www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 August 8, 1986 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 86-15 TO: ALL APPROVED MORTGAGEES SUBJECT: Changes to Single Family Programs Recently HUD Secretary Samuel R. Pierce, Jr., established a Task Force to investigate allegations of fraud and abuse in HUD's single family mortgage insurance programs. Based upon the data analyses and recommendations of the Task Force and at the direction of the Secretary, we are making several changes to HUD's single family program procedures. Some of these changes will be effective immediately, while others will be phased in over the next few months. We believe these changes will curb the abuses that were found in our single family programs, strengthen our commitment to maintaining effective quality control and improve our underwriting process. The Task Force uncovered numerous instances where individuals and entities with multiple mortgages, including mortgages in default and mortgages on which claims had been paid, continued to obtain insured mortgages on additional properties. Neither the new applications nor the required credit reports disclosed these prior defaults. To prevent these and other abuses, we are implementing the following changes: 1. Using delinquency and claims reports, the Office of Single Family Housing periodically distributes to Field Offices data on mortgagors who (i) have been reported as 90 or more days delinquent, or (ii) were the mortgagor under a mortgage on which an insurance claim was paid during the preceding three years. Field Offices have been instructed to compile and distribute a list of "problem mortgagors" to all Direct Endorsement Lenders within their jurisdiction. Updated lists will be distributed by Field Offices as more recent data is made available from Headquarters. _____________________________________________________________________ 2 Effective immediately, names of proposed mortgagors on new applications must be matched against the most current "problem mortgagors" list. A non-occupant mortgagor reported on the list will be an automatic credit reject, unless the mortgagor has been reported as delinquent and is able to establish that the delinquency has been cured. In the case of an owner- occupant mortgagor, a continuing serious delinquency or claim payment within the preceding three years will be grounds for automatic rejection in the absence of extenuating circumstances beyond the mortgagor's control. Examples of extenuating circumstances are serious long-term illnesses, loss of employment because of factory slowdowns or shutdowns, death of a principal wage-earner, etc. Acceptance of a mortgage for assignment constitutes evidence of extenuating circumstances. Of course, such extenuating circumstances surrounding a previous delinquency are not necessarily positive indications of current creditworthiness but are merely factors to be taken into account in the evaluation. It is important to stress that the "problem mortgagors" list is not all-encompassing. Absence of an applicant's name on the list does not excuse the mortgagee from its obligation to ask all appropriate questions in preparing the application form and to check the credit report and other available sources of financial information to determine the borrower's credit history. Where the credit report or other information indicates that a non-occupant applicant was the mortgagor under a non-FHA- insured mortgage which was the subject of a foreclosure proceeding pending at any time within the preceding three years, or is currently more than 90 days delinquent on such a mortgage, such information will be grounds for automatic credit rejection unless the applicant is able to establish that the delinquency has been cured. In the case of an owner-occupant applicant, such information should be taken into account in the evaluation of creditworthiness in the same manner as listing on the FHA "problem mortgagors" list, as described above. _____________________________________________________________________ 3 2. Effective August 15, 1986, the term of newly issued HUD conditional commitments for proposed construction and Direct Endorsement proposed construction appraisals will be shortened from one year to nine months. No extensions will be granted after this nine-month term without an appraiser updating the appraisal and making a field review of the property. Extensions of outstanding conditional commitments or Direct Endorsement appraisals will be subject to these same requirements, i.e. nine-month term and a field review and update of the appraisal. VACRVs involving proposed construction are also subject to this nine-month term. This means that for any CRV issued by the VA on or after August 15, 1986, the CRV expiration date will be considered by FHA to be nine months from the date of issue. The purpose of this change is to reduce HUD's risk because of lower inflation and the possible rapid development of regional soft markets. 