1. Sale Contracts

In order to qualify for FHA insured financing, the first block in Item 4 on the sales contract, Form HUD-9548, as well as the block for the appropriate FHA 203(b) program 203(b) with repair escrow, or 203(k)- must be checked. In the case of condominiums, Section 203(b) should be checked. The amount of the repair escrow shall be entered on Line 11.b. as an addition. (Revised in 11-02-99 REO GUIDELINES)

2. New Case Number

Mortgagees must obtain a new FHA case number to process an application for an FHA insured mortgage for a HUD owned property.

3. Closing Time Frame

Item 9 of the sales contract will specify the number of days, normally between 30 and 60, in which the borrower is required to close the sale. Mortgagees should be prepared to complete their processing in sufficient time to allow the borrower to meet this time frame.

4. Appraisals

Prior to marketing a HUD owned property for sale, HUD Contractors obtain an as-is appraisal to establish the initial list price for the property. In order to calculate the maximum mortgage amount, mortgagees may obtain a copy of this appraisal from the regional office covering the state in which the property is located. The mortgage amount may no longer be based solely on the sales price.

Mortgagees may not order, and the borrower may not be charged for, a new appraisal except in specific cases as noted in Mortgagee Letter 00-27. Click here to see the Mortgagee Letter 00-27. This includes situations where the sales price exceeds the as-is value. Ordering a new appraisal in hopes of obtaining a higher value is not permissible.

Because the Contractor's appraisals may provide only an as-is value, and the scope of work to be undertaken was unknown at the time the Contractor's appraisal was completed, a mortgagee must order and may charge the borrower for another appraisal to determine the after-improved value for Section 203(k) cases.

Mortgagees should include a copy of the appraisal in the case binder submitted for insurance endorsement.

5. Maximum Mortgage Amount and Minimum Cash Investment

A) Section 203(b) and Condominiums: The maximum mortgage amount and minimum cash investment shall be calculated in accordance with the procedures outlined in Mortgagee Letter 98-29 using Form HUD-92900-PUR, Mortgage Credit Analysis worksheet. The minimum cash investment shall be 3% of the sales price.

In performing the maximum mortgage calculation, the mortgagee shall enter on Line 11a of Form HUD-92900-PUR, the lesser of the sales price or the as-is value specified on the Contractor's appraisal. As noted above, the mortgage amount may no longer be based solely on the sales price.

B) Section 203(b) With Repair Escrow: The maximum mortgage amount and minimum cash investment shall be calculated in accordance with the procedures outlined in Mortgagee Letter 98-29 using Form HUD-92900-PUR, Mortgage Credit Analysis Worksheet. The minimum cash investment shall be 3% of the sales price.

In performing the maximum mortgage calculation, the mortgagee shall enter on Line 11a of Form HUD-92900-PUR lessor of the sales price or the as-is value specified on the Contractor's appraisal. The amount of the repair escrow shall be entered on Line 11.b. as an addition. (Revised in 11-02-99 REO GUIDELINES)

C) Section 203(k): Mortgagees should first complete Form HUD-92700 (2/99), 203(k) Maximum Mortgage Worksheet. The instructions for Line C1 on Form HUD-92700 refer mortgagees to Notice H 98-32 and 99-4 on HUD REO cases. Under the instructions in that Notice, the acquisition cost is defined as the as-is value plus the cost of rehabilitation. Mortgagees should enter on Line C1 the as is from the contractor's appraisal, rather than the lesser of the sales price or the as is value from the sales contract.

On Line C5 the form refers to the "LTV factor (Owner-Occupant) of Less Allowable Down payment/HUD-Owned Property." This refers to situations where HUD has authorized the Contractor to offer as a sales incentive, a reduced down payment requirement. This sales incentive is not being offered within the jurisdiction to the Denver Homeownership Center at this time.

Information from Form HUD-92700 should then be transferred to Form HUD-92900-PUR in accordance with the instructions on page 2 of Form HUD-92700. Form HUD-92900-PUR should then be completed in accordance with the instructions for that form.

