4566-1 REV-1

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CHAPTER 9. THE MORTGAGE CREDIT PROCESS

9-1. PURPOSE. The purpose of Mortgage Credit processing in the 223(f)

coinsurance program is to analyze the credit risk, the acceptability

of the sponsorship (defined as the principals of the mortgagor

entity), evaluation of the mortgagor\'s ability to close the

transaction, the mortgagor\'s cost certification, and the mortgagor\'s

ability to successfully operate the project and liquidate the mortgage

debt. These analyses involve a great deal of informed judgment

supported by credit bureau, Dun and Bradstreet, or similar reports on

the principals, current financial statements of the principals and the

project under consideration, and bank and trade references.

9-2. PROCESSING STAGE. Except as may be required to assist in the

valuation analysis and rent roll verification at the conditional stage

of processing (if utilized), mortgage credit processing will usually

commence at the firm commitment stage. It is, however, advantageous

to keep the mortgage credit examiner apprised of pertinent information

at all stages of processing.

9-3. PROCEDURES AND ANALYSIS. Mortgage Credit procedures and analyses

are to be completed in general conformance with the procedures set

forth in HUD Handbook 4470.1, Mortgage Credit Analysis for Project

Mortgage Insurance, Section 207, Reference 12 of the Foreword, except

as modified herein. Specific instructions for completion of Form

HUD-92264A to determine the maximum insurable mortgage are contained

in paragraph 9-15c of this Chapter. It is important that the form

be completed as required, as the information will be used by HUD for

program data purposes.

9-4. MORTGAGE AMOUNT. The determination of the maximum mortgage amount

is subject to certain restrictions depending upon the type of

transaction. Two types of transactions are eligible. A purchase

transaction is one in which the property is changing hands by way of a

sale on an arms length basis. A refinance transaction is one in which

an existing owner is restructuring the mortgage debt against the

property.

a\. Purchase transaction. The amount of the 223(f) coinsured loan

in a purchase transaction may not exceed the lesser of:

\(1\) An amount not to exceed 85 percent of the lender\'s estimate

of the value of the project (90 percent if the project meets

the requirements of 24 CFR 207.32a(1)).

\(2\) The statutory limitations (adjusted for cost not attributable

to dwelling use) applicable to the area in which the project

is located. See paragraph 9-4d.

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9-1 1/84

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4566.1 REV-1

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(9-4) (3) An amount which entails a debt service not in excess of 85

percent of the net annual income as estimated by the lender

based upon the project appraisal.

\(4\) Eighty-five percent (90 percent if the project meets the

requirements of 24 CFR 207.32a(1)) of the amount required

to acquire the property, as determined by the lender. For

purposes of this program, the cost of acquisition is defined

as the sum of the following:

\(a\) Purchase price as indicated in the purchase agreement

and determined allowable by the lender.

\(b\) The estimate of repair cost, if any, as determined by

the lender, provided such costs will be borne by the

purchaser and are not included in the purchase price.

\(c\) The sum of the amounts attributable to financing, legal,

organizational, title and recording expenses which the

mortgagor is required to pay and which the lender

determines are reasonable.

\(d\) Discounts as determined eligible by the lender provided

they are paid by the purchaser. See limitations in

paragraph 9-12.

\(e\) The amount as determined by the lender for the initial

deposit to the Reserve Fund for Replacements, provided

such deposit will be funded by the purchaser.

\(f\) Architect\'s fees, mechanical engineering fees, and

municipal inspection fees, as may be determined eligible

by the lender.

NOTE: Any fees, discounts or other amounts which are included

in the preceding calculation and which are paid by the

seller for or on behalf of the purchaser must be

reflected as a reduction to the acquisition cost.

\(5\) In purchase transactions, a determination must be made as

to whether any identity of interest exists between the seller

and the purchaser. If there is any identity of interest,

regardless of how slight, the application shall be processed

as a refinancing transaction. The amount used as existing

indebtedness shall be the allowable amount of the

indebtedness on the property existing prior to the change in

ownership. It is not necessary that an identity of interest

exist in the subject transaction in order for an identity to

exist for this purpose. If, for example, the seller and

buyer

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1/84 9-2

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4566.1 REV-1

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(9-4) are partners in an unrelated complex or business or are

related by blood or marriage, an identity is considered to

exist for purposes of this computation.

b\. Refinancing transaction. The amount of a 223(f) coinsured loan

in a refinancing transaction will be the lesser of:

\(1\) An amount not to exceed 85 percent (90 percent if the

project meets the requirements of 24 CFR 207.32a(1)) of the

lender\'s estimate of value of the project.