3. Effective for all appraisals assigned on or after August 15, 1986, appraisers will be instructed to make a dollar-for-dollar adjustment to comparables where seller buydowns exceeding five percent of the sales price were included. Seller buydowns are payments for discount points, any type of interest payments, or seller payment of closing costs normally (under local market practice) paid by the buyer (including the one percent loan origination fee). The sales price of the comparable is selected as the base for making the adjustment in order to simplify the process. To provide an abbreviated example: Sales Price of Comparable $75,000 Dollar amount of seller buydowns: $8,750 Less: five percent of sales price 3,750 5,000 Adjusted Value of Comparable Property $70,000 _____________________________________________________________________ 4 To the extent possible, appraisers should select comparable sales from properties which sold without the benefit of various seller buydowns in excess of five percent. When comparables are not available without these types of incentives, adjustments must be made to the sales price of the comparable to better reflect the cash equivalent value of the property. The instructions above, particularly the five percent allowance, relate to seller buydowns as defined. Where sellers use other known incentives such as trips, non-realty items, monthly payments to principal, homeowner association or condominium association fees, and similar gifts as inducements to purchase, reductions in the sales price of the comparable must be made on a dollar-for-dollar basis from the first dollar, without regard to the five percent allowance. These instructions apply both to new construction and sales of existing properties. The appraiser will be responsible for making appropriate notations on the HUD Form 92800-3, explaining all adjustments made. 4. The instructions in this paragraph are intended to assure that reasonable adjustments are made to reflect the effects of excessive buydowns or creative financing. For all applications for HUD firm commitment submitted on or after August 15, 1986, and all applications not processed by Direct Endorsement lenders (i.e., mortgage credit worksheet not yet signed by the underwriter) prior to August 15, 1986, seller buydowns in excess of five percent of the mortgage amount must be applied as a dollar-for-dollar reduction of the sales price in mortgage credit process. Seller buydowns are payments for discount points, any type of interest payments, or seller payment of closing costs normally (under local market practice) paid by the buyer (including the one percent loan origination fee). _____________________________________________________________________ 5 Attachment A to this Mortgagee Letter provides a sample format for mortgagee calculation of the maximum mortgage amount in all transactions involving a seller buydown. (Examples I-III of Attachment A demonstrate sample calculations. Additional examples of application of this instruction are provided in Attachment B.) The mortgagee should complete the form (or a comparable worksheet) in every case involving a seller buydown and retain the completed form or a copy in the mortgagee's origination file. The completed worksheet should be submitted to HUD as part of the application package (or, the case of Direct Endorsement lenders, as an attachment to Form 92900) only where the seller buydown exceeds five percent. If the sales contract sets forth a specific number of discount points to be paid by the seller, that amount should be used by the mortgagee to calculate the total seller buydown unless the specified points, when added to any points provided to be paid by the buyer, are less than those currently being provided for in the market at the time of execution of the sales contract. If the amount of points to be paid by the seller, plus any discount points provided to be paid by the buyer, are less than the amount currently being charged in the market, the mortgagee should include in the total seller buydown the amount of discount points it currently would charge, less any points provided to be paid by the buyer. If the sales contract guarantees a specific interest rate to the buyer but leaves the amount of discount points to be paid by the seller to be determined at closing, the mortgagee should include in the total seller buydown (as reflected in Attachment A worksheet) the discount points which the mortgagee would charge to fund a loan on the date of execution of the sales contract. (See Attachment B, Example VI.) _____________________________________________________________________ 6 The examples contained in the Attachments do not include seller buydown payments in the form of seller-paid closing costs or temporary buydowns. However, it is emphasized that all such payments are to be included in the calculation. HUD recognizes the complexities of these requirements and will