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U. S. Department of Housing and Urban Development
Washington, D.C. 20410-8000

September 18, 1991
OFFICE OF THE ASSISTANT SECRETARY
FOR HOUSING-FEDERAL HOUSING COMMISSIONER
Mortgagee Letter 91-44
   TO:  ALL APPROVED MORTGAGEES
   SUBJECT:  Single Family Loan Production - Clarification to
               Mortgagee Letter 91-24 on Lender Paid Closing Costs
 
        Since the publication of Mortgagee Letter 91-24, we have
   received a number of questions about how to calculate the maximum
   mortgage amount when the lender will be paying all or a portion
   of the borrower's closing costs by charging a premium interest
   rate or additional discount points.  The purpose of this letter
   is to clarify the Department's position on this issue.
 
        When the lender pays all or a portion of the borrower's
   closing costs by charging the borrower a premium interest rate or
   additional discount points, there is no adjustment to the sales
   price when calculating the maximum mortgage amount.  Also, the
   amount of lender paid closing costs would not be included in the
   estimate of closing costs used to calculate the mortgage amount,
   because the borrower is not paying these costs.
 
        However, if the lender is paying the borrower's closing
   costs by charging the seller higher discount points, the amount
   of the closing costs paid by the lender must be subtracted from
   the sales price when calculating the mortgage amount.  In this
   instance, the lender paid amount must be subtracted from the
   sales price because, in HUD's opinion, the seller is really
   paying the buyer's closing costs by merely using the lender as a
   conduit for the funds.  This, or any other practice that
   circumvents our requirements that the sales price be reduced by
   the amount of seller paid closing costs, is unacceptable.
 
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     Since there has been some confusion about when deductions to
the sales price must be made for lender paid closing costs, the
policy set forth in this letter will be effective for all
applications involving sales contracts signed on or after
October 15, 1991.
 
     If you have any questions concerning this letter, please
contact your local HUD office.
 
                              Very sincerely yours,
 
                              Arthur J. Hill
                              Assistant Secretary for
                                Housing-Federal Housing Commissioner