Heart and Homestead Earned Incentive Overview

• Provides a down payment incentive of up to 10% of the home purchase price or $20,000, whichever is less.
• Pre-paid to homebuyers at the time of closing on their home and secured by a subordinate mortgage.
• Earned over a 5-year period through volunteer time and financial donations to nonprofit Participating Agencies.
• No income requirements and never amortizes.
• There is never any interest or payment schedule for any Unearned Incentive Balance.
• Any Unearned Incentive Balance ONLY becomes due upon certain triggering events; namely future sale of the home (see Incentive Agreement).
• In the event there remains an Unearned Incentive Balance at the time of a bona fide, arm’s length home sale, the obligation is generally limited to available proceeds after satisfaction of approved senior mortgage(s). Other restrictions apply.

Treatment of Earned and Unearned Incentive Amounts

Is the Earned Portion of the Incentive Taxable?

While every Recipient should consult their tax advisor to determine tax implications for themselves, the total value of the incentive is generally not considered taxable income at the time of disbursement since it is an unearned incentive obligation secured by a junior mortgage. Recipients will, however, receive a 1099-G annually from Washington County for the portion of the incentive that they actually earned (accrued) over the previous year through volunteer service and or financial contributions to eligible entities. These earnings represent reportable grant income for the purposes of the IRS.

Does the Recipient Ever Owe the Unearned Incentive Balance?

The Unearned Incentive Balance must be repaid, with limitation, in the event any of the following were to occur:

1. The home is no longer the recipient’s primary residence.
2. The home is sold or transferred to a third party.
3. Refinancing occurs without EDWC consent.
4. Total aggregate debt exceeds initial balance of first mortgage and, if applicable, government supported homebuyer assistance second mortgage.
5. Fraud and/or misrepresentation in the application.
6. Breach of Incentive Agreement.

Refinancing & Subordination

The incentive is prepared to assume a changed subordinate position to accommodate various eligible situations such as a homeowner modifying their existing mortgage, selling to the secondary market, refinancing to a lower rate or obtaining a HELOC (with limitation). Here is what the process would look like in the event such a need occurs:

1. 1. Lenders will contact EDWC requesting a modified subordination, providing an explanation.
   2. EDWC will review the request and determine if it is eligible per the Incentive Agreement.
   3. If yes, EDWC will ensure that the total aggregate debt secured by mortgages on the Home do not exceed the sum of the initial balance of the first mortgage loan from Lender and, if approved at the time of application, the initial balance of a government supported homebuyer assistance second mortgage incurred by the Recipient upon acquisition of the Home.
   4. We will also confirm that Heart and Homestead’s junior mortgage would not slide any further than a third position.
   5. EDWC will then provide the Lender with a standard form Mortgage Subordination Agreement.
   6. There is a $250 pass-through charge that EDWC will ask Lenders to assess the Recipient at close, incorporating this charge into the closing statement.

Positioning for the Secondary Market GSEs

When packaging a mortgage for the secondary market, lenders should code the Heart and Homestead incentive as a Community Seconds® subordinate mortgage.  While not purchased by the GSEs, Community Seconds® are required to meet certain criteria when they are subordinate to first mortgages purchased by Fannie Mae or Freddie Mac. When they do, they are accepted by these GSEs as a tool for prospective home buyers to overcome barriers to ownership by addressing upfront costs associated with the mortgage transaction, including down payments and closing costs. Also, when repayment of the Community Seconds® is deferred for five years or more, a lender is not required to include a monthly payment for the Community Seconds® in its calculation of the borrower’s debt-to-income ratio. This is the case for Heart and Homestead.

We encourage lenders to review this criteria checklist provided by Fannie Mae as part of seeking to establish underwriter confidence that the GSEs will accept a first mortgage with a Heart and Homestead subordinate mortgage attached as a Community Seconds®. Specifically, a Washington County Heart and Homestead Down Payment Incentive approved and awarded by EDWC – with its subordinate second mortgage securing the incentive’s disbursement at close – meets all the “Yes” criteria referenced here by virtue of both Heart and Homestead’s eligibility requirements and how Heart and Homestead is structured through the incentive agreement.  The Heart and Homestead Community Seconds® subordinate mortgage does not include any resale restrictions.

Lenders can find further information on Community Seconds® eligibility in the Seller Guides of the respective GSE’s in the following sections:

• FNMA / MPF – B5-5.1-02
• FHLMC – 4204.2