\(2\) The maximum statutory per unit limitation (adjusted for

cost not attributable to dwelling use) applicable to the

area in which the project is located. See paragraph 9-4d.

\(3\) An amount which entails a debt service not in excess of

85 percent of the net annual income as estimated by the

lender.

\(4\) An amount which equals the greater of the following:

\(a\) 70 percent of the lender\'s estimate of the value of

the project, or

\(b\) The cost to refinance the project. For purposes of

this section, the cost to refinance is defined as the

sum of the following:

1 The amount required to pay off the existing

indebtedness as determined eligible by the lender.

2 The amount as determined by the lender for the

initial deposit to the Reserve Fund for

Replacements.

3 The estimate of repair cost, if any, as determined

by the lender.

4 The sum of the amounts attributable to financing,

legal, title, and recording expenses which the

mortgagor is required to pay and which the lender

determines are reasonable.

5 Discounts as determined eligible by the lender

provided they are paid by the mortgagor. See

limitations in paragraph 9-12.

6 Architect\'s fees, mechanical engineering fees, and

municipal inspection fees, as may be determined

eligible by the lender.

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9-3 1/84

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4566.1 REV-1

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(9-4) c. Existing indebtedness. For the purpose of determining the

maximum insurable mortgage in a refinancing transaction, existing

indebtedness is defined to be:

\(1\) The outstanding mortgage(s) incurred in connection with the

construction of the project or with capital improvements

made to the property as confirmed in writing by the present

lender, and other recorded indebtedness such as mechanics\'

and tax liens. The tax liens must be for a project

indebtedness rather than for an indebtedness against the

property arising from a personal obligation of the

mortgagor, or in connection with other realty.

\(2\) Some unrecorded indebtedness, such as delinquent interest,

indebtedness incurred in making significant betterments to

the property subsequent to the initial completion of the

project, prepayment penalties, etc., may also be eligible.

If the indebtedness is not recorded, the mortgagor must

provide the lender with documentation which unquestionably

identifies the indebtedness with the project. The key here

is to make certain that the obligation is directly connected

to the project.

\(3\) In some instances, it shall not be appropriate to recognize

the total indebtedness in establishing the maximum mortgage

amount. For example, if a second mortgage has been created

shortly before the application for mortgage insurance was

filed and runs to an identity of interest party, there is a

strong presumption that such debt was created merely for the

purpose of securing a large insured loan to enable the owner

to recapture equity out of mortgage proceeds. In any such

case, the amount of the existing indebtedness shall not

include the second mortgage unless it can be proven that

such mortgage was essential to the project.

\(4\) Any recent indebtedness placed against the property whether

or not an identity of interest party is involved must be

closely investigated. If it appears that any such

indebtedness was placed against the project in an effort to

increase the mortgage or to circumvent program intent, then

it shall not be considered existing indebtedness for the

purpose of determining the maximum insurable mortgage.

d\. Statutory limits. Statutory limits vary depending upon the type

of construction (elevator and non-elevator) and location. In

order to apply this criterion, it will be necessary that the

lender call the HUD field office having jurisdiction in the area

in which the project is located to obtain the applicable per

unit limitations.

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1/84 9-4

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4566.1 REV-1

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9-5. TERM OF MORTGAGE AND COMMENCEMENT OF AMORTIZATION.

a\. Term. The term of the mortgage shall not be less than 10 years,

nor shall it exceed the lesser of 35 years or 75 percent of the

estimated remaining economic life of the physical improvements.

Accordingly, the mortgage term shall be the eligible number of

whole years between 10 and 35. Any fraction of a year shall be

disregarded. Note that these maximums may be increased to 40

years and/or 100 percent of remaining economic life if the

project meets the eligibility requirements of 24 CFR 207.32a(1).

b\. Commencement of Amortization. Amortization shall commence on

the first day of the second month following the date of the

lender\'s endorsement of the mortgage.

9-6. RESERVE FUND FOR REPLACEMENTS. The initial deposit to the Reserve

Fund for Replacements shall be eligible for inclusion in determining

the maximum insurable mortgage in either a purchase or a refinancing

transaction. If a Reserve Fund for Replacements has already been

established for the project under consideration, the funds on deposit

shall be used first to reduce the required deposit, with the excess,

if any, applied toward the reduction of any discounts, miscellaneous

fees, etc., that are included in the mortgage. In order to avoid

possible duplication of costs, the following shall be required:

a\. Purchase Transaction.

