www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 October 2, 1992 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 92-35 TO: All Approved Mortgagees SUBJECT: Single Family Loan Production - Miscellaneous Policy Issues This Mortgagee Letter alerts lenders to the October 1, 1992, reduction to the Upfront MIP rate; provides relief to lenders by permitting loans to be underwritten before the borrower signs the final loan application; and addresses several additional important issues. I. UPFRONT MORTGAGE INSURANCE PREMIUM (MIP): Section 203(c) of the National Housing Act provides that the rate for the Upfront MIP is reduced and the annual mortgage insurance premium is collected for a longer period of time for loans that close on or after October 1, 1992. For those loans subject to Upfront MIP that close on or after October 1, 1992, the mortgage insurance premium is 3.0 percent of the base mortgage amount. The annual premium of 0.50 percent of the outstanding balance will be collected for 7 years for mortgages with loan-to-value ratios of 89.99 percent and less, 12 years for LTVs of 90.00 percent through 95.00 percent, and 30 years for LTVs of greater than 95.00 percent. If a mortgage application was processed at the 3.8 percent Upfront MIP rate but will close after September 30, 1992, the lender need only reduce the mortgage at closing by the excess premium. Revised applications or mortgage credit analysis worksheets are not required. These rates are in effect through September 30, 1994. On any refinance where the MIP refund exceeds the Upfront MIP required on the new loan at 3.0 percent, the overage will be refunded directly to the borrower from HUD. So that the borrower will not be burdened with additional out-of-pocket expenses, the lesser of the MIP refund or the new upfront MIP at 3.0 percent should be subtracted from the unpaid principal balance before calculating the new mortgage amount. Mortgagees are required to continue completing form HUD-27001 and forwarding these to the address shown on the form. The upfront MIP remains 3.8 percent with no annual premium for streamline refinance mortgages exempt from the annual MIP (as described in Mortgagee Letter 92-14). The MIP Statement of Account (SOA) will acknowledge that the maximum mortgage amount for these type transactions will be less than that shown on the SOA. _____________________________________________________________________ 2 Details regarding mortgage insurance premiums and applicability may be found in HUD Handbook 4000.2 Rev-2, paragraph 1-12. II. LOAN APPLICATION PROCESS--ADDITIONAL INFORMATION: The Department has long required that the application for HUD mortgage insurance be signed and dated by the borrower(s) prior to underwriting, and that it was not an acceptable practice to have borrowers execute the HUD application at loan closing. However, now that the Department has adopted the Uniform Residential Loan Application (URLA), and to offer simplified processing of HUD-insured mortgages to lenders, HUD will permit the final URLA and the final Addendum to the URLA (HUD-92900-A) to be signed by the borrower(s) anytime before or at closing provided an initial Addendum and URLA are signed by the borrower before the loan is underwritten. It will no longer be necessary to have the final loan application or Addendum signed by the borrower before underwriting. The Addendum provides specific information to the borrower regarding the application for HUD mortgage insurance, as well as certifications that must be made by the borrower. The Department believes that all parties are best served when the borrower is aware of these certifications at the earliest point in processing the loan. The final URLA and the final Addendum may be signed and dated by the borrower(s) anytime before or at loan closing. (The borrower, however, is not permitted to sign these documents in blank.) The underwriter must condition the loan approval for the final URLA and final Addendum to be signed and dated by the borrower(s). A satisfactory letter of explanation from the borrower addressing any significant variances between the initial application and final application is also required. Additional Information: - Page 1 of the initial Addendum should be signed by the interviewer. Page 1 of the final Addendum must be signed by an officer of the company. - The underwriter must have either the signed or unsigned final URLA and Addendum before underwriting the loan application. _____________________________________________________________________ 3 - The case binder must contain a copy of the completed and signed initial application and initial Addendum along with the final URLA and final Addendum at time of submission for endorsement. A copy of the initial application is required on all loans submitted for endorsement. - The interviewer section of the final URLA (page 3) does not have to be completed and signed by the interviewer provided the initial application contains the information and signature of the interviewer. - It is not necessary to provide seven years residence information as requested in Section III of the URLA (page 1). HUD requires residence information for a period of only two years. - Streamline Refinances: It is not necessary to complete Sections IV, V, VI, or items a-k of Section VIII of the URLA. (Item 1, Section VIII, "Do you intend to occupy the property as your primary residence" is required.) It is not necessary to complete Section IV of the Addendum to the URLA, except item 25(6), regarding lead paint poisoning. - Order of documents in HUD Case Binder: Place a copy of the initial application and a copy of the initial Addendum under the final URLA and final Addendum. III. SELLER PAYMENT OF BORROWER'S SALES COMMISSION ON PRESENT RESIDENCE: Whenever a borrower is purchasing a property and is also selling his or her present residence, there exists an opportunity for sales and financing schemes that may result in a circumvention of either HUD's minimum investment requirements or limitation on seller concessions, or both. This is particularly true on new construction where the builder offers to pay any portion of the buyer's real estate commission on the sale of the previous house, as well as sales guarantee programs, special sales commission splits, or sales bonus