provide additional guidance and refinements as experience dictates. Any increases in the seller's contribution subsequent to mortgage credit processing which, when added to those previously disclosed, amount to more than five percent of the mortgage amount, will require reprocessing by HUD or the Direct Endorsement underwriter. If the mortgagee was required to use an estimate of the seller-paid points in the original processing, as described above, only increases over the estimate should be counted as increases for reprocessing purposes. The reprocessing requirement does not apply where the seller is required to pay discount points in excess of those anticipated at the time of contract signing due solely to subsequent upward movement in market interest rates and discount points. This exception applies where a sales price and interest rate are fixed in the sales contract, and the increase in seller-paid points constitutes what is commonly referred to as an "unplanned buydown." 5. Effective August 15, 1986, firm applications received which use a temporary buydown will no longer be processed at the first year buydown interest rate but will be processed at the note rate. Direct Endorsement applications processed (mortgage credit worksheet signed by underwriter) on and after August 15 must also comply with this underwriting change. 6. Effective August 15, 1986, all applications for firm commitment and all applications being processed by Direct Endorsement lenders must contain the borrower(s) social security number(s). Where HUD Form 92900.1 does not have a specific box designated for this information, the lender will be required to insert it on the right side of block 3. _____________________________________________________________________ 7 7. All mortgages originated pursuant to an Application for Commitment for Insurance (HUD-92900) signed by the applicant on or after December 1, 1986, will contain a provision requiring that any subsequent purchaser of the property must be found to be creditworthy if the contract of sale is executed less than 24 months after execution of the mortgage, or less than 24 months after a prior transfer of the property subject to the mortgage. Failure to satisfy this condition will be grounds for acceleration of the mortgage, subject in each case to HUD approval. This requirement applies whether or not a formal assumption of the mortgage obligation by the purchaser, and a release of the original mortgagor from liability, is proposed. The new provision will read as follows: The mortgagee shall, with the prior approval of the Federal Housing Commissioner, or his designee, declare all sums secured by this mortgage to be immediately due and payable if all or a part of the property is sold or otherwise transferred (other than by devise, descent or operation of law) by the mortgagor, pursuant to a contract of sale executed not later than 24 months after the date of execution of this mortgage or not later than 24 months after the date of a prior transfer of the property subject to this mortgage, to a purchaser whose credit has not been approved in accordance with the requirements of the Commissioner. This provision must be made a part of the mortgage (or, where applicable, deed of trust or security deed), either by incorporation into the form itself or by rider, and in either case initialed by the parties. When the mortgage forms for a state are depleted and must be reprinted, the above provision will be inserted into the new printed form. _____________________________________________________________________ 8 Creditworthiness of the purchaser will be determined in accordance with FHA mortgage credit analysis requirements. In the case of a proposed transfer of a property subject to a mortgage either owned or serviced by a Direct Endorsement lender, credit analysis will be the responsibility of the Direct Endorsement lender. (If the owner and servicer are separate but both are approved Direct Endorsement lenders, they may work out responsibility for the credit analysis between themselves.) If neither the owner nor the servicer of the mortgage is a Direct Endorsement lender, a submission for credit analysis must be made to the HUD Field Office by either the owner or servicer. When a submission for credit analysis is made to HUD, the submission should be made under an explanatory cover letter and must include the following documentation: 1. Copy of the Sales Contract 2. Credit Report 3. Form 92900 with required exhibits 4. Verification of Deposits (Form HUD-92004-F) 5. Verification of Employment (Form HUD-92004-G) 6. Amount of Second Mortgage to be executed by purchaser, if any, and required monthly payments 7. Purchaser Approval/Rejection Letter (described below) prepared for HUD Underwriter's signature The lender or servicer preparing the submission is responsible for following HUD requirements applicable to originations of new mortgages. For example, a face-to-face interview with the