\(1\) The purchase agreement must specify whether or not the

acquisition price includes the purchase, as an asset of the

project, of any Reserve Fund for Replacements (9-6) or other

escrows that may be on deposit with the lender and must

specify the dollar amount of such escrows that are being

transferred with the sale.

\(2\) The purchase agreement must specify the dollar amount any

and all items which the seller will pay on behalf of the

mortgagor, e.g., the operating deficit, discounts, the

initial deposit to the Reserve Fund for Replacements, etc.

\(3\) In order to ensure that the required initial deposit to the

Reserve Fund for Replacements will be included in the

mortgage (if the deposit will be funded by the purchaser),

the amount of the required deposit must be included on the

appropriate line of Criterion 7 on Form HUD-92264A. If, as

a result of the disclosures required in (1) and (2) above,

the lender determines that a Reserve Fund for Replacements

was transferred to the new mortgagor as an asset of the

project, then the amount currently on deposit must be

applied as a reduction when computing Criterion 7.

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9-5 1/84

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4566.1 REV-1

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(9-6) b. Refinancing Transaction.

\(1\) The mortgagor is required to submit a list of all escrows

currently on deposit in connection with the project. All

such escrows must remain with the project.

\(2\) In computing Criterion 10, the required initial deposit to

the Reserve Fund for Replacements must be shown on the

appropriate line.

\(3\) If the analysis of the escrow statement reveals that the

mortgagor currently has funds on deposit in a Reserve Fund

for Replacements, the amount currently on deposit must be

applied as a reduction when computing Criterion 10 on Form

HUD-92264A.

\(4\) The commitment shall carry the requirement that the balance

in the existing Reserve Fund for Replacements account must

be applied to the initial deposit to the Reserve Fund for

Replacements; and that any excess shall be applied as a

reduction to the costs of discounts, miscellaneous fees and

charges, etc., which have been included in the determination

of the maximum insurable mortgage.

9-7. EXHIBITS TO BE REVIEWED IN MORTGAGE CREDIT PROCESSING. The
following

required exhibits must be reviewed as a part of the mortgage credit

processing.

a\. Form HUD-92013, Application for Project Mortgage Insurance.

b\. The rent roll.

c\. Balance sheets, operating statements, \"Statements of Changes in

Financial Position.\"

d\. All Forms HUD-2530, Previous Participation Certificate.

e\. The statement reflecting the balance in any existing escrow

accounts.

f\. The statement reflecting any identities of interest between the

seller, buyer, present mortgage holder, etc.

g\. A copy of the legal documents creating the mortgagor entity. (A

copy must be forwarded to the lender\'s counsel for review and

comment.)

h\. A copy of the Purchase Agreement, if applicable.

i\. Credit bureau reports and credit references.

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1/84 9-6

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4566.1 REV-1

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(9-7) j. Form FHA 2417, Personal Financial and Credit Statement, or

equivalent.

k\. The statement reflecting all debt service requirements of the

project.

l\. The title search report.

9-8. FINANCIAL AND CREDIT ANALYSIS. The fundamental credit consideration

in the analysis of an existing multifamily project transaction

involves the determination that the mortgagor has the financial

capacity to provide the necessary equity to complete the loan

transaction, liquidate the mortgage debt and successfully operate the

project. This determination is based upon the analysis of current

financial statements submitted by the mortgagor with appropriate

supporting schedules (which include an aging of accounts receivable).

Commercial and individual credit reports shall be ordered by the

mortgage credit examiner as appropriate.

a\. Statements of mortgagor entity. If the mortgagor entity has

been formed and capital has been paid in prior to the issuance

of a commitment, financial statements of the mortgagor entity

shall be analyzed in accordance with sound analytical credit

practices. The analysis shall determine the adequacy of this

capital to meet the financial requirements to which the mortgagor

entity may be obligated.

b\. Aging of receivables. If the \"accounts receivable\" entry

includes rents, an aging of the receivables must be provided by

the applicant with a listing of the tenants from whom the rents

are due and the units occupied by those tenants. This

information will be needed when the operating deficit is

established. (See paragraph 9-13.)

c\. Age of financial statements. Financial statements submitted in

connection with the transaction should bear a date not in excess

of 90 days prior to the date of the loan application. An

exception may be granted by the lender where the statement is CPA

prepared. In such cases, the statement may be up to one year old

at the time of application.

d\. Extent of credit investigation. While the extent of credit

investigation required for competent analysis will vary with

each project, it is essential that any important contradictory

information be reconciled. Care should be exercised to obtain

adequate information for sound conclusions. The investigation

should not extend into unimportant or nonessential details which

would not have a material bearing on the final determination of

acceptability of the risk in the transaction.

