www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 September 28, 1990 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 90-36 TO: ALL APPROVED MORTGAGEES SUBJECT: Single Family Loan Production - Direct Endorsement Processing of Section 203(k) Rehabilitation Mortgage Insurance Effective immediately, the Department will allow Direct Endorsement lenders to process mortgages insured pursuant to Section 203(k) of the National Housing Act. With this change, HUD hopes to increase the number of mortgages processed under Direct Endorsement and, in particular, to increase loan production activity under the Section 203(k) program. With a 203(k) insured loan, the borrower can get one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work. To minimize the risk to the mortgage lender, the 203(k) loan can be insured by HUD after the initial closing of the loan, but prior to the rehabilitation being completed. At this point the lender has a fully-insured mortgage loan. The Government National Mortgage Association (GNMA) will accept fully-insured 203(k) loans into GNMA pools. Detailed information about the 203(k) program can be found in HUD Handbook 4240.4 REV-1, dated September 1989. The DE lender must be specifically approved and trained by the local HUD Office to process 203(k) insured loans. However, once approved, the DE lender may process any part of the application (property and/or borrower). The DE lender must provide certifications with each mortgage as required under 24 CFR 200.163 (b), (c) and (f). The DE lender must use Form HUD 54113 to comply with the certifications requirements of 24 CFR 200.163(b)(xi), (c) and (f). The certifications in Attachment A will be treated as an Addendum to Appendix 3 and Attachment B will be treated as an Addendum to Appendix 4 of HUD Handbook 4000.4 REV-1, until that handbook can _____________________________________________________________________ 2 be updated to incorporate the 203(k) certifications. Form HUD 54113 must be modified (see Attachment C) by adding "or applicable Mortgagee Letter" immediately after the phrase "as detailed in the Single Family Direct Endorsement Program Handbook" which appears in both the underwriter certification and the mortgagee certification. We encourage lenders to contact state and local government agencies to make them aware of the advantages of rehabilitating properties in their communities with 203(k) insured financing. When a government agency purchases a property and remains as the mortgagor, the Department will allow high loan-to-value financing (97/95 percent), the same as an owner-occupant. If a Local Urban Homesteading Agency (LUHA) makes a property available to a Homesteader, there will not be any additional downpayment requirements, because the LUHA's equity in the property is greater than the cost of the property to the Homesteader. Therefore, the difference will be considered a downpayment gift from the LUHA to the Homesteader. Investors can participate in the 203(k) program with 85 percent loan-to-value financing. You are also reminded that the interest rate and discount points are negotiable with the homebuyer and are not regulated by the Department. The use of Direct Endorsement has also been authorized for Section 222 (Mortgage Insurance for Service Persons); Section 238(c) (Mortgage Insurance for Federally Impacted Areas); and Section 240 (Purchase of Fee Simple Title from Lessors). You will be notified at a later date when you can begin processing these insured loans under the DE program. For additional information about the 203(k) program, please contact your local HUD Field Office for assistance. Very sincerely yours, Arthur J. Hill Acting Assistant Secretary for Housing-Federal Housing Commissioner Attachments _____________________________________________________________________ Attachment A SECTION 203(k) - GUIDE TO UNDERWRITER CERTIFICATIONS Addendum to Appendix 3, Handbook 4000.4 ===================================================================== Section 203(k) Purchase Transaction APPLICABLE DESIGNATION MORTGAGE TYPE CERTIFICATIONS A-31 Owner-occupant; 3, 5, 7, 46, first lien level 47, 48 payment mortgage. A-32 Owner-occupant; 3, 4, 5, 7, 46, first lien, 48, 49 graduated payment mortgage. A-32 Owner-occupant, 3, 5, 7, 46, first lien, 48, 53 adjustable rate mortgage (ARM). A-33 Investor, first lien 3, 5, 7, 46, 47, 50 A-34 Investor, first lien 3, 5, 7, 46, for higher 47, 51 owner-occupant mortgage amount pursuant to escrow procedure. A-35 Owner-occupant, 3, 5, 47, 52 junior lien, level payment mortgage. _____________________________________________________________________ Section 203(k) - Refinance Transaction Without Secondary Financing APPLICABLE DESIGNATION MORTGAGE TYPE CERTIFICATIONS B-51 Refinance; 3, 5, 7, 43, owner-occupant; first 46, 47, 48 lien; level payment mortgage. B-52 Refinance; 3, 5, 7, 43, Owner-occupant; 47, 48, 49 first lien, adjustable rate mortgage. B-53 Refinance; investor 3, 5, 7, 45, first lien. 47, 50 Section 203(k) - Purchase Transaction With Secondary Financing by a Federal, State or Local Government Agency APPLICABLE DESIGNATION MORTGAGE TYPE CERTIFICATIONS C-31 Owner-occupant, 3, 5, 7, 37, first lien; level 46, 47, 48 payment