proposed purchaser is required if the lender/servicer's office is within 50 miles of the property. A telephone interview may be utilized where the property is more than 50 miles distant as set forth in Mortgagee Letter 83-17. The applicable requirements are set forth generally in HUD Handbook 4000.2 REV-1 and supplementary mortgagee letters. _____________________________________________________________________ 9 If HUD consent to release the current mortgagor from liability is to be sought, Form 2210 should be included in the submission. If the purchaser obtains HUD credit approvals, HUD will also consent to release the mortgagor from liability, if requested under Form 2210, subject to execution by the purchaser of a formal assumption and agreement to pay the mortgage. The Form 2210-1, executed by the local office, will evidence this consent. However, credit approval will not itself effectuate release of liability. The mortgagee therefore should advise the seller and buyer, at the time the request for credit approval is made, that the seller will not be released unless the buyer executes a formal assumption and agreement to pay and a formal release of the seller is executed. (If the purchaser's credit is approved by a Direct Endorsement lender, the Direct Endorsement lender will be authorized to release the mortgagor from liability, if requested, subject to similar conditions.) The submission should be sent to the mortgage credit section of the HUD Field Office prior to the transfer of the property or, if the request has not been submitted before the transfer, as promptly after the mortgagee learns of the transfer as practicable. If the purchaser refuses to provide the necessary mortgage credit information and the transfer has already occurred without mortgage credit approval or subsequently occurs without such approval, the mortgagee will be required to notify the mortgage credit section of the HUD Field Office as promptly as practicable, as described below. Credit analysis by a Direct Endorsement lender's underwriter should be conducted pursuant to similar procedures based upon substantially similar documentation. The findings of a HUD-processed mortgage credit analysis will be transmitted to the mortgagee by means of a letter in the form attached to this Mortgagee Letter as Attachment C. The mortgagee should provide copies of this letter to the seller and proposed purchaser. Notice of the findings of a Direct Endorsement lender- processed mortgage credit analysis, in substantially similar form, _____________________________________________________________________ 10 should be addressed by the lender directly to the seller and buyer. Where the buyer's credit is rejected and the transfer has not already taken place, language should be added to the notification to the seller to the effect that the seller should seek another purchaser who will meet the HUD mortgage credit requirements. It is anticipated that inclusion in the mortgage of the new provision will cause sellers to apply for prior credit approval of proposed purchasers in cases covered by these requirements. As indicated above, however, if the transfer is completed before approval is requested or before processing is completed, the analysis should be completed nevertheless. If the analysis is completed after transfer and the purchaser is found creditworthy (by the Direct Endorsement lender or HUD), the mortgage will not be accelerated. If a HUD-processed analysis is completed after transfer and the purchaser is rejected, then HUD, at its discretion, may instruct the mortgagee to accelerate the mortgage in accordance with the new provision. If a Direct Endorsement lender-processed analysis is completed after transfer and the purchaser is rejected, the lender will be required to notify HUD as promptly as practicable, together with the lender's recommendation as to whether the mortgage should be accelerated. The lender will be required to furnish to HUD the credit file on the basis of which the lender's credit analysis was made. HUD thereafter will advise the mortgagee whether to advise the seller and buyer of the possibility of acceleration or of HUD's election not to direct that the mortgage be accelerated. If a transfer is completed before credit approval of the purchaser is requested, the mortgagee will be required to advise the seller and purchaser of the requirement of credit approval of the purchaser. If the purchaser fails or refuses to provide necessary mortgage credit information to permit processing, the mortgagee (whether Direct Endorsement lender or not) must notify HUD of such failure or refusal and furnish to HUD such credit information as is available from sources other than the purchaser. _____________________________________________________________________ 11 Additional instructions regarding the processing of mortgage credit approvals of purchasers covered by these requirements and the application of HUD's mortgage credit