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9-7 1/84

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4566.1 REV-1

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(9-8) e. Information required. Information required for analysis of the

credit risk ordinarily includes:

\(1\) Bank and trade references for each project principal and

on the mortgagor entity, if applicable.

\(2\) Current, within 90 days of the application date, credit

reports on each sponsor and on any business concern in

which the sponsors hold a substantial ownership interest.

9-9. SECONDARY FINANCING. The usual policy with respect to HUD-insured

multifamily mortgages requires that the insured first mortgage be

the only indebtedness against the property, with no secondary

indebtedness of any kind permitted. In 223(f), however, that policy

has been altered to permit secondary financing in accordance with

the following:

a\. Purchase Transaction. When a loan is made to finance the

purchase of an existing multifamily housing project, additional

obligations are permitted in connection with the transaction

which do not exceed the lesser of:

\(1\) Seven and one-half percent (7.5%) of the lender\'s estimate

of value, or

\(2\) Seven and one-half percent (7.5%) of the cost of

acquisition as defined in paragraph 9-4a(4).

Such additional obligations may only be represented by a

\"Promissory Note,\" Form FHA-2223, without alteration or

amendment, except that the name of the lender may be inserted in

lieu of the words \"Federal Housing Administration\" in the last

line of the second paragraph.

Example 1. Fair Market Value \$2,000,000

7-1/2% of Value \$ 150,000

Cost of Acquisition \$2,200,000

7-1/2% of Cost of Acquisition \$ 165,000

Maximum Amount Permitted to be

Financed thru Promissory Notes \$ 150,000

Example 2. Fair Market Value \$2,000,000

7-1/2% of Value \$ 150,000

Cost of Acquisition \$1,900,000

7-1/2% of Cost of Acquisition \$ 142,000

Maximum Amount Permitted to be

Financed thru Promissory Notes \$ 142,000

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1/84 9-8

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4566.1 REV-1

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(9-9) b. Refinancing Transaction. When a loan is made to refinance an

existing debt on a multifamily housing project, additional

promissory obligations are permitted in connection with the

transaction which do not exceed the lesser of:

\(1\) Seven and one-half percent (7.5%) of the lender\'s estimate

of value; or

\(2\) Fifty percent (50%) of the difference between the cost to

refinance as defined in paragraph 9-4b(4) and the maximum

mortgage amount as determined by the lender.

Such additional obligations may only be represented by a

\"Promissory Note,\" Form FHA-2223, without alteration or

amendment, except as noted in the example cited in paragraph

9-9a.

Example 1. Fair Market Value \$2,000,000

85% of Value \$1,700,000

Cost to Refinance \$1,900,000

Maximum Mortgage Amount \$1,700,000

Maximum Amount Permitted to be

Financed thru Promissory Notes is \$ 100,000

This represents the lesser of (a) \$2,000,000

x .075

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\$ 150,000

or (b) \$1,900,000

-1,700,000

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\$ 200,000

x .50

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\$ 100,000

Example 2. Fair Market Value \$2,000,000

85% of Value \$1,700,000

Cost to Refinance \$2,100,000

Maximum Mortgage Amount \$1,700,000

Maximum Amount Permitted to be

Financed thru Promissory Notes is \$ 150,000

This represents the lesser of (a) \$2,000,000

x .075

\$ 150,000

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or (b) \$2,100,000

-1,700,000

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\$ 400,000

x .50

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\$ 200,000

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9-9 1/84

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4566.1 REV-1

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(9-9) Example 3. Fair Market Value \$2,000,000

