www.hudclips.org
U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D. C. 20410-8000
May 28, 1991
OFFICE OF THE ASSISTANT SECRETARY FOR
HOUSING-FEDERAL HOUSING COMMISSIONER
Mortgagee Letter 91-24
TO: APPROVED MORTGAGEES
SUBJECT: Single Family Loan Production - Implementation of Limit
on Financing Closing Costs
In Mortgagee Letter 91-1, you were advised that the
Department would publish regulations limiting the amount of
closing costs that can be financed in the mortgage. These
regulations have been published in the Federal Register.
The Secretary has determined that a maximum of 57 percent of
the borrower's total allowable closing costs may be financed in
the mortgage. All firm commitments issued by HUD or borrower
approvals (mortgage credit worksheets signed by the approved
underwriter) issued by Direct Endorsement lenders on or after
July 1, 1991 will be subject to the 57 percent limit on
financeable closing costs. This restriction applies to
applications insured under Sections 203(b), 203(i) (Outlying
Areas), 203(n) (Cooperative Units), 222 (Service Members), 223(e)
(Miscellaneous Housing Insurance), 234(c) (Condominiums), 238(c)
(Military Impact Area), 240 (Fee Simple purchase), 244
(Coinsurance), 245 (GPM/GEM), 251 (Adjustable Rate), and 809
(Armed Services Housing-Civilian Employees). The requirements
regarding the 98.75 percent loan-to-value limitation (or 97.75
percent if over $50,000) previously stated in Mortgagee Letter
91-1 also remain in effect.
PROCESSING INSTRUCTIONS
The Department will continue to have each HUD Field Office
establish those closing costs that the borrower may pay. To
calculate the maximum mortgage, underwriters will now follow
these steps:
1. Subtract from the sales price the amount of
closing costs to be paid by the seller. To the
lesser of this amount or the appraised value, add
57 percent of the total closing costs and apply
the standard 97/95 percent loan-to-value ratios
(97 percent if the adjusted price or the appraised
value is $50,000 or less).
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2. Apply the 97.75 percent maximum loan-to-value ratio
imposed by the 1990 housing legislation to the
appraised value excluding closing costs (98.75 percent
if the value is $50,000 or less).
The maximum mortgage amount is the lower of the two
calculations. Do not reduce the appraised value by the amount of
any closing costs paid by the seller or any third party in either
calculation. However, if the appraised value is less than sales
price, the maximum mortgage in the first calculation will be
based on the lesser of the adjusted price (sales price minus any
seller-paid closing plus 57 percent of total allowable closing
costs) or the appraised value plus 57 percent of total allowable
closing costs multiplied by the 97/95 percent loan-to-value
ratios.
Since nearly all mortgage transactions covered by the 1990
housing legislation will require additional equity, HUD is no
longer making any adjustment to the appraised value for closing
costs paid by the seller or any third party, provided those
contributions remain below our six percent limit on such
contributions. (If seller or third party contributions exceed
the six percent limit, adjustments are made using Attachment A to
the Mortgage Credit Analysis Worksheet, form HUD-92900WS.)
If the lender pays all or a portion of the borrower's
closing costs by charging a premium interest rate or more
discount points, that amount is not included in the estimate of
closing costs used to determine the maximum mortgage, nor is it
subtracted from the appraised value.
Examples of mortgage amount calculations are attached along
with the Mortgage Credit Analysis Worksheet (HUD-92900WS) which
has been revised to incorporate these changes.
Any questions regarding these changes should be directed to
your local HUD Field Office.
Very sincerely yours,
Arthur J. Hill
Assistant Secretary for
Housing-Federal Housing Commissioner
Attachments
_____________________________________________________________________
MORTGAGE CALCULATION EXAMPLES
A. Examples where the borrower pays all closing costs.
EXAMPLE NO. A1 - Sales price and value are $90,000;
total allowable closing costs are $3000.
First Calculation
$ 90,000 Lesser of Sales price or Value
+ 1,710 57% of Total Closing Costs ($3000 x 0.57)
=$ 91,710
X 97/95% (97% of first $25,000, 95% of remainder)
=$ 87,624 Maximum Mortgage
Second Calculation
$ 90,000 Appraised Value
X 97.75% Maximum loan-to-value under 1990 housing
legislation.