analysis requirements will be made available before December 1, 1986. The credit approval procedures prescribed herein do not affect current requirements regarding notification of changes in mortgagors. Requirements that lenders report changes in mortgagors to HUD in accordance with MIAS Letter 86-2 will remain in effect. Mortgagees may charge mortgagors a reasonable and customary fee, in no event exceeding $500, for the processing of purchaser credit approvals required by these provisions. The fee will be permitted to be collected at the time of receipt of the application for approval. However, if the purchaser's credit is approved but a closing of the sale does not occur for reasons beyond the control of the purchaser, the mortgagee will be required to refund one-half of the collected fee. 8. Effective October 1, 1986, lenders are required to report all foreclosures to a national credit bureau which includes but is not limited to such firms as: Associated Credit Services, Associated Credit Bureaus, Chilton Corporation, Credit Bureaus, Inc., TRW, Trans Union and United Credit Bureaus. This action must be taken at initiation of foreclosure. State law will govern the appropriate process which is to be considered the initiation of foreclosure. Lenders must report at initiation of foreclosure the following information. (1) Mortgagor's (co-mortgagor, if applicable) full name. (2) Mortgagor's (co-mortgagor, if applicable) social security number. (3) If mortgage was assumed and the original mortgagor was not released from liability, original mortgagor's name and social security number must be reported. (4) Property address affected by the foreclosure. (5) original mortgage amount. (6) Outstanding mortgage balance at time of initiation of foreclosure. _____________________________________________________________________ 12 At the time the information is provided the credit bureau, lenders should notify mortgagors in writing that the above information is being forwarded to the credit bureau. Subsequently, if an Application for Insurance Benefits (HUD Form 27011) is submitted, lenders must attach to that form the name of the credit bureau where the information was submitted. 9. Effective August 15, 1986, mortgagees are requested to include the social security number of the mortgagor in block 33, Part A, Form HUD-27011 Single Family Application for Insurance Benefits. The number should be written preceding and one line above the mortgagor's name. If a co-mortgagor's social security number is available, it should be placed to the right of the mortgagor's social security number. If there are additional mortgagors or additional space is required, you may use the "Mortgagee's comment" space after block 44. HUD intends to propose regulatory changes in the coming months which will facilitate the pursuit of deficiency judgments against individuals and entities who default on their mortgages and abuse our program. We have seen evidence that significant numbers of defaulting mortgagors--particularly investors--have considerable assets available to cover deficiencies remaining after foreclosure and disposition of the properties. Although State laws relating to deficiency judgments against single family mortgagors vary, we intend to vigorously pursue such actions in selected categories of cases. We will demonstrate to the public that HUD will not tolerate misuse of Government programs. The information collection requirements set forth in this Mortgagee Letter are being cleared with the Office of Management and Budget. Appropriate notification will be provided upon OMB approval. Very sincerely yours, Silvio J. DeBartolomeis General Deputy Assistant Secretary for Housing-Federal Housing Commissioner Attachments _____________________________________________________________________ ATTACHMENT A SUGGESTED FORMAT FOR PROVIDING INTEREST REDUCTION INFORMATION AND COMPUTING MAXIMUM MORTGAGE AMOUNT FOR EXCESS FINANCING CONCESSION TRANSACTION 1. $_____ Contract Sales Price 2. ______ Closing Cost to be 5. $_____ HUD estimate of value paid by purchaser 6. ______ HUD estimate of 3. ______ Required repairs closing cost to be paid by 7. ______ Value plus closing purchaser costs 4. ______ Acquisition Cost 8. $_____ Maximum mortgage amount based on the lesser of lines 4 or 7 9. _____ MIP to be financed in the mortgage 10. _____ Maximum mortgage amount including the MIP 11. _____ Amount of sellers contribution toward buydown (payments for points, any type of interest payment, or closing costs normally paid by the buyer including the one percent origination fee ). List amounts in each category based on mortgage amount on line 10 ____________________ 12. _____ 5 percent of line 10 13. _____ The amount that line 11 exceeds line 12 NOTE: If line 12 exceeds line 11, no further calculations are necessary. 