mortgage C-32 Owner-occupant, 3, 5, 7, 37, first lien; graduated 46, 48, 49 payment mortgage. C-33 Owner-occupant, 3, 5, 7, 37, first lien; adjustable 46, 48, 53 rate mortgage. C-34 Investor, first lien; 3, 5, 7, 37, level payment mortgage 46, 47, 50 2 _____________________________________________________________________ Section 203(k) - Refinance Transaction With Secondary Financing by a Federal, State or Local Government Agency APPLICABLE DESIGNATION MORTGAGE TYPE CERTIFICATIONS D-30 Refinance, 3, 5, 7, 37, owner-occupant, first 43, 46, 47, 48 lien; level payment mortgage. D-31 Refinance; 3, 5, 7, 37, owner-occupant, first 43, 46, 48, 53 lien; adjustable rate mortgage. D-32 Refinance; investor; 3, 5, 7, 37, first lien; level 43, 46, 47, 50 payment mortgage. Section 223(e) - Older Declining Area Purchase Transaction APPLICABLE DESIGNATION MORTGAGE TYPE CERTIFICATIONS A-56 Owner-occupant; first 3, 5, 7, 46, lien level payment; 47, 48, 57 rehabilitation involving insured advances pursuant to 203(k); property located in older, declining area. A-57 Owner-occupant; first 3, 5, 7, 46, lien adjustable rate 48, 53, 57 mortgage; rehabilitation involving insured advances pursuant to 203(k), property located in older, declining area. A-58 Investor; first lien; 3, 5, 7, 46, rehabilitation involving 47, 50, 57 insured advances pursuant to 203(k); Property located in older, declining area. 3 _____________________________________________________________________ APPLICABLE DESIGNATION MORTGAGE TYPE CERTIFICATIONS A-59 Investor; first lien with 3, 5, 7, 46, owner-occupant mortgage 47, 51, 57 amount pursuant to escrow commitment procedure; rehabilitation involving insured advances pursuant to 203(k); property located in older, declining area. Section 223(e) - Older Declining Area Refinance Transaction APPLICABLE DESIGNATION MORTGAGE TYPE CERTIFICATIONS B-54 Refinance; owner-occupant; 3, 5, 7, 43, first lien; level payment 46, 47, 48, 57 mortgage; rehabilitation involving insured advances pursuant to 203(k); property located in older, declining area. B-55 Refinance; owner-occupant; 3, 5, 7, 43, first lien; adjustable rate 46, 48, 53, 57 mortgage; rehabilitation involving insured advances pursuant to 203(k), property located in older, declining area. B-56 Refinance; investor; first 3, 5, 7, 45, lien; rehabilitation 46, 47, 50, 57 involving insured advances pursuant to 203(k), property located in older, declining area. 4 _____________________________________________________________________ Section 223(e) - Older Declining Area Purchase Transaction with Secondary Financing by a Federal, State or Local Government Agency APPLICABLE DESIGNATION MORTGAGE TYPE CERTIFICATIONS C-35 owner-occupant; first lien; 3, 5, 7, 37, level payment mortgage; 46, 47, 48, 57 rehabilitation involving insured advances pursuant to 203(k); property located in older, declining area. C-36 owner-occupant; first lien; 3, 5, 7, 37, adjustable rate mortgage; 46, 48, 53 rehabilitation involving insured advances pursuant to 203(k); property located in older, declining area. C-37 Investor; first lien; 3, 5, 7, 37, level payment mortgage; 46, 47, 50, 57 rehabilitation involving insured advances pursuant to 203(k), property located in older, declining area. Section 223(e) - Older, Declining Area Refinance Transaction with Secondary Financing by a Federal, State or Local Government Agency APPLICABLE DESIGNATION MORTGAGE TYPE CERTIFICATIONS D-33 Refinance; owner occupant; 3, 5, 7, 37, first lien; level payment 43, 46, 47, 48, mortgage; rehabilitation 57 involving insured advances pursuant to 203(k); property located in older, declining area. D-34 Refinance; owner occupant; 3, 5, 7, 37, first lien; adjustable rate 43,,46, 48, mortgage; rehabilitation 53, 57 involving insured advances pursuant to 203(k); property located in older, declining area. 5 _____________________________________________________________________ APPLICABLE DESIGNATION MORTGAGE TYPE CERTIFICATIONS D-35 Refinance; investor; first 3, 5, 7, 37, lien; level payment mortgage 43, 46, 47, rehabilitation involving 50, 57 insured advances pursuant to 203(k); property located in older, declining area. 6 _____________________________________________________________________ Attachment B SECTION 203(k) - LIST OF UNDERWRITER CERTIFICATIONS Addendum to Appendix 4, Handbook 4000.4 46. The mortgage involves the rehabilitation, the rehabilitation and refinancing or the rehabilitation and purchase of an existing one-to-four unit dwelling which will be used primarily for residential purposes. The property was completed more than one year prior to the date of the application for mortgage insurance. The Property will, upon completion, conform with standards prescribed by HUD. The mortgage is executed on a form approved by HUD for use in the jurisdiction and modified to the extent required by HUD to insure a mortgage under Section 203(k). The mortgage involves the insurance of advances during rehabilitation. The payments on the mortgage come due on the first of the month. The amortization period is not greater than the term of the mortgage. The payments begin no later than 60 days from the date of this certification. The mortgagor and mortgagee have executed a Rehabilitation Loan Agreement, which includes the construction exhibits and the Draw Request Form (Form HUD 9746-A), setting forth the terms and conditions under which advances will be made. The mortgagee and mortgagor have established a interest bearing Rehabilitation Escrow Account into which the loan proceeds designated for the rehabilitation have been deposited. 