85% of Value \$1,700,000

Cost to Refinance \$1,650,000

Maximum Mortgage Amount \$1,650,000

Maximum Amount Permitted to be

Financed thru Promissory Notes is \$ 0

This represents the lesser of (a) \$2,000,000

x .075

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\$ 150,000

or (b) \$1,650,000

-1,650,000

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\$ 0

Example 4. Fair Market Value \$2,000,000

85% of Value \$1,700,000

70% of Value \$1,400,000

Cost to Refinance \$1,300,000

Maximum Mortgage Amount \$1,400,000

Maximum Amount Permitted to be

Financed thru Promissory Notes is \$ 0

This represents the lesser of (a) \$2,000,000

x .075

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\$ 150,000

or (b) \$1,300,000

-1,400,000

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(\$ 100,000)

c\. Decreases in cost. In both purchase and refinancing

transactions, if the cost of acquisition or cost to refinance

decreases for any reason, the maximum allowable amount of

promissory notes must be recomputed. For example, in a purchase

transaction, the seller may lower the purchase price in order to

reduce the buyer\'s front money requirements. Also, in a

refinancing transaction, the financing plan may reveal that a

portion of the indebtedness has been forgiven in order to reduce

the mortgagor\'s front money requirements. In either case, the

permissible amount of promissory notes must be recomputed.

d\. Special eligiblity projects. The foregoing limitations also

apply to projects which meet the requirements of 24 CFR

207.32a(1).

9-10. CASH REQUIREMENTS. HUD terminology defines cash requirements as
the

difference between the total cost to finance the purchase or

refinance a project and the indicated co-insurable mortgage amount.

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1/84 9-10

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4566.1 REV-1

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9-11. FINANCING PLAN. At the time of firm commitment processing, the

mortgagor must submit a financing plan setting forth all

obligations in connection with the project and identifying the

source of payment for each such item. The plan must be signed by a

principal of the proposed mortgagor entity.

a\. Promissory Notes. If a promissory note(s) will be utilized to

retire any portion of the cash requirements, the financing plan

must disclose to whom the note(s) (in approved form - see

paragraph 9-9) will be issued and the amount(s) of each. Any

other source(s) of capital must also be identified; the amount

to be obtained from each source must be specified; and

verification from the source(s) involved must accompany the

plan.

b\. Indebtedness Forgiven. If any portion of the indebtedness will

be forgiven, verifications from the appropriate lenders must

accompany the plan.

c\. Verification. If the financing plan indicates that a

particular mortgagor principal is to provide a specified sum,

the mortgage credit examiner must be satisfied, based upon an

analysis of the principal\'s financial statement, that the

principal has sufficient net assets to support the proposed

contribution.

9-12. DISCOUNTS. For purposes of 223(f) coinsurance, permanent loan

discounts may be eligible for inclusion in the computation upon

which the maximum coinsurance mortgage is based. The mortgage

credit examiner (MCE) must review the documentation submitted

regarding permanent financing. Such documentation will state the

amount of the discounts to be charged and to whom they will be

paid. If the MCE determines that the stated discounts are

reasonable and are in line with prevailing market conditions and

mortgage credit data, they may be included in the determination of

the maximum coinsurable mortgage subject to the following

limitations:

a\. In a refinancing transaction, where there is an identity of

interest between the present permanent lender or the interim

lender and the new permanent lender, no additional financing

charges or discounts other than the 2 percent financing fee and

1 1/2 percent placement fee shall be eligible for inclusion.

b\. In a purchase or refinancing transaction where an identity of

interest exists between the lender and the mortgagor, no

additional financing charges or discounts other than the 2

percent financing fee and 1 1/2 percent placement fee shall be

eligible for inclusion.

c\. In a refinancing or purchase transaction, where there is no

identity as described in a and b above, discounts may be

recognized only for those actual costs charged by the permanent

lender which are determined to be eligible.

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9-11 1/84

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4566.1 REV-1

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(9-12) Discounts charged for warehousing a mortgage for future

delivery as well as those which may be charged by the interim

lender are not eligible for inclusion.

d\. In a refinancing or purchase transaction where an identity of

interest exists between the lenders, and the GNMA

Mortgage-Backed Securities Program will be used for permanent

financing, discounts as determined reasonable by the lender may

be included.

e\. If the GNMA Mortgage-Backed Securities Program will be used for

permanent financing, a sum equal to 1 percent of the mortgage

amount must be placed in escrow for three years. This sum

shall not be eligible for inclusion in the determination of the

maximum insurable mortgage but will be a cash requirement to

the mortgagor, notwithstanding any identity of interest which

may or may not exist between any of the parties.

f\. Each of the foregoing fees (if applicable) must be identified

as an obligation in the financing plan discussed earlier in

this chapter.

