www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 October 16, 1992 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 92-39 TO: All Approved Mortgagees SUBJECT: Single Family Loan Production - Elimination of Limit on Financing Closing Costs This Mortgagee Letter alerts lenders and Field Office staff to the enactment of legislation removing the 57 percent limitation on financeable closing costs. ELIMINATION OF THE 57 PERCENT LIMITATION ON FINANCEABLE CLOSING COSTS: The 57 percent limitation on financeable closing costs, implemented by Mortgagee Letter 91-24, has been repealed by recent legislation. Effective immediately, borrowers may include up to 100 percent of their reasonable and customary closing costs in the calculation used to determine the maximum mortgage amount. However, the mortgage amount is still restricted by the 97.75 percent and 98.75 percent loan-to-value limits applied to the appraised value. (HUD still retains authority to approve the acceptability of any charge, including appraisal, inspection, and other fees.) To calculate the maximum mortgage amount, add 100 percent of borrower-paid closing costs to the lesser of the sales price or appraised value, then multiply the result by the appropriate loan-to-value ratio. The closing costs to be added is the amount remaining of total borrower closing costs after subtracting any closing costs paid by the seller. Seller concessions remain limited to 6 percent of the contract sales price (as described in HUD Handbook 4155.1 Rev-4) and seller-paid prepaid items, personal property items, etc., result in dollar-for-dollar reductions to the sales price. Note that the 97.75 percent (or 98.75 percent if $50,000 or less) limits applied to the appraised value excluding closing costs remain in effect and may limit the maximum mortgage amount. The mortgage credit analysis worksheet (HUD-92900WS) has been revised to reflect these changes. A sample copy is attached to this letter, as are several mortgage calculation examples. _____________________________________________________________________ 2 The closing costs used in calculating the maximum mortgage amount during processing and underwriting should be that amount shown on the Good Faith Estimate (or, for refinances, any other similar form listing borrower's closing cost). HUD expects this amount to be a reasonable reflection of actual closing costs at the time of settlement. If the estimated closing costs used to calculate the mortgage exceeds by more than $250 the actual charges, the mortgage amount must be recalculated and reduced before settlement. It is the lender's responsibility to assure that its loans close in compliance with this requirement. The recent legislation also raised the mortgage limit ceiling in high cost areas and increased downpayment requirements for mortgage amounts above $125,000. A separate Mortgagee Letter implementing these higher mortgage limits and the additional cash downpayment requirements will be issued following publication in the Federal Register of those areas with the higher mortgage limits. If you have any questions regarding this letter, please contact your local HUD office. Very sincerely yours, Arthur J. Hill Assistant Secretary for Housing -Federal Housing Commissioner Attachments _____________________________________________________________________ MORTGAGE CALCULATION EXAMPLES A. No Seller Concessions: The borrower is paying all the closing costs in the following examples. 1. Allison Able is purchasing a house for $60,000. Her closing costs total $1000 and the property appraised for $60,000. Acquisition Value w/o CC $ 60,000 Sales Price/Value $ 60,000 + 1,000 Closing Costs x 97.75% $ 61,000 Mortgage Basis $ 58,650 x 97/95 Maximum LTV Ratio $ 58,450 Maximum Mortgage (before UFMIP) Closing costs are simply added to the mortgage basis and the LTV ratio is then applied. The 97.75 percent limit applied to the appraised value ($58,650) did not affect the maximum mortgage amount and, thus, all closing costs may be financed. 2. Bonnie Brewer is purchasing a house for $60,000, and must pay $1500 in closing costs. The house appraised for $60,000. Acquisition: Value w/o CC $ 60,000 Sales Price/Value $ 60,000 + 1,500 Closing Costs x 97.75% 61,500 Mortgage Basis $ 58,650 x 97/95 Maximum LTV Ratios $ 58,925 Maximum Mortgage (before UFMIP) The 97.75 percent limits the actual maximum mortgage amount to $58,650. Obviously, a portion of the closing costs must be paid in cash. 3. Carroll Cassidy purchased a house for $48,000. He will pay all of his own closing costs ($2000) and the house appraised for $50,000. Acquisition: Value w/o CC $ 48,000 Sales Price/Value $ 50,000 + 2,000 Closing Costs x 98.75% $ 5O,000 Mortgage Basis $ 49,375 x 97% Maximum LTV Ratios $ 48,500 Maximum Mortgage (before UFMIP) The 98.75 percent limit ($49,375) has no affect on the maximum mortgage amount. The higher-than-sales price appraised value permits the financing of all closing costs. _____________________________________________________________________ 4. Dennis Dimengo signed a sales contract for $60,000. However, the property appraised for only $59,000. He wants the home anyway and is paying