14. $____ Contract sales price from line 1 15. _____ Minus amount on line 13 16. _____ Adjusted sales price 17. _____ Closing cost and/or required repairs to be paid by purchaser - lines 2 and 3 18. _____ Corrected Acquisition cost 19. _____ Maximum mortgage amount based on the lesser of line 7 or 18 _____________________________________________________________________ EXAMPLE I - Buyer pays $75,000 for the property Seller pays 4 points discount and $4,000 buydown SUGGESTED FORMAT FOR PROVIDING INTEREST REDUCTION INFORMATION AND COMPUTING MAXIMUM MORTGAGE AMOUNT FOR EXCESS FINANCING CONCESSION TRANSACTION 1. $75,000 Contract Sales Price 2. 3,000 Closing Cost to be 5. $70,000 HUD estimate of value paid by purchaser 6. 3,000 HUD estimate of 3. ____0__ Required repairs closing cost to be paid by 7. 73,000 Value plus closing purchaser costs 4. 78,000 Acquisition Cost 8. $69,850 Maximum mortgage amount based on the lesser of lines 4 or 7 9. 2,654 MIP to be financed in the mortgage 10. 72,504 Maximum mortgage amount including the MIP 11. 6,900 Amount of sellers contribution toward buydown (payments for points, any type of interest payment, or closing costs normally paid by the buyer including the one percent origination fee ). List amounts in each category base on mortgage amount on line 10 $2900 discount $4,000 int. buydown 12. 3,625 5 percent of line 10 13. 3,275 The amount that line 11 exceeds line 12 NOTE: If line 12 exceeds line 11, no further calculations are necessary. 14. $75,000 Contract sales price from line 1 15. 3,275 Minus amount on line 13 16. 71,725 Adjusted sales price 17. 3,000 Closing cost and/or required repairs to be paid by purchaser - lines 2 and 3 18. 74,725 Corrected Acquisition cost 19. 69,850 Maximum mortgage amount based on the lesser of line 7 or 18 _____________________________________________________________________ EXAMPLE II - Buyer pays $70,000 for the property Seller pays 6 points discount SUGGESTED FORMAT FOR PROVIDING INTEREST REDUCTION INFORMATION AND COMPUTING MAXIMUM MORTGAGE AMOUNT FOR EXCESS FINANCING CONCESSION TRANSACTION 1. $70,000 Contract Sales Price 2. _3,000 Closing Cost to be 5. $70,000 HUD estimate of value paid by purchaser 6. __3,000 HUD estimate of 3. -0- Required repairs closing cost to be paid by 7. 73,000 Value plus closing purchaser costs 4. 73,000 Acquisition Cost 8. $69,850 Maximum mortgage amount based on the lesser of lines 4 or 7 9. 2,654 MIP to be financed in the mortgage 10. 72,504 Maximum mortgage amount including the MIP 11. 4,350 Amount of sellers contribution toward buydown (payments for points, any type of interest payment, or closing costs normally paid by the buyer including the one percent origination fee ). List amounts in each category based on mortgage amount on line 10 $4,350 discount 12. 3,625 5 percent of line 10 13. 725 The amount that line 11 exceeds line 12 NOTE: If line 12 exceeds line 11, no further calculations are necessary. 14. $70000 Contract sales price from line 1 15. 725 Minus amount on line 13 16. 69275 Adjusted sales price 17. 3000 Closing cost and/or required repairs to be paid by purchaser - lines 2 and 3 18. 72275 Corrected Acquisition cost 19. 69161 Maximum mortgage amount based on the lesser of line 7 or 18 _____________________________________________________________________ EXAMPLE III - Buyer pays $65,000 for the property Seller pays $3,000 interest buydown SUGGESTED FORMAT FOR PROVIDING INTEREST REDUCTION INFORMATION AND COMPUTING MAXIMUM MORTGAGE AMOUNT FOR EXCESS FINANCING CONCESSION TRANSACTION 1. $65000 Contract Sales Price 2. _3000_ Closing Cost to be 5. $70000 HUD estimate of value paid by purchaser 6. 3000 HUD estimate of 3. -0- Required repairs closing cost to be paid by 7. 73000 Value plus closing purchaser costs 4. 68000 Acquisition Cost 8. $65100 Maximum mortgage amount based on the lesser of lines 4 or 7 9. 2473 MIP to be financed in the mortgage 10. 67573 Maximum mortgage amount including the MIP 11. 3000 Amount of sellers contribution toward buydown (payments for points, any type of interest payment, or closing costs normally paid by the buyer including the one percent origination fee ). List amounts in each category based on mortgage amount on line 10 ___$3000 interest buydown__ 12. 3378 5 percent of line 10 13. ____0_ The amount that line 11 exceeds line 12 NOTE: If line 12 exceeds line 11, no further calculations are necessary. 