www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 June 27, 1989 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING- FEDERAL HOUSING COMMISSIONER Mortgagee Letter 89-20 TO: ALL APPROVED MORTGAGEES SUBJECT: Single Family Loan Production - Modifications to Mortgage Credit underwriting As you know, we recently revised and reissued HUD Handbook 4155.1, Mortgage Credit Analysis for Mortgage Insurance on One-to Four-Family Properties. This revised Handbook consolidated all of the Mortgage Credit Underwriting policy changes that occurred since 1983. We have received many comments and suggestions about the Handbook since its publication and based upon these comments, we are making several changes and clarifications. A. The following changes are effective immediately: 1. Paragraph 1-6H, Verification of Mortgage. As an alternative to a Verification of Mortgage, the lender may provide 12 months of cancelled checks. Also, if the mortgage is reported on the Residential Mortgage Credit Report, no separate Verification of Mortgage or cancelled checks need to be obtained. 2. Paragraph 1-16, Real Estate Certification. Although some lenders believe that this was a new requirement, this certification requirement has been a part of the HUD Application (Form HUD 92800) for many years. However, it is not necessary for the borrower, seller and the selling real estate agent or broker to execute a separate certification if the sales contract already includes a provision that states that it constitutes the entire agreement between the parties and that there are no other agreements. All three parties must be signatories to the contract. 3. Paragraph 1-17, Face-to-Face Interview. Additional exceptions to the requirement for a face-to-face interview with all borrowers will be made under the following limited circumstances: 2 a. When related co-borrowers (parents/children, siblings, etc.) are purchasing the property, the co- borrowers who will not occupy the property may be interviewed by telephone instead of face-to-face. The lender must document the file to show that a telephone interview was performed. b. When spouses are living apart because of job transfer or military duty face-to-face interview with one spouse is acceptable. The lender should interview the other spouse by telephone, if possible, and document the file to show that a telephone interview was performed or if one was not performed, the reason why it was not. A spouse that is unavailable for an interview because of military duty, is an acceptable reason. If only one spouse is to take title, that borrower must be interviewed. 4. Paragraphs 1-19, Signatures on the Application Form and 5-17A, Mortgagee Responsibility. In those states which continue to recognize inchoate property interests such as the right of homestead, dower or curtesy, lenders may have both husband and wife execute the security instrument in order to acquire a valid and enforceable lien in the face of the statutory right. Execution of the security instrument for such reasons does not make the spouse a borrower under this paragraph for purposes of requiring the spouse to co-sign the application or note. 5. Paragraph 2-19B, Closing Cost Estimate. To give lenders more flexibility, if the closing costs used in processing are now overstated by more than $250, the maximum mortgage amount must be recalculated before settlement. The estimate of closing costs should be a reasonable reflection of the actual closing costs used in the settlement of the mortgage. All charges must be reasonable for the market area as determined by the local Field Office. The closing costs must be added to the estimate of value on the HUD-92800 for underwriting purposes. 3 6. Paragraph 3-8A, Self-Employed Borrowers. The definition of self-employed borrower will now be an individual that has a 25 percent or greater ownership interest in the business. The change to 25 percent from 10 percent conforms to general requirements within the industry. There have been some questions about the requirements of Paragraph 3-8C, concerning the borrower's earning trend. We continue to believe that a self-employed borrower whose company shows a continuing decline in its financial position over an extended period of time (two or three years) generally, should be rejected. However, there may be special circumstances or conditions under which the borrower can be approved (for example, the borrower's company has just been awarded a contract that is expected to boost the company's and the individual earnings, or the gross income of the company is so great and the declines so small when compared to the income that such declines have and would continue to have minimal effect on the general financial soundness of the company). Individual, special circumstances should be discussed with the local HUD Field Office and then appropriately documented in the file. B. The following changes are effective for all applications involving sales contracts signed 60 days after the date of this letter: 1. Paragraph 3 - 24C. 25 Percent Cash Investment. The 25 percent cash investment cannot include any gift funds. 2. Three- and Four-Unit Properties. For all three- and four unit properties the maximum mortgage HUD will insure on the property is limited to a mortgage on which the monthly payment ratio, defined as the principal, interest, taxes and insurance divided by the net income from the units cannot exceed 100 percent. Net income is defined as HUD's estimate of market rent (determined by the appraiser) less a reasonable allowance for vacancies and collections. Each HUD Field Office will set the vacancy and collections allowance based upon local market conditions. Once this limit is established, even if the borrower's income will support a greater mortgage, no increase is to be made. _____________________________________________________________________ 4 We expect to reprint the appropriate pages of the Handbook in the next few months to reflect the above changes. If you have any questions concerning this letter, please contact your local HUD Office or the Headquarters Single Family Mortgage Credit Branch at (202) 755-6700. Sincerely yours, James E. Schoenberger General Deputy Assistant Secretary for Housing