www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 January 12, 1987 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 87-5 TO: ALL APPROVED MORTGAGEES SUBJECT: Additional Processing instructions for Determining Creditworthiness of Assuming Mortgagors- Mortgagee Letter 86-15 The processing lender will prepare a full credit application on the new applicant mortgagor in accordance with instructions contained in Handbook 4000.2 REV-l , Mortgagees' Handbook, Application through insurance, and other related material. However, HUD recognizes that the current owner and/or servicing mortgagee may not have an office in the vicinity of the property on which the HUD-insured mortgage is being assumed. Where there is no such office within 50 miles of the subject property, the lender may forego the requirement for a face-to-face interview provided a telephone interview is conducted by a specifically designated employee of the lender prior to the Application for Insurance (HUD 92900) being signed by the applicant. The mortgagee designated employee, must be experienced and well qualified to perform an in-depth interview. The Department expects that the questions during the interview will not be limited exclusively to those necessary to complete the blanks on the application, but rather are to include appropriate follow-up questions where necessary to elicit a complete picture of the applicant's financial position as well as the intended use of the property. The interview should be preceded by an application or information sheet being sent to the applicant so they can be prepared to respond to the questions during the interview. Where telephone interviews are conducted, the full application package must include a certification from the interviewer as to the date of the interview and the person(s) to whom they spoke. A separate interview must be conducted for unrelated co-mortgagors. Assistance in preparing the HUD Form 92900 is permissible under conditions outlined in Mortgagee Letter 83-17, Rural Outreach. _____________________________________________________________________ 2 The balance of the process is identical to all other applications; i.e., credit reports, VOEs and VODs must be ordered and handled solely by the lender. Exhibits submitted to the lender by the applicant are to include copies of recent payroll stubs or statements and recent bank statement(s). The application should also contain some reasonable confirmation of the Social Security number(s) such as the social security number(s) being displayed on the applicant's payroll stubs unless the applicant(s) is not enrolled, in which case an explanation should be included. Secondary mortgages or other borrowed funds may be used by assuming mortgagors, including investors, provided the repayment terms are clearly spelled out and included in the underwriting analysis. At this time, high ratio loans being assumed by non- occupant mortgagors need not be paid down. However, the non- occupant mortgagor who intends to assume a mortgage is subject to the same limitations as an initial purchaser as to the number of rental units in which he may have a financial interest (see 24 CFR 203.42). Current underwriting criteria regarding acceptability of credit and adequacy and stability of the mortgagor's income remain essentially unchanged. However, the Department has no desire to needlessly increase claims, so the underwriter's determination must include such additional considerations as the current market conditions where the property is located as well as the ability of the current mortgagor to continue to make the mortgage payments. It should be understood though that a clearly unacceptable applicant is never to be considered creditworthy to assume the mortgage regardless of other factors or circumstances. HUD's principal goal in implementing this procedure is to root out abuses to the programs which have grown disproportionately in recent years. We expect to largely eliminate such practices as "quick flips" of ownership and "straw buyers" acting on behalf of unqualified purchasers. As indicated in Mortgage Letter 86-15 , where the buyer is rejected and the sale has not been completed, the seller is to be advised to seek another purchaser who will meet the HUD mortgage credit requirements. As expressed in Mortgagee Letter 86-15, HUD Field Offices will make all decisions regarding possible acceleration of a mortgage. Unless there are compelling reasons not to do so, we expect to accelerate the mortgage in virtually every instance. However, creditworthiness will be determined by the DE underwriter. HUD will make the mortgage credit decision only in those instances in which neither the mortgage holder nor the servicer is DE qualified. For processing assumption applications, the DE underwriter, as in the case of streamlined refinancing, need only be approved in one HUD Field Office regardless of where the property is located. _____________________________________________________________________ 3 Ownership changes resulting from changes in shared equity mortgage arrangements are also considered to fall under the new mortgage provision and require credit approval. Credit approval will not be required in such instances as: (1) a divorce decree in which one of the spouses is required to transfer their interest in the property, and (2) devise of the property by will or intestate succession. When HUD or the DE underwriter approves the creditworthiness of the purchaser it is tantamount to the issuance of Form HUD 2210, Request for Credit Approval of Substitute Mortgagor. Thus, when the sale has been completed and the purchaser executes a formal assumption and agreement to pay, the seller may be issued a Form HUD 2210.1, Approval of Purchaser and Release of Seller, or otherwise advised that they are no longer liable to HUD for any claim made on this loan. HUD's 2210 procedure may continue to be utilized to permit substitution of mortgagors where not required by the security instrument. Sincerely yours, Thomas T. Demery Assistant Secretary _____________________________________________________________________