FHA Issues New Guidance on Policeman Next Door Program

This program has been around for a long time, but FHA has added some incentives.

The Federal Housing Administration has updated its guidance for  its long-running REO sales program that provides incentives for policeman, firefighters and teachers to purchase FHA-owned homes in designated revitalization areas.

The Department of Housing and Urban Development will sell FHA properties to municipal employees at 50% of the appraised value provided they agree to fix up and live in the home for at least three years.

The new mortgagee letter notes that eligible buyers can take out an FHA-insured mortgage with a $100 downpayment and
“you may finance closing costs,” according to mortgagee letter 2013-20.

“The mortgagee letter provides clarification that seemed to be needed based on input from the industry, and gives us an opportunity to remind lenders of the basic program requirements,” a HUD spokesman said.

An eligible buyer can also get an FHA 203(k) mortgage that provides financing for the purchase and renovation of the property.  Participants in the “Good Neighbor Next Door Sales Program” can also take out conventional or VA financing.

However, the borrower earns the 50% discount by living in the house for three years.

If the property has an appraised value of $100,000, the borrower must take out a second mortgage and a note on the
discounted amount, which is $50,000 in this example.

The mortgagee letter contains the note and second mortgages that the borrower must sign.

No interest or payments are required on this "silent second" mortgage if the borrower fulfills the obligation to live
in the home. However, they will be required to pay a pro-rata portion of the discount to HUD if they fail to live in the house for three
years.