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by Mortgagee Letter 91-24, has been repealed by recent legislation.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.
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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
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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.
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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.
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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.
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Mortgage Credit
Analysis Worksheet
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form HUD-92900-WS (10/91)
ref. handbook 4155.1
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form HUD-92900-WS
ref. handbook 4155.1
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