9-13. OPERATING DEFICIT. It is expected that most projects which are the

subject of 223(f) coinsurance applications will have reached

sustaining occupancy at the time of application. There may,

however, be projects which have not reached sustaining occupancy

but which can be reasonably anticipated to do so within a

relatively short period. For 223(f) coinsurance purposes, this

period may not exceed 12 months. In such cases, the mortgagor must

establish an operating deficit escrow to cover the difference

between project income and expenditures during this period (also

see paragraph 3-2f).

a\. The appraiser, based upon a study of the local rental market,

will have recorded in the remarks section of the Form

HUD-92264, the date upon which the project will reach

sustaining occupancy.

b\. The mortgage credit examiner, based upon the verified rent roll

figures, the time the appraiser has estimated as required to

reach sustaining occupancy, and the expense and debt service

requirement of the project, will determine the necessity for an

operating deficit by completing the format shown at Appendix 14

of this handbook.

c\. If an operating deficit is necessary, an escrow must be

established at the time of endorsement for mortgage

coinsurance. Form FHA-2476A, Escrow Agreement - Additional

Contribution by Sponsors, must be used for this purpose. The

form, however, may be altered to omit references to HUD

approval for disbursements, etc. Such determinations are the

responsibility of the lender in this program.

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1/84 9-12

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4566.1 REV-1

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(9-13) (1) The escrow agreement provides that the lender may accept,

at its option and discretion, cash, a letter of credit, or

United States bearer bonds in support of the agreement.

\(2\) If a letter of credit is accepted, it must be issued by a

banking institution other than the lender. Further, if a

letter of credit or bearer bonds are accepted by the lender

in support of the escrow agreement, the burden of collection

is on the lender. If there is a need to draw upon the

escrow, the lender is expected to provide cash. In the

event of a claim under the mortgage insurance contract, the

undrawn balance of the escrow will be considered as cash

held by the lender and will be deducted in the computation

of the coinsurance claim.

9-14. COST CERTIFICATION. The mortgagor must submit a certificate of

actual costs using Form FHA-2205A shown at Appendix 11. This

certificate must be submitted and approved after the repairs, if

any, are completed and prior to endorsement of the mortgage for

coinsurance. An exception to this requirement is granted for

refinancing transactions where 70 percent of value is the criterion

upon which the maximum coinsurance mortgage is based. In such

cases, cost certification is not required.

a\. The mortgagor must certify to the total actual costs incurred

in the acquisition or refinancing of the property. The

certification must be dated and signed by an authorized agent

of the mortgage entity.

b\. The MCE shall review the submission comparing the amounts

claimed to those used in the firm commitment processing to

reestablish the maximum insurable mortgage amount. Generally,

the amounts used in processing establish an upper limit in each

cost category. Any disallowance shall be explained on a

separate worksheet and attached to Form FHA-2205A. The MCE

shall complete Section II of Form FHA-2205A.

c\. The general contractor will only be required to submit a cost

certification if a cost-plus form of contract is used.

d\. If, in a purchase transaction, the amount of the acquisition

cost is determined allowable at cost certification exceeds the

lender\'s estimate of value of the project determined during

processing, the rent formula must be recomputed by the

appraiser. In order that the appraiser may accomplish this

recomputation, the MCE shall advise the appraiser of (1) the

allowable acquisition cost as determined by cost certification

and (2) the dollar amount of secondary financing represented by

the approved promissory notes, Form FHA-2223, shown at Appendix

12\.

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9-13 1/84

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4566.1 REV-1

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(9-14) e. If no repair contract has been executed between the mortgagor

and the general contractor, or where the mortgagor elects to

act as its own repair contractor, the maximum cost allowable

will be the lender\'s estimate of repairs.

9-15. INSTRUCTIONS FOR COMPLETING FORM HUD-92264A, SUPPLEMENT TO PROJECT

ANALYSIS. This form is used by HUD in connection with multifamily

insured programs. Not all portions of the form need be completed

in the 223(f) coinsurance process.

a\. The heading of the form should be completed with the name of

the mortgagor, if known, and the name and location of the

project. The type of mortgagor in 223(f) coinsurance projects

will, in nearly all cases, be private, profit-motivated

mortgagors. Check both blocks. The type of project will be

rental housing and in one of the blanks to the right of this

section indicate 223(f) coinsurance. In the other blank

indicate whether the transaction is a purchase or a refinance.

b\. Instructions for completing the remaining portion of the form

will depend upon whether the transaction is a purchase or a

refinance.

c\. Section I, Determination of Maximum Insurable Mortgage. In a

purchase transaction, Criteria 1, 3, 4, 5 and 7 must be

completed. The maximum coinsurable mortgage is the least of

the following criterion:

\(1\) Criterion 1. Enter the amount of mortgage applied for.