47. The mortgage hall level payment amortization. Interest is payable in monthly installments on the principal amount of the mortgage outstanding on the due date. 48. The mortgagor is the occupant of the property. The mortgage amount does not exceed the lesser of: a. 97 percent of the first $25,000 and 95 percent of the amount in excess of $25,000, based upon the sum of the estimated cost of rehabilitation and the estimated value of the property before rehabilitation; or b. 97 percent of the first $25,000, and 95 percent of the amount in excess of $25,000, based upon 110 percent of the estimated value of the property after rehabilitation. 7 _____________________________________________________________________ 49. The mortgage is a Graduated Payment Mortgage. When all deferred interest is added to the mortgage, the mortgage amount does not exceed 97-percent of the estimated value of the property. The monthly mortgage payments are not in excess of the mortgagor's reasonable ability to pay, according to mortgage credit guidelines issued by HUD. The sum of the payments to principal and/or interest increase annually for a period of five years at a rate of 2-1/2 percent, 5 percent or 7-1/2 percent; or for a period of 10 years at a rate of 2 percent or 3 percent. The required increase in payments occur on the anniversary date of the beginning of amortization. At termination of the annual payment increase, the sum of the payments to principal and interest in each month shall be substantially the same. The Graduated Payment Plan has been fully explained to the mortgagor. The mortgagor has certified to an understanding of the obligation. 50. The mortgagor is the non-occupant owner of the property. The mortgage amount does not exceed the lesser of: a. 85 percent of the sum of the estimated cost of the rehabilitation and the estimate of value of the property before rehabilitation; or b. 85 percent of the amount based upon 110 percent of the estimated value of the property after rehabilitation. 51. The mortgagor is the non-occupant owner of the property. The mortgage amount equals the amount for an occupant mortgagor. The mortgage covers a one or two family dwelling. Not less than 15 percent of the original principal amount of the mortgage has been placed in escrow with the mortgagee. The mortgagor intends to sell the property to an owner-occupant that has a mortgage credit standing which is acceptable according to HUD mortgage credit guidelines or intends to sell the property and prepay the mortgage. The mortgagor agrees that if the property is not sold prior to the due date of the 18th amortization payment of the mortgage to an acceptable purchaser who will occupy the property, assume and agree to pay the mortgage debt, the amount held in escrow will be applied to reduce the outstanding principal amount of the mortgage. The mortgagee agrees that any portion of the escrow amount not applied to the mortgage in accordance with this paragraph, shall be deducted from the amount to which the mortgagee would otherwise be entitled if an insurance claim is filed. 8 _____________________________________________________________________ 52. The mortgage involves only the rehabilitation of an existing one to four family dwelling which will be used primarily for residential purposes. The property was completed more than one year prior to the date of the application for mortgage insurance. The property will, upon completion, conform with standards prescribed by HUD. The mortgage is executed on a form approved by HUD for use in the jurisdiction and modified to the extent required by HUD to insure a mortgage under Section 203(k). The mortgage does not involve the insurance of advances, the refinancing of existing debt or the purchase of the property. The mortgage is a junior lien on the property, but not junior to any lien other than a first mortgage. The required monthly payment under both mortgages does not exceed the mortgagor's reasonable ability to pay. The amortization period is not greater than the term of the mortgage. 53. The mortgage is on Adjustable Rate Mortgage (ARM). The mortgagor is the occupant of the property. The mortgage provides for annual interest rate adjustments according to movements in the weekly average yield of one year Treasury Securities. No single interest rate adjustment will exceed one percentage point per year. Adjustments in the interest rate over the entire term of the mortgage will not exceed five percentage points from the initial contract interest rate. The mortgagor has certified that he or she understands the terms of the ARM and has signed the ARM Disclosure Statement. 54-56. See Handbook 4000.4 REV-1. 57. The property is located in an area that is reasonably viable and there is a need in the area for adequate housing for families of low and moderate income. The mortgage is an acceptable risk. 9