid by the property seller that are fees or costs customarily paid by the property seller according to local convention are not subject to the maximum financing concession limitations above.

(c) Sales concessionsSales concessions include:

• Financing concessions in excess of the maximum financing concession limitations in  Section 5501.5(b)
• Any contributions such as vacations, furniture, automobiles, securities or other giveaways granted by any interested party to the transaction
• Interested party contributions used to reimburse the Borrower for payment of fees charged to process or negotiate a short sale (commonly referred to as short sale processing fees, short sale negotiation fees, buyer discount fees, or short sale buyer fees)

For purposes of determining the value of the Mortgaged Premises pursuant to Section 4203.1, the dollar amount of any excess financing concessions, the value of any contributions and/or the dollar amount of any short sale fee reimbursements granted by an interested party to the transaction must be deducted from the purchase price. The LTV ratio is then calculated using the lower of the reduced purchase price (after the reduction for all sales concessions has been made) or the appraised value of the Mortgaged Premises.

(d) Unplanned buydownsIn calculating the total value of financing concessions, Freddie Mac does not include amounts paid as an "unplanned buydown."An unplanned buydown is comprised of any funds paid at closing by an interested party to reduce the effective interest rate on the Borrower's Mortgage to a rate closer to or equal to the rate specified in the sales contract. Unplanned buydowns arise from an increase in Mortgage market interest rates between the date of the sales contract and the Note Date. Typically, unplanned buydowns arise in transactions involving properties that are newly constructed. For example, if prevailing interest rates in the Mortgage market rise during construction, the builder may increase the amount of his financing concessions, using funds from his profit margin to maintain the sales contract financing terms.In order for a financing concession to be considered an unplanned buydown, the following conditions must be met:

• The sales price of the property must be fixed in the sales contract and the transaction must be closed at that price
• The terms of the financing must be specified in the sales contract. The interest rate must be either specified in the contract or sufficiently identified so as to be fixed (for example, prevailing VA rate) in the contract
• The amount paid as an unplanned buydown must have been caused by an increase in Mortgage market interest rates between the date of the sales contract and the Note Date
• Any unplanned buydown that is a temporary subsidy buydown plan must comply with the provisions of Section 4204.4

The following items are not unplanned buydowns and must not exceed the limitations specified in Section 5501.5(b) above:

• Costs and charges to which the property seller agreed in the sales contract
• Costs and charges resulting from financing terms contained in the sales contract that were more favorable to the Borrower than market conditions that existed as of the date of the sales contract

(e) Special documentation requirementsThe amount and the source of all interested party contributions must be documented in the Mortgage file and be clearly shown on the Settlement/Closing Disclosure Statement.Mortgages with interested party contributions paid outside of closing and not disclosed on the Settlement/Closing Disclosure Statement are not eligible for sale to Freddie Mac.When the Settlement/Closing Disclosure Statement discloses financing concessions that exceed Freddie Mac's limits and an unplanned buydown was involved, the Mortgage file must contain a written analysis and documentation evidencing that the unplanned buydown met each of the conditions in Section 5501.5(d) above.For Loan Product Advisor® Mortgages, the Seller must ensure that the data submitted to Loan Product Advisor accurately reflects the presence of any financing and sales concessions.