\(2\) Criterion 3. In line a, enter the amount from Section L,

Line 9 of the Form HUD-92264 in the first space and 85 in

the second. Multiply the figures as indicated and enter

the result in column 2. Lines b, c, and d are inapplicable

to this program. Enter the result of the computation from

line a in column c of line e.

\(3\) Criterion 4 involves a determination of the maximum

mortgage based upon statutory per unit limitations. A

no-bedroom unit as referred to in the form is an efficiency

unit. The amounts vary from location to location depending

upon the high cost factor determined. The MCE must contact

the HUD office in whose jurisdiction the project under

consideration is located. The office will advise the MCE

of the applicable limits. The MCE must contact the office

each time an application is processed because high cost

limits change regularly and different limits apply to

different locales within a given Area Office\'s

jurisdiction.

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1/84 9-14

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4566.1 REV-1

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(9-15) (4) Criterion 5 computes the maximum coinsurable mortgage

based upon debt service.

\(a\) In item a, enter the interest rate to be charged on

the coinsured mortgage.

\(b\) In item b, enter the annual mortgage insurance

premium, i.e., .75, which is applicable after the

initial year.

\(c\) In item c, enter appropriate initial curtail rate

from the table shown at Appendix 22.

\(d\) Item d is self-explanatory.

\(e\) In item e, enter in the first blank the net income to

the project from Section F, line 34 of the Form

HUD-92264. Enter 85 as the percentage limitation.

Multiply these figures and enter the result in Column

2\.

\(f\) If there is any periodic payment required for a

special assessment indicated in Section D, line 39 of

Form HUD-92264, enter the amount here and extend the

sum to Column 2. The references herein to ground

leases are inapplicable to 223(f) coinsurance.

\(g\) Items g and h are self-explanatory.

\(5\) Criterion 7 as it appears on the form must be deleted and

a revised criterion completed using the following format.

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9-15 1/84

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4566.1 REV-1

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Criterion 7. AMOUNT BASED ON MORTGAGOR\'S TOTAL COST OF ACQUISITION

FORMAT Column 1 Column 2 Column 3

Item 7a. Purchase Price

Project \$\_\_\_\_\_\_\_

Repairs and

Improvements, if any \$\_\_\_\_\_\_\_

Other Fees \$\_\_\_\_\_\_\_

Loan Closing Charges \$\_\_\_\_\_\_\_

Sum of Items a, b,

c, and d \$\_\_\_\_\_\_\_

Amount of Reserve

for Replacements

on Deposit under

Existing Mortgage \$\_\_\_\_\_\_\_

Item e minus Item f \$\_\_\_\_\_\_\_

Item g x \_\_\_\_\_\_\_ % \$\_\_\_\_\_\_\_

INSTRUCTIONS

Item 7a. Enter the purchase price of the property reflected in the

purchase agreement and determined allowable.

Item 7b. Amount to be entered on this line will not exceed the estimated

cost of these repairs determined as a result of the visit to the

project and entered in the \"Remarks\" Section of the Form

HUD-92264. If the cost of the repairs has been included in the

purchase price per the purchase agreement, enter zero.

Item 7c. If costs will be incurred for municipality inspection services

or architectural and/or engineering services that are required

by the lender, enter the sum of these costs, which appear in the

\"Remarks\" Section of the Form HUD-92264. Then record an

itemization of these costs in the \"Remarks\" Section of the Form

HUD-92264A.

Item 7d. Disregard the amounts appearing in Section G of the Form

HUD-92264. The amount to be entered on this line will be the

sum of the allowable costs for MIP, Exam Fee, Financing Fee,

Permanent Placement Fee, Discounts, Title and Recording, Legal,

and Organizational expenses and the initial deposit to the

Reserve for Replacements

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1/84 9-16

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4566.1 REV-1

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Fund (which expenses the appraiser will furnish to the MCE in the

\"Remarks\" Section of the Form HUD-92264), and will be computed

as follows:

Step 1. Add the known dollar amounts for the following:

A. Purchase Price

B. Repairs

C. Legal

D. Organizational

E. Title and Recording

F. Initial Deposit to the Reserve Fund for Replacements,

provided the deposit will be funded by the purchaser.

G. Other Fees

Step 2. Deduct the amounts of any Replacement Reserve Escrow

which will be purchased as an asset of the project.

Step 3. Multiply the sum from Step 2 by 85 percent.

