www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 February 11, 1991 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 91-9 TO: ALL APPROVED MORTGAGEES SUBJECT: Single Family Loan Production - Providing Closing Instructions to Settlement Agents and Revised HUD-1 Certifications It is a fundamental principle of FHA mortgage insurance programs that the borrower must satisfy his or her financial obligations at or before closing by making the earnest money deposit and downpayment and paying required closing costs : typically referred to as satisfying the downpayment or minimum investment requirements. Without this investment, the borrower subsequently may have little or no commitment to the property or monthly payment obligation. As part of its quality control program, the Department has been reviewing various means of assuring that HUD-FHA downpayment requirements are being met by borrowers. HUD-FHA approved mortgagees are charged with the principal responsibility of verifying the source of funds for the borrower's minimum investment. Settlement agents involved in closing FHA-insured single family transactions, however, have not been formally placed on notice of either these requirements or any role (no matter how limited) they may play in assisting HUD-FHA approved mortgagees in carrying out these requirements. Therefore, through this Mortgagee Letter, the Department proposes additional safeguards that enlist the settlement agent's assistance in this area. Accordingly, for FHA-insured mortgages to be closed after June 1, 1991, HUD-FHA approved mortgagees are to put settlement agents on notice of borrower obligations regarding downpayment requirements by amending their closing instructions to provide such notice. Further, settlement agents are to be informed that, _____________________________________________________________________ 2 if they have actual knowledge that the source of the funds is other than as described in the closing instructions, loan proceeds may not be disbursed and the mortgage lender must be contacted for further instructions. The above is to be implemented in the following manner. First, below is the instruction which must be inserted precisely as written (with appropriate inserts) in the closing instruction letters of all HUD-FHA approved mortgagees in all single family FHA-insured transactions (except refinancings and assumptions). Second, an addendum (attached) to the HUD-1 Settlement Statement, referenced in the required instruction must be provided to the settlement agent in all single family FHA-insured transactions where this instruction is required. You will note that the certifications contained on the addendum form are modifications of and substitutes for the certifications required in Mortgagee Letter 86-10 (and its addendum). That letter is superseded by this Mortgagee Letter. This addendum is intended to be attached to and made a part of the HUD-1 Settlement Statement and distributed to all parties who are to be provided copies of the statement itself. The instruction is as follows: The borrowers in this FHA-insured transaction must, from their own funds, make the required earnest money deposit, pay closing costs and make the required downpayment required by FHA, unless otherwise explained below. In order to assist in assuring that the borrowers in this transaction have met their financial obligations, you are to have executed the certifications contained on the form enclosed herewith by both the borrower and seller. You also are to execute and date the certification as indicated. Your executed certification notes receipt of the other certifications. You should make these certifications an addendum to the HUD-1 Settlement Statement and provide copies to all parties receiving copies of such statement. If you have actual knowledge that the source of such funds is other than from the borrower (except as described below) you are not to disburse any loan proceeds and must immediately notify insert approved mortgagee contact and telephone number . You may only proceed with the closing upon receipt of written instructions from name of approved mortgagee . _____________________________________________________________________ 3 Source of funds other than from borrower: Lender to disclose the source and amount of funds from third parties, e.g., local government agency or instrumentality, non-profit organization, etc. The HUD-1 must be completed to show the amount and source of any funds being contributed on behalf of the borrower or deposited with the lender. The Department understands that a settlement agent performs a limited function and is not responsible for investigating the credit-worthiness of the borrower; that continues to be the responsibility of the HUD-FHA approved mortgagee. The Department, therefore, does not expect settlement agents to conduct an investigation, but rather may rely upon disclosures and instructions of the lender along with the certifications made by the borrower and seller unless the settlement agent has actual knowledge that the transaction is not proceeding as directed by the lender in its closing instructions. In those instances, we expect the settlement agent to contact the lender for further instructions before disbursing loan proceeds. A copy of this letter should be sent to those parties who regularly provide you with settlement services. Very sincerely yours, Arthur J. Hill Acting Assistant Secretary for Housing-Federal Housing Commissioner Attachment _____________________________________________________________________ ADDENDUM TO HUD-1 SETTLEMENT STATEMENT NOTICE TO ALL PARTIES: If information is obtained which indicates that the source of the borrower's financial contribution is other than from the borrower or other than stated by the lender in its closing instructions, the settlement agent is to obtain written instructions from the lender before proceeding with settlement. CERTIFICATION OF BUYER IN AN FHA-INSURED LOAN TRANSACTION I certify that I have no knowledge of any loans that have been or will be made to me (us) or loans that have been or will be assumed by me (us) for purposes of financing this transaction, other than those described in the sales contract dated __________ (including addenda). I certify that I (we) have not been paid or reimbursed for any of the cash downpayment. I certify that I (we) have not and will not receive any payment or reimbursement for any of my (our) closing costs which have not been previously disclosed in the sales contract (including addenda) and/or my application for mortgage insurance submitted to my (our) mortgage lender. __________________________________ ___________________________________ ___________________ Borrowers Date CERTIFICATION OF SELLER IN AN FHA-INSURED LOAN TRANSACTION I certify that I have no knowledge of any loans that have been or will be made to the borrower(s), or loans that have been or will be assumed by the borrower(s), for purposes of financing this transaction, other than those described in the sales contract dated _____________(including addenda). I certify that I have not and will not pay or reimburse the borrower(s) for any part of the cash downpayment. I certify that I have not and will not pay or reimburse the borrower(s) for any part of the borrower's closing costs which have not been previously disclosed in the sales contract (including any addenda). __________________________________ ___________________________________ ___________________ Sellers Date WARNING: It is a crime to knowingly make false statements to the United States on this or any other similar form. Penalties upon conviction can include a fine and imprisonment. For details, see: Title 18 U.S. Code Sections 1001 and 1010. _____________________________________________________________________ CERTIFICATION OF SETTLEMENT AGENT IN AN FHA-INSURED LOAN TRANSACTION To the best of my knowledge, the HUD-1 Settlement Statement which I have prepared is a true and accurate account of the funds which were (i) received, or (ii) paid outside closing, and the funds received have been or will be disbursed by the undersigned as part of the settlement of this transaction. I further certify that I have obtained the above certifications which were executed by the borrower(s) and seller(s) as indicated. _____________________________________ __________________ Settlement Agent Date The certifications contained herein may be obtained from the respective parties at different times or may be obtained on separate addenda WARNING: It is a crime to knowingly make false statements to the United States on this or any other similar form. Penalties upon conviction can include a fine and imprisonment. For details, see: Title 18 U.S. Code Sections 1001 and 1010.