www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 December 1, l988 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 88-37 TO: ALL APPROVED MORTGAGEES SUBJECT: Single Family Production - Recap of HUD's Temporary Interest Buydown Policy An infinite variety of temporary buydown arrangements are presently being offered or proposed by sellers in an effort to market homes. As indicated in Mortgagee Letter 87-35 : 1. HUD will continue to underwrite loans on the basis of the reduced interest rate (not to exceed 2 percent or 200 basis points reduction). 2. While larger buydowns, such as 3-2-1, will be permitted, the Department will qualify borrowers at an interest rate no more than 2 percent less than the note rate regardless of how much reduction takes place in the first year. We want to emphasize, however, that in all cases the buydown agreement may not result in more than a 1 percent increase in the effective interest rate each year. Instructions for handling the escrow funds are contained in HUD Handbook 4155.1 REV, Mortgage Credit Analysis on One- to Four-Family Properties. Buydown arrangements which do not meet all the requirements of Paragraph 3-28 e.(3) of Handbook 4155.1 REV, as modified by Mortgagee Letter 87-35 and by this Mortgagee Letter, shall not be processed as a buydown, but the monthly assistance payments will be treated as a compensating factor. Even if not treated as a buydown, the amount of the seller's contribution must be reported on Attachment A, as required in Mortgagee Letter 88-15 and will be computed in arriving at the 6 percent limitation. Applications that are not underwritten on the basis of a reduced interest rate are not identified with the buydown suffix and the escrowed funds need not be placed with a supervised lending institution. The funds, however, must not be made available to the mortgagor. Mortgage loans which involve a so-called "premium interest rate" (typically somewhat over the current market rate) will normally produce revenue` when sold in the secondary market. To the extent that these funds are to be used for the benefit of the purchaser, their use is restricted to the establishment of a buydown and would not become a part of the 6 percent threshold. Of course, contributions on any mortgage loan where the mortgagee provides funds from sources other than those cited above, or where the seller provides a buydown or pays discounts, must become a part of the 6 percent contribution in completing Attachment A as required in Mortgagee Letter 88-15. Attachment A, with explanatory information, must accompany even those applications where the funds for the buydown are derived solely from charging a premium interest rate. Any questions regarding this letter should be directed to the Mortgage Credit Branch of the Field Offices. Sincerely yours, Thomas T. Demery Assistant Secretary