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). _____________________________________________________________________ 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. _____________________________________________________________________ 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. _____________________________________________________________________ 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. _____________________________________________________________________ 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. _____________________________________________________________________ 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 __________________________________________________________________________ ******************************************************************** * * * * * * * * * GRAPHICS MATERIAL IN ORIGINAL DOCUMENT OMITTED * * * * * * * * * ******************************************************************** __________________________________________________________________________ form HUD-92900-WS (6/91) 8 _____________________________________________________________________ Mortgagee Letter 91-24 __________________________________________________________________________ U.S. Department of Housing and Urban Development Mortgage Credit Analysis Worksheet __________________________________________________________________________ ******************************************************************** * * * * * * * * * GRAPHICS MATERIAL IN ORIGINAL DOCUMENT OMITTED * * * * * * * * * ******************************************************************** __________________________________________________________________________ form HUD-92900-WS (6/91) 9