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U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D. C. 20410-8000

October 22, 1987
OFFICE OF THE ASSISTANT SECRETARY FOR
HOUSING-FEDERAL HOUSING COMMISSIONER
Mortgagee Letter 87-35
        TO:    ALL APPROVED MORTGAGEES
     SUBJECT:   Single Family Production--Revisions to Interest
                  Buydown Policy
 
           Because of the recent rise in interest rates, we believe
     that it is necessary to make certain revisions to our current
     interest rate buydown policy which balances our goal of
     encouraging home-ownership and the need to protect FSA's
     insurance funds. Therefore, effective immediately, we are
     revising the interest rate buydown policies set forth in
     Mortgagee Letter 86-15 , dated August 8, 1986, as follows:
 
           1.  The five percent limitation on seller buydowns set
               forth in item 4 of Mortgagee Letter 86-15  is raised
               to six percent.
 
           2.  Seller interest rate buydown arrangements not
               exceeding two percent the first year and one percent
               the second year (2-1 buydowns) may be underwritten and
               the borrower qualified at an interest rate two percent
               (in no event to exceed the first year buydown) below
               the note rate.  This instruction permitting
               underwriting at the lower rate only applies to level
               payment, fixed rate mortgages and therefore supersedes
               the instructions in item 5 of Mortgagee Letter 86-15
               as they relate to such mortgages.
 
           3.  The five percent adjustment requirement set forth in
               item 3 of Mortgagee Letter 86-15  is raised to six
               percent.  Appraisers will now make a dollar-for-dollar
               adjustment to comparables where seller buydowns
               exceed six percent of the comparable's sales price.
 
           We anticipate that there will be situations where larger
     buydowns such as a 3-2-1 are offered.  In such instances, the
     Department will qualify the borrower at an interest rate no more
     than two percent less than the note rate regardless of how much
     of a reduction takes place in the first year.
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     The instructions which required that the buydown funds be
escrowed and how they were to be handled are applicable to any
situation where the buyer qualifies at a rate lower than the note
rate.  These instructions became moot when HUD rescinded the policy
of approving buyers at reduced rates.  However, they are once again
applicable to this new buydown policy.  The instructions may be found
in HUD Handbook 4155.1 REV, Mortgage Credit Analysis, and Mortgagee
Letters 81-23, dated June 12, 1981, and 82-7 , dated May 6, 1982.
 
     Questions regarding these changes should be directed to the
Mortgage Credit section of your local HUD Field Office.
 
                           Sincerely yours,
 
                           James E. Schoenberger
                           General Deputy Assistant Secretary
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