programs. Many inflate the borrower/seller's net proceeds used for the cash investment for the new home (by reducing the real estate sales commission) and are directly or indirectly funded from the sales commission of the new home. Proceeds from the sale of a borrower's current residence is an acceptable source of funds to meet the cash requirements for the purchase of new or existing property. However, schemes which circumvent HUD's minimum downpayment requirements/maximum seller concessions restrictions are not acceptable. _____________________________________________________________________ 4 Most lenders, real estate agents, real estate brokers, and builders know when a "sales or financing" program circumvents HUD's downpayment requirement. If, prior to endorsement, the Department becomes aware of a program or scheme which results in a circumvention of HUD's minimum investment requirements, the mortgage will be rejected for insurance because the Underwriter's Certification is invalid. If lenders become involved in programs that offer sales commission splits, sales bonuses, etc., HUD strongly recommends that the lender obtain prior approval of the program from HUD. A written request describing the specifics of the program should be sent to the local HUD Field Office for review and approval. IV. APPRAISAL ISSUES: A. PROVIDING APPRAISAL REPORTS TO BORROWERS --- Section 223(d) of the FDIC Improvement Act, Pub. L. 102-242, added a new Section 701(e) to the Equal Credit Opportunity Act (ECOA) which reads as follows: (e) Each creditor shall promptly furnish an applicant upon written request by an applicant made within a reasonable period of time of the application, a copy of the appraisal report used in connection with the applicant's application for a loan that is or would be secured by a lien on residential real property. The creditor may require the applicant to reimburse the creditor for the cost of the appraisal. Accordingly, it is HUD policy that a lender must provide a copy of the appraisal report to the borrowers upon their request. Although HUD does not administer ECOA and will not give detailed advice to mortgagees on its provisions, we believe it is important to alert lenders to this new legislation. Lenders that need further advice about this legislation should contact: Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, Washington, DC 20551. B. DIRECT ENDORSEMENT (DE) PROCESSING WITH VA-CRVs ON EXISTING PROPERTIES --- Mortgagee Letter 91-51 added VA-CRVs on existing properties to the category of loans eligible for DE processing. Special processing instructions were not believed necessary, but there have been some questions from lenders on how these cases should be processed and underwritten, _____________________________________________________________________ 5 VA-CRVs on existing properties should be processed and underwritten by the DE lender exactly as they would any other appraisal. Although the appraisal was completed by a VA-approved appraiser rather than a member of the FHA fee panel or a FHA-approved staff appraiser of the lender, the underwriting process is the same. A CRV or a Notice of Value signed by an approved Lender Appraisal Processing Program (LAPP) lender (VA's equivalent to DE) will be included with the appraisal. However, the DE underwriter is responsible for the review of the appraisal, determination of the property's eligibility and final value, and is obligated to resolve instances when the value on the CRV or Notice of Value does not appear to be supported by the appraisal report. V. BUILDER'S CERTIFICATION FORM (HUD-92541) and WARRANTY OF COMPLETION OF CONSTRUCTION (HUD-92544): The above referenced forms have been revised. The revised versions of these forms (copies attached) must be used on all proposed construction and under-construction properties with an insured 10-year homeowners protection plan involving sales contracts signed on or after October 1, 1992. In addition, to assist builders and lenders by eliminating unnecessary paperwork, form HUD-92541-A, Agreement to Execute a Builder's Warranty of Completion of Construction, and form HUD-92544-A, Addendum to Warranty of Completion of Construction, have been canceled and need not be used for cases involving sales contracts signed on or after October 1, 1992. Unless otherwise stated in this Mortgagee Letter, these requirements are effective immediately. If you have any questions regarding these issues, please contact your local HUD office. Very sincerely yours, Arthur J. Hill Assistant Secretary for Housing -Federal Housing Commissioner Attachments _____________________________________________________________________ ___________________________________________________________________________ Warranty of Completion of Construction ******************************************************************** * * * * * * * * * * * * * * * * * * * GRAPHICS MATERIAL IN ORIGINAL DOCUMENT OMITTED * * * * * * * * * * * * * * * * * * * ******************************************************************** __________________________________________________________________________ VA form 26-1859 form HUD-92544 (8/92) ref. Handbook 4145.1 _____________________________________________________________________ __________________________________________________________________________ ******************************************************************** * * * * * * * * * * * * * * * * * * * GRAPHICS MATERIAL IN ORIGINAL DOCUMENT OMITTED * * * * * * * * * * * * * * * * * * * ******************************************************************** __________________________________________________________________________ VA form 26-1859 form HUD-92544 _____________________________________________________________________ __________________________________________________________________________ Builder's Certification of Plans & Specifications ******************************************************************** * * * * * * * * * * * * * * * * * * * GRAPHICS MATERIAL IN ORIGINAL DOCUMENT OMITTED * * * * * * * * * * * * * * * * * * * ******************************************************************** __________________________________________________________________________ Combines previous forms HUD-92541 and HUD-92541-A form HUD-92541 (8/92) ref. Handbook 4145.1