14. $____ Contract sales price from line 1 15. _____ Minus amount on line 13 16. ______ Adjusted sales price 17. ______ Closing cost and/or required repairs to be paid by purchaser - lines 2 and 3 18. ______ Corrected Acquisition cost 19. ______ Maximum mortgage amount based on the lesser of line 7 or 18 _____________________________________________________________________ ATTACHMENT B Example I A buyer and seller execute a written sales contract. The buyer agrees to seek a mortgage loan at the current interest rate of 9-1/2 percent and the seller agrees to pay only the current discount of 3 points and no more. In the transaction, the mortgagee must use 3 points in its calculations on Attachment A, because that reflects the market in effect when the contract was signed. If the market discount were 6 points, even though the contract limited the seller's payment to 3 points, 6 would have to be used in the mortgagee's calculations. Example II A buyer and seller execute a written sales contract. The buyer agrees to seek a mortgage loan at an 8-1/2 percent interest rate (one percent below the current market) and the seller agrees to pay 3 points. The buyer does not agree to pay a discount. In this transaction, since the mortgagee would have funded an 8-1/2 percent mortgage at a higher discount on the date the sales contract was signed (assume 8 points) and since the contract only provides for the seller to pay 3 points, the mortgagee would prepare Attachment A using 8 points. Had the buyer agreed to pay 5 points in writing, the mortgagee could then use 3 points for the seller's portion. Example III A buyer and seller execute a written sales contract. The seller agrees to pay whatever points are necessary at the closing in order for the buyer to receive a 9-1/2 percent mortgage. Since the discount obligation is open ended, the mortgagee must determine the number of points it would have charged had the loan closed on the date the sales contract was signed, assume 3 points on a rate of 9- 1/2 percent. The mortgagee must prepare Attachment A with a seller discount of 3 points. _____________________________________________________________________ Example IV A buyer and seller execute a written sales contract. The seller agrees to pay whatever points are necessary at the closing in order for the buyer to get an 8-1/2 percent mortgage. Since the discount is open ended, the mortgagee must determine the number of points it would have charged had the loan closed on the date the sales contract was signed. In this example assume the current market was 9-1/2 percent and 3 points and the mortgagee would have only funded an 8- 1/2 percent mortgage with 8 points. The mortgagee would use 8 points in preparation of Attachment A. Example V A buyer and seller execute a written sales contract. The buyer agrees to seek a 10 percent mortgage and the seller agrees to pay up to 4 points. At the time the contract is signed, the market rate is 9-1/2 percent and 3 points. Since the lender would fund the 10 percent loan with no points, it would prepare Attachment A with no seller points. Note that if the buyer subsequently obtained a 9-1/2 percent loan and the seller paid more than 5 points discount, reprocessing would be necessary as required below since the conditions under which the mortgage was underwritten had changed. Example VI A buyer and seller execute a written sales contract. The buyer agrees to seek a 9-1/2 percent mortgage and the seller agrees to pay what discount points may be charged at closing but under no circumstances more than 8 points. In this transaction, assume the mortgage was funding 9-1/2 percent loans at the time the sales contact was signed with 3 points. The mortgagee would use 3 points in preparing Attachment A for determining the seller's discount. _____________________________________________________________________ Example VII A buyer and seller execute a written sales contract. The buyer agrees to close the loan at the VA rate in effect at the time of closing and the seller agrees to pay whatever number of points that are charged at closing. In this transaction, assume the VA rate in effect at the time the sales contract is signed is 9-1/2 percent and 4 points are being charged. The mortgagee would use 4 points in preparing Attachment A for determining the seller's discount. Note that if the VA rate in effect at the time of closing had been raised to 10 percent and the discount points would be over 5, if the buyer would close at 10 percent, reprocessing would be necessary since more than 5 points would be paid by the seller and that no specific interest rate was set forth in the sales contract. _____________________________________________________________________ ATTACHMENT C SAMPLE LETTER FOR PURCHASER CREDIT APPROVAL/REJECTION TO: (Mortgagee Name) DATE: ______________ SUBJECT: Request for Credit Approval of Purchaser FHA Case # for property being purchased: ___________________ Purchaser's Name: ________________________ Seller's Name: _____________________________ Address of Property: ___________________________ The purpose of this letter is to advise you that the credit of the purchaser as identified above has been _________ Approved _________ Rejected for the purchase of the subject property. ______________________________ HUD Underwriter (Copies of this letter when signed by HUD Underwriter should be provided to the seller and the purchaser by the mortgagee. A Form 2026, Report on Application, should be prepared under the same procedures as initial cases when a reject is involved and distributed as an attachment to this letter.) _____________________________________________________________________