www.hudclips.org DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410 August 7, 1980 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING - FEDERAL HOUSING COMMISSIONER IN REPLY REFER TO: Mortgagee Letter 80-33 TO : All Approved Mortgagees Subject: Housing and Community Development Amendments of 1979 - Section 245 A new provision has been added to the Section 245, Graduated Payment Mortgage (GPM) program, which will permit certain eligible home purchasers to obtain HUD mortgage insurance under GPM with lower downpayments than required under the present GPM program. The new program has a statutory designation of Section 245(b) and does not replace the present Section 245 program which now has a statutory designation of Section 245(a). Mortgagees may continue to submit applications for mortgage insurance under the original program. Field Offices will process applications in accordance with outstanding instructions contained in HUD Handbook 4240.2 , the Graduated Payment Mortgage Program, and HUD Handbook 4155.1 , Mortgage Credit Handbook for Mortgage Insurance on One- to Four-Family Properties, except as modified below. The benefits of the program are available only to borrowers who have not held title to a home within the three-year period preceding the application for mortgage insurance. The borrower may not reasonably afford to purchase the dwelling unit by means of a mortgage insured under the provision of the existing Section 245(a) program or any other mortgage insurance program of the Department. The initial mortgage amount is limited to the loan-to-value ratios under Section 203(b) or if the borrower is an eligible veteran, the higher amounts permitted under Section 203(b) for qualified veterans. However, the principal obligation may not at any one time exceed 97 percent of the projected value of the property. The initial appraised value of the property may be increased by 2-1/2 percent per annum. In no event may the principal obligation of the mortgage with deferred interest added exceed 113 percent of the initial appraised value of the property, including closing costs. The program is limited to new or substantially rehabilitated housing approved by the Secretary prior to the beginning of construction or rehabilitation. The new program is limited to 50,000 mortgages or 10 percent of the aggregate initial principal obligation of all mortgages on one- to four-family residences insured in the previous fiscal year, whichever is greater. If necessary, Field Offices which use their allocation may be allocated additional units. Such allocation would require a shift in authority from an office that does not use its allocation. Shifts in allocations will be authorized by the appropriate Regional Administrator. _____________________________________________________________________ 2 The maximum loan will be limited to the lesser of $67,500; or the amount determined by applying 203(b) loan-to-value ratios against an assumed value equal to 110 percent of the median prototype housing cost for the market area, or the 203(b) loan-to-value ratios applied against the property value, including closing costs. The local HUD Field Office will advise all mortgagees within the Field Office jurisdiction of the appropriate limit. At the time of application, the mortgagee must include a signed statement from the borrower(s) that he/she or they have not held title to property for at least three years prior to the date of the application for mortgage insurance. Individuals who are in title as tenants by the entirety, tenants in common and/or joint tenants shall be considered as having held title to a property and are not eligible under this program. In the event the application involves two or more borrowers, one of whom has held title to a property and the other(s) has not, the application will be accepted for processing under the new program. However, in no event may any borrower retain an ownership interest in other real estate. In addition to the prior ownership requirements, it must be determined that the borrower(s) does not qualify under the existing 245 program or any other HUD mortgage insurance program. In order to make this determination: 1. Determine the maximum loan amount under Section 203(b) and calculate the total housing expense using level annuity monthly payments for the interest rate and loan term requested in the application. Calculate the housing expense ratio to net effective income. In the event the housing expense exceeds 35 percent of the borrower's net effective income, the application may be processed under the new program. 2. Calculate the maximum mortgage available under the Existing 245(a) program, Plan III, and determine whether or not the borrower has the cash and/or assets that can readily be converted to cash, such as stocks or bonds, in the amount needed to close the loan under the regular program. If the borrower does not have sufficient assets to close the loan, the application may be processed under the new program. The 245(b) program is limited to two graduated mortgage payment plans. The plans include the present Plan III, 7-1/2 percent 5-year graduation with reduced downpayments, and the second plan provides for increasing mortgage payments of 4.9 percent a year for 10 years. Once it has been determined that the application for mortgage insurance may be processed under the new program, the mortgage credit processing will follow the outstanding instructions in HUD Handbook 4155.1, except as modified herein. _____________________________________________________________________ 3 Field Offices may use the following loan-to-value ratio tables and cash investment percentages to process applications under 245(b). 