his own closing costs of $1000. Acquisition: Value w/o CC $ 59,000 Value $ 59,000 + 1,000 Closing Costs x 97.75% $ 60,000 Mortgage Basis $ 57,672 x 97/95 Maximum LTV Ratios $ 57,500 Maximum Mortgage (before UFMIP) The closing costs are added to the lesser of value or the contract sales price, then the loan-to-value ratio is applied. The 97.75 percent ($57,672) did not affect the maximum mortgage. In addition to the normal cash investment, Mr. Dimengo will have to pay --in cash-- the $1000 difference between the sales price ($60,000) and the value ($59,000). The property's value is used twice: Once with closing costs added and LTV ratios applied, and once without any closing costs and the 97.75 limit used. B. Seller Concessions: In the following examples, the seller has agreed to pay various items on the borrower's behalf. 5. Elaine Ellington just purchased a home for $60,000, and the seller has agreed to pay all her closing costs (totalling $2000). The house appraised for $60,000. Acquisition: Value w/o CC $ 60,000 Sales Price/value $ 60,000 + 0 Closing Costs x 97.75% $ 60,000 Mortgage Basis $ 58,650 x 97/95 Maximum LTV Ratios $ 57,500 Maximum Mortgage (before UFMIP) Since the seller is paying all closing costs, there is nothing to add before applying the LTV ratio. The 97.75 percent limit ($58,650) has no affect on the maximum mortgage. 6. Fred Funai is purchasing a house for $50,000. The seller agreed to pay $1000 of the $2500 in closing costs. The house appraised for $50,000. Acquisition: Value w/o CC $ 50,000 Sales Price/Value $ 50,000 + 1,500 Closing costs PAID BY BORROWER x 98.75% $ 51,5OO Mortgage Basis $ 49,375 x 97/95 Maximum LTV Ratios $ 49,425 Maximum Mortgage (before UFMIP) Since the seller is paying $1000 of the $2500 closing costs, that amount is subtracted before adding the remaining $1500 of closing costs to the sales price. However, the 98.75 percent limit ($49,375) affects the actual maximum mortgage amount. _____________________________________________________________________ 7. Gregory Gershwitz bought a new home for $60,000. The seller is paying all $2000 of Mr. Gershwitz's closing costs as well as $500 of his prepaid costs. The house appraised for $60,000. Acquisition: Value w/o CC $ 60,000 Sales Price/Value $ 60,000 500 Prepaid by Seller x 97.75% $ 59,500 Mortgage Basis $ 58,650 x 97/95 Maximum LTV Ratios $ 57,025 Maximum Mortgage (before UFMIP) The seller-paid closing costs were subtracted from the total closing costs ($2000 minus $2000) and, thus, there are no borrower-paid closing costs to be added in determining the mortgage basis. However, the seller-paid prepaid costs must be subtracted dollar-for-dollar from the contract sales price in calculating the mortgage amount. 8. Helen Honeycutt's new home was purchased for $60,000, but does not qualify for maximum (>90%) financing. The builder will pay $2000 of her $2500 closing costs. The house appraised for $60,000. Acquisition: Value w/o CC $ 60,000 Sales Price/Value $ 60,000 + 500 Closing Costs PAID by Borrower x 97.75% $ 60,500 Mortgage Basis $ 58,650 x 90% Maximum LTV Ratio $ 54,450 Maximum Mortgage (before UFMIP) The remaining amount of Ms. Honeycutt's closing costs are added to the mortgage basis, with the LTV ratio of 90% applied to the sum of sales price and closing costs. The value limit had no effect. 9. Israel Idero's new home was purchased for $60,000. The builder will pay $4000 toward closing costs and discount points. The house appraised for $60,000 and closing costs are $2500. Acquisition: Value w/o CC $ 60,000 Sales Price/Value $ 60,000 400 Excessive Financing Concession x 97.75% 59,600 Mortgage Basis $ 58,650 x 97/95 Maximum LTV Ratio $ 57,120 Maximum Mortgage (before UFMIP) Per Attachment A, financing concessions, including closing costs, are limited to 6% of the sales price ($60,000 x 6% = $3600). The remaining $400 must be subtracted when determining the mortgage basis. _____________________________________________________________________ __________________________________________________________________________ Mortgage Credit Analysis Worksheet ******************************************************************** * * * * * * * * * * * * * * * * * * * * * * * GRAPHICS MATERIAL IN ORIGINAL DOCUMENT OMITTED * * * * * * * * * * * * * * * * * * * * * * * ******************************************************************** __________________________________________________________________________ form HUD-92900-WS (10/91) ref. handbook 4155.1 __________________________________________________________________________ _____________________________________________________________________ __________________________________________________________________________ ******************************************************************** * * * * * * * * * * * * * * * * * * * * * * * GRAPHICS MATERIAL IN ORIGINAL DOCUMENT OMITTED * * * * * * * * * * * * * * * * * * * * * * * ******************************************************************** __________________________________________________________________________ form HUD-92900-WS ref. handbook 4155.1 __________________________________________________________________________