=$ 87,975 Maximum Mortgage
In this example, the maximum mortgage, excluding
Upfront MIP, is $87,624, which is the lesser of the two
calculations. The full 57 percent of closing costs is
added to the lesser of sales price or value before
applying the 97/95 percent calculations.
EXAMPLE NO. A2 - Sales price is, $90,000; appraised
value, however, is only $88,000. Total allowable
closing costs are $3000.
First Calculation
$ 88,000 Lesser of Sales price or Value
+ 1,710 57% of Total Closing Costs ($3000 x 0.57)
= 89,710
X 97/95% (97% of first $25,000, 95% of remainder)
$ 85,724 Maximum Mortgage
Second Calculation
$ 88,000 Appraised Value
X 97.75% Maximum LTV under 1990 housing legislation.
=$ 86,020 Maximum Mortgage
In this example, the maximum mortgage, excluding
Upfront MIP, is $85,724, the lesser of the two
calculations. Both calculations in this example (A2)
require use of the appraised value even though the
sales price was greater.
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EXAMPLE NO. A3 - Sales price and value are $47,000;
total allowable closing costs are $1200.
First Calculation
$ 47,000 Lesser of Sales price or Value
+ 684 57% of Total Closing Costs ($1200 x 0.57)
47,684
X 97% (Moderate-priced housing loan-to-value ratio)
=$ 46,253 Maximum Mortgage
Second Calculation
$ 47,000 Appraised Value
X 98.75% Maximum LTV under 1990 housing legislation
=$ 46,412 Maximum Mortgage
In this example, the maximum mortgage, excluding Upfront
MIP, is $46,253, the lesser of the two calculations.
The full 57 percent of closing costs is added to the
lesser of sales price or value before applying the 97
percent loan-to-value ratio.
B. Examples where all or a portion of closing costs are
Paid by the seller (or other third party).
EXAMPLE NO. B1 - Sales price and value $90,000; total
allowable closing costs are $3000, $1000 of which will
be paid by the seller. (For an example where value is
less than sales price, see Example B4.)
First Calculation
$ 90,000 Sales price
- 1,000 Seller Paid Closing Costs
+ 1,710 57% of Total Closing Costs ($3000 x 0.57)
= 90,710
X 97/95% (97% of first $25,000, 95% of remainder)
$ 86,674 Maximum Mortgage
Second Calculation
$ 90,000 Appraised Value
X 97.75% Maximum LTV under 1990 housing legislation
=$ 87,975 Maximum Mortgage
In this example, the maximum mortgage, excluding
Upfront MIP, is $86,674, which is the lesser of the two
calculations. 57 percent of the total closing costs
were added to the adjusted sales price before applying
the 97/95 percent loan-to-value ratios. Note that the
amount of seller-paid closing costs was subtracted from
the sales price before applying the 57 percent limit;
but, the amount of seller-paid closing costs was not
subtracted from appraised value in the second
calculation.
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EXAMPLE NO. B2 - Sales price and value are $60,000;
total allowable closing costs are $2000, $1000 of which
will be paid by the seller.
First Calculation
$ 60,000 Sales price
- 1,000 Seller-paid Closing Costs
+ 1,140 57% of Total Closing Costs ($2000 x 0.57)
=$ 60,140
X 97/95% (97% of first $25,000, 95% of remainder)
=$ 57,633 Maximum Mortgage
Second Calculation
$ 60,000 Appraised Value
X 97.75% Maximum LTV under 1990 housing legislation
=$ 58,650 Maximum Mortgage
In this example, the maximum mortgage, excluding
Upfront MIP, is $57,633 (the first calculation), which
is the lesser of the two. The full 57 percent of total
closing costs ($1140) is added to the adjusted sales
price before applying the 97/95 percent loan-to-value
ratios.
EXAMPLE NO. B3 - Sales price and value are $47,000;
total allowable closing costs are $1200, all of which
will be paid by the seller.