D) Including Borrower-Paid Closing Costs and Pre-Paid Expenses in the Mortgage: Closing costs and pre-paid expenses may not be included in the mortgage amount except for those costs included in the rehabilitation portion for Section 203(k) cases. In accordance to Mortgagee Letter 98-29, allowable closing costs but not pre-paids paid by the borrower do count towards satisfying the 3% minimum cash investment.

E) Including the Mortgage Insurance Premium (MIP) in the Mortgage: HUD has authorized as a sales incentive, the inclusion of the MIP in the mortgage amount without regard to the down payment.

F) HUD-Paid Closing Cost: Item 5 of the sales contract can specify an amount that HUD will pay on the borrower's behalf at time of settlement. If the amount specified in Item 5 exceeds the actual closings costs on the settlement statement, any excess from Item 5 may not be credited to the buyer.

Depending upon the amount of closing costs that HUD pays for the borrower, the maximum mortgage amount may have to be reduced in order for the borrower to meet the minimum cash investment required.

G) Investor Loans: Investors may purchase properties with FHA insured financing under Section 203(b) only. Investors are not eligible for Section 203(k) financing. Maximum allowable financing for investors is 75% on 1 unit properties, and 85% on 2-4 unit properties.

6. Special Procedures for Section 203(b) With Repair Escrow

An escrow account equal to 110% of the estimated cost of repairs must be established for properties sold under this program. Since the maximum cost of repairs is $5,000, the maximum escrow amount may not exceed $5,500. The escrow account should be established and administered in accordance with the procedures outlined in HUD Handbook 4145.1. A completed Form HUD-92300 should be included in the case binder submitted for insurance endorsement, and a completed Form HUD-92051 must be submitted after completion of repairs.

As compensation for administering the escrow account and performing required inspections, HUD's closing agent will pay the mortgagee a fee of up to $200 at sales closing. No additional charges to the borrower are permitted.

7. Other Sales Incentives

From time to time, for particular properties, or in particular geographic areas, HUD may authorize the Contractors to offer additional sales incentives beyond those referenced in this Circular Letter. Such incentives could include down payment reductions, permission to include closing costs in the mortgage, or other items. Where additional incentives are authorized, they will be noted in writing on either the sales contract, or on a cover letter accompanying the sales contract. Mortgagees may not apply other incentives based on oral instruction from borrowers, Realtors, or any other parties.

REO Guidelines FHA 203b Wth Repair Escrow Page 3-10a

Clarification has been provided by HUD HQ pertaining to the proper procedures for the FHA 203b with repair escrow program. It has been determined that the repair escrow is to be financed in the FHA loan and is not to be taken from HUD proceeds at closing.

Accordingly, for all REO contracts accepted on or after 1 November, 1999 the deduction of the repair escrow from seller's proceeds is no longer permitted. All DE Underwriters are hereby advised that the amount of the repair escrow is to be financed with the FHA mortgage. HUD will still pay the $200 escrow fee; but in order to be paid, the $200 fee must be included on the lender instructions.

The DE Underwriter will take the mortgage amount shown on Line 4 of the sales contract and add the repair escrow amount to line 3a on the HUD-92900-PUR to determine the FHA loan amount. All loan calculations are subject to the provisions described in ML 98-29. REO properties are no longer exempt. No closing costs, prepaids, etc. are permitted to be financed in the loan and the loan is calculated, with the exception of the repair escrow, the same as all other FHA loans. DE Underwriters will reserve the right to adjust the loan in accordance with ML 98-29 to ensure the statutory 3% minimum investment is met.

Lenders are to use the "normal" loan calculations per Mortgagee Letter 98-29. For example, insert the lesser of sales price or value in item 11a (of the HUD-92900-PUR) and use the appropriate factor to arrive at the loan amount in item 11d. Note that this amount might need to be modified to meet the statutory 3 percent investment requirement (10d). Then after all the calculations are done, the total repair escrow is added to arrive at the final mortgage amount which will be shown in items 11d and 3a on the PUR.