7-1/2 Percent for 5 Years ___________________________________________________________________ 11-1/2%* 12% 13% 14% Maximum Lesser of Lesser of Lesser of Lesser of insurable loan 203(b) 203(b) 203(b) 203(b) non-veteran limits or limits or limits or limits or as well as 96.98% of 96.86% of 96.63% of 96.29% of veteran value value value value Minimum Greater of Greater of Greater of Greater of investment 203(b) 203(b) 203(b) 203(b) requirements requirement requirement requirement requirement non-veteran or 3.02% or 3.14% or 3.37% or 3.71% loans only of of of of acquisition acquisition acquisition acquisition cost cost cost cost ___________________________________________________________________ * At rates less than 11-1/2 percent, the maximum insurable mortgage will be limited by the 203(b) loan-to-value and cash investment ratios. At rates falling between those listed above, use the loan-to-values for the next higher rate. For example, if the rate is 11-7/8 percent, use the loan-to-value ratio at 12 percent. 4.9 Percent for 10 Years ____________________________________________________________________ 12%* 13% 14% Maximum Lesser of Lesser of Lesser of insurable loan 203(b) 203(b) 203(b) non-veteran as limits or limits or limits or well as veteran 96.76% of 96.08% of 94.43% of value** value value Minimum Greater of Greater of Greater of investment 203(b) 203(b) 203(b) requirements requirement requirement requirement non-veteran or 3.24% of or 3.92% of or 5.57% of loans only acquisition acquisition acquisition cost cost cost ____________________________________________________________________ * At rates less than 12 percent, the maximum insurable mortgage will be limited by the 203(b) loan-to-value and cash investment ratios. If the interest rate falls between the amounts shown, the loan-to-value ratio will be the same as the next highest rate. For example, if the rate is shown as 12-1/2 percent, use the loan-to-value ratios at 13 percent. ** Value means the HUD estimate of value including closing cost. _____________________________________________________________________ 4 Minimum investment for a veteran loan will be the total prepaid items but not less than $200 plus 5 percent of acquisition cost in excess of $25,000. In no event may the insurable mortgage exceed the lesser of $67,500, or the loan amount determined by applying 203(b) limits against a value equal to 110% of the median range prototype housing cost for the market area. Prototype housing costs are developed by each Field Office and are published in the Federal Register. For purposes of this program, each Field Office may use the latest information on prototype cost developed by the Field Office. Factors to compute the payment to principal, interest and mortgage insurance premium (12.75 percent to 15 percent in quarter percent increments), and the factors for computing the outstanding balance of the mortgage loan are included in Handbook 4240.2 REV CHG 3, Graduated Payment Mortgage Program, Section 245, dated 8/80. The Handbook change is being distributed simultaneously with this Letter. There must be an indication that borrowers under the program have a reasonable opportunity for increases in income which will be commensurate, but not necessarily equal to the increases in mortgage payment. An employer may not be willing to unequivocally guarantee the potential for increased income of a particular applicant. However, the mortgagee must include with the request for verification of employment, a statement from the employer describing possible promotion opportunities offered, incentive programs available, opportunities for additional pay increases either through upward mobility programs, mid level management training programs or through union contract terms. Any employee benefits offered by an employer should be delineated in order that the Mortgage Credit Examiner can be reasonably assured that the applicant will be able to meet the increase in monthly payments. Self-employed individuals must supply HUD, through the mortgagee, with financial statements covering operations for the last two full years prior to application for mortgage insurance. Newly self-employed borrowers must include their latest financial statement plus a detailed analysis of future trends. This program carries identifying case number suffix codes different than the existing 245 program. Mortgagees must indicate a case number suffix code of 261 for all 245(b) GPM loans originated under 203(b) or 203(b) veteran. Case number suffix code 262 will be used to identify 245(b) loans originated under 234(c) condominium units. Sincerely, Lawrence B. Simons Assistant Secretary for Housing-Federal Housing Commissioner