First Calculation
$ 47,000 Sales price
- 1,200 Seller-paid Closing Costs
+ 684 57% of Total Closing Costs ($1200 x 0.57)
$ 46,484
x 97% (Moderate-priced housing loan-to-value ratio)
=$ 45,089 Maximum Mortgage
Second Calculation
$ 47,000 Appraised Value
X 98.75% Maximum LTV under 1990 housing legislation
=$ 46,412 Maximum Mortgage
In this example, the seller is paying all the
borrower's closing costs, and thus, the total amount is
subtracted from sales price with the 57 percent added
back. The maximum mortgage is derived from the first
calculation, the lesser of the two.
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EXAMPLE NO. B4 - Sales price is $80,000; appraised
value is $78,000. Total allowable closing costs are
$2000, $800 of which will be paid by the seller.
First Calculation
(Step 1)
$ 80,000 Sales price
800 Seller-paid Closing Costs
+ 1,140 57% of Total Closing Costs ($2000 x 0.57)
$ 80,340
(Step 2)
$ 78,000 Appraised Value
+ 1,140 57% of Total Allowable Closing Costs
= 79,140 Value plus 57% of Total Closing Costs
(Step 3)
$ 79,140 Lesser of sales price minus seller-paid
closing costs plus 57% of total closing costs
or Appraised Value plus 57% of Allowable
Closing Costs
X 97/95% (97% of first $25,000; 95% of remainder
=$ 75,683 Maximum Mortgage
Second Calculation
$ 78,000 Appraised Value
X 97.75% Maximum LTV under 1990 housing legislation
=$ 76,245 Maximum Mortgage
In this example, the appraised value was $2,000 less
than the sales price. Subtract from the sales price
the amount of borrower closing costs paid by the
seller. The first calculation requires that the loan
amount be predicated on the lesser of the adjusted
sales price (sales price minus seller-paid closing
costs plus 57 percent of total allowable closing costs)
or the appraised value plus 57 percent of total
allowable closing costs. In this case, the lesser of
the two is $79,140 (based on appraised value) which
yields a maximum mortgage of $75,683 after applying the
normal 97/95 percent loan-to-value limits. The second
calculation of 97.75 percent of the appraised value did
not affect the maximum mortgage.
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ATTACHMENT "A" TO HUD-92900-WS
FHA CASE NUMBER: ______________________
PART I. (Numbers in () in Part I correspond to HUD-92900-WS)
A1. $__________________ Total Mortgage with UFMIP (6c)
A2. $__________________ Six percent (6%) of Line A1.
A3. $__________________ Total Seller or other third party
contribution toward buydown (discount
points, interest payments, etc.) or
closing costs normally paid by the
borrower, including origination fee.
Show amount in each category below:
$___________ CCs $___________ Pts
$___________ Buydown $__________ Other:
A4. $__________________ Excess Contribution (Amount A3 exceeds
A2; if 0, no further computation is
required.)
PART II.
(Excess contributions must be subtracted from Adjusted Price
(Line 14d) and maximum mortgage amount recomputed even if
mortgage amount was determined by Value computation (Line
14f(2)). If sales price exceeds value, subtract excess
contribution from value, add 57% of closing costs, and
recompute maximum mortgage per Line 14f(1).
B1. $__________________ Adjusted Price (14d) minus Excess
Contribution A4
B2. $__________________ Maximum mortgage per Line 14f(1) using
B1. B1 x 97/9.5% or 97% if $50,000 or
less.
B3. $__________________ Maximum mortgage without UFMIP. (May not
exceed B2 above or 14f(2) of HUD-92900-WS.)
6/91
_____________________________________________________________________
Mortgagee Letter 91-24
__________________________________________________________________________
U.S. Department of Housing and Urban Development
Mortgage Credit Analysis Worksheet
__________________________________________________________________________
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form HUD-92900-WS (6/91)
8
_____________________________________________________________________
Mortgagee Letter 91-24
__________________________________________________________________________
U.S. Department of Housing and Urban Development
Mortgage Credit Analysis Worksheet
__________________________________________________________________________
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form HUD-92900-WS (6/91)
9