www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER November 18, 1996 MORTGAGEE LETTER 96-63 TO: ALL APPROVED MORTGAGEES SUBJECT: Single Family Loan Production - Mortgage Calculation in Alaska and Hawaii Recent legislation amended the National Housing Act to provide a revised mortgage calculation process for the States of Alaska and Hawaii. The new formulas permit a maximum mortgage amount to be based on a fixed percentage of value exclusive of closing costs. In Alaska and Hawaii, the property's value (or sales price, if less) exclusive of any borrower-paid closing costs will be multiplied by 97.75 percent (or 98.75 percent if $50,000 or less). This determines the maximum mortgage amount that FHA will insure provided that the mortgagor makes a cash investment of at least three percent into the property, which may include closing costs. The National Housing Act requires the minimum cash investment to be 3 percent of the cost of acquisition, which includes closing costs. However, FHA interprets the intent of the new legislation as permitting the minimum cash investment to be based on sales price without considering closing costs to further Congressional objectives of simplifying the FHA mortgage calculation without significantly increasing FHA's risk. Closing costs will not be included in calculating the 3 percent cash requirement, but may be included in satisfying the 3 percent requirement. The revised mortgage calculation procedure applies to those mortgages currently subject to the two-step mortgage calculation process, as described in paragraph 1-6B of the mortgage credit analysis handbook (HUD Handbook 4155.1 REV-4, Chg 1), where the 97.75 percent (or 98.75 percent if $50,000 or less) loan-to-value limits are applied to the appraised value exclusive of closing costs and a second mortgage calculation is made based on the acquisition cost of the property (or appraised value plus allowable closing costs, if less). Further, existing credit policies remain intact for those properties and transactions not typically eligible for 97/95/90 percent financing, such as cash-out refinances, streamline refinances without appraisals, properties under construction or less than one year old, identity-of-interest transactions, and other situations as described in the mortgage credit handbook where FHA limits the percentage of financing below the statutory maximum. While sellers may continue to provide financing concessions up to 6 percent of the sales price, amounts exceeding six percent must be subtracted from the sales price before applying the appropriate loan-to-value multiplier. The following examples illustrate the process for calculating the maximum mortgage in Alaska and Hawaii: 1. In the first example, the property sold for and is appraised at $100,000. The homebuyer is paying $1,000 in closing costs. The maximum mortgage is first calculated at $97,750 ($100,000 x 97.75%), and the borrower must have at least 3 percent cash into the property (excluding prepaid expenses) totalling $3,000. The acquisition cost to the borrower is $101,000 with a maximum mortgage of $97,750, yielding $3250 cash investment, exclusive of prepaid expenses. Since the $3250 represents at least 3 percent of the sales price, no further mortgage amount calculation is necessary. 2. In this example, the property sold for and is appraised at $100,000. Closing costs are being paid partially by the seller with the remaining costs paid through premium pricing. The maximum mortgage calculation applied solely to the sales price/appraised value generates a maximum mortgage amount to $97,750. However, this would yield a cash investment of only $2250 ($100,000 minus $97,750) or $750 less than the 3 percent of the $100,000 sales price that is required. Therefore, the actual maximum mortgage must be reduced to $97,000 to ensure that at least $3000 exclusive of prepaid expenses is invested into the property. The required investment must be from the borrower's own funds, a bona fide gift, a loan from a family member, or from a governmental agency or instrumentality; it may not come from premium pricing, loans from other sources, the seller, builder, etc. The legislation permits this revised mortgage calculation process only in those areas of the two States where closing costs exceed 2.10 percent of the sales price. We have determined, through consultation with the Alaska and Hawaii FHA Offices, that closing costs exceed 2.10 percent in all areas of the two States. The effect of the legislation in these two states is to eliminate closing costs in the mortgage calculation process in most situations. On those properties with sales prices/values above $50,000, borrower-paid closing cost percentages below 0.75 percent will require a reduction to the mortgage amount beyond the 97.75 percent limitation to ensure that the 3 percent cash investment is made. Unless renewed by Congress, this legislation ends September 30, 1997. Questions regarding these instructions should be addressed to the FHA offices in Anchorage and Honolulu. Sincerely yours, Nicolas P. Retsinas Assistant Secretary for Housing- Federal Housing Commissioner