Step 4. Add the known percentages for the following:

A. MIP (1%)

B. Permanent Placement Fee (not to exceed 1 1/2%)

C. Financing Fee (Initial Service Charge)

D. Exam Fee

E. Discounts, if allowable

Step 5. Multiply total from Step 4 by 85 percent. (Product

should be shown to four decimal places.)

Step 6. Subtract result from Step 5 from 100 percent.

Step 7. Divide the product from Step 3 by the result from Step 6.

The quotient rounded down to the nearest hundred becomes

the mortgage amount.

Step 8. Using the percentages from Step 4, compute and total the

actual fees based on the mortgage amount determined in

Step 7 for the following items:

A. MIP

B. Permanent Placement Fee (not to exceed 1 1/2%)

C. Financing Fee (Initial Service Charge - not to

exceed 2%)

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9-17 1/84

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4566.1 REV-1

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D. Exam Fee (not to exceed 3/10%)

E. Discounts, if allowable\*

Step 9. Add to the total derived from Step 8, the allowable

amounts for Legal, Organizational, Title and

Recording, the Initial Deposit to the Reserve Fund for

Replacements, and Permanent Placement Fee. The sum

will be transferred to Item 7d.

Using the Mortgage Credit data based on prevailing market conditions,
the

MCE will evaluate the amount of the requested discounts for
reasonableness.

The MCE will prepare a worksheet showing the computation of the

loan charges as indicated above and attach it to the completed

copy of the Form HUD-92264A.

Item 7e. Self-explanatory.

Item 7f. Enter the amount of the Reserve for Replacement on deposit with

the lender, provided that the Replacement Reserve will be

purchased as an asset of the project. The lender must furnish

verification of the amount on deposit.

Item 7g. Self-explanatory.

Item 7h. Enter 85 as the percentage. Multiply Item g by this percentage

and extend the product, rounded down to the nearest hundred, to

Column 3.

d\. Section II, Total Requirements for Settlement. This section

consists of two parts, A and B. Part B should be completed

before Part A.

\(1\) Part B.

a Line 1, Fees Not to be Paid in Cash, is not applicable

to 223(f) processing.

b Commitment, Marketing Fees, and Discounts.

\*The instructions regarding the eligibility of discounts are set forth
in

paragraph 9-12. After establishing whether the discounts are eligible

for inclusion in the determination of the maximum insurable mortgage,
the

MCE will determine the amount to be allowed.

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1/84 9-18

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4566.1 REV-1

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1 Fees: GNMA. If the GNMA mortgage-backed

securities plan is used for permanent financing, an

escrow of 1 percent of the mortgage amount will be

required. This amount is not eligible for inclusion

in the maximum insurable mortgage, but is a cash

requirement to the mortgagor. As such, the MCE

will enter the appropriate amount.

2 Discounts. The amount of those discounts which

will be charged by the new lender, but have been

determined not to be eligible for inclusion in the

determination of the maximum insurable mortgage,

will be entered.

c Working Capital. This line is inapplicable in 223(f)

processing.

\(2\) Part A.

a Line 1, Development Cost. Delete the words \"Development

Cost\" and enter \"Purchase Price Including Loan Closing

Charges.\" The amount to be entered on this line

represents the total of Item 7a plus the \"Other Fees\"

reflected on Line 7c, plus the loan closing charges

based on the maximum insurable mortgage. The MCE will

compute the fees based on the maximum insurable mortgage

and list a breakdown of these fees and other loan

charges (Legal, Organizational, Title and Recording,

Initial Deposit to the Reserve Fund for Replacements),

in the \"Remarks\" Section of the Form FHA-2264A.

b Line 2, Land Indebtedness. Delete \"Land Indebtedness\"

and enter \"Required Repairs.\" The amount to be entered

on this line will be the amount shown in Item 7b of

Criterion 7.

c Line 3, Self-explanatory.

d Line 4. Enter the lowest of the criteria established

in Section I.

e Line 5. Not applicable.

f Line 6. Self-explanatory.

g Line 7. Self-explanatory.

h Line 8, Initial Operating Deficit. Compute the

operating deficit following the format which appears as

Appendix 14, and enter the required deposit on this

line. Attach a

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9-19 1/84

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4566.1 REV-1

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copy of the worksheet showing the computation of the

operating deficit to the completed Mortgage Credit copy

of the Form FHA-2264A.

i Line 9, Commitment, Marketing Fees, Discounts. Transfer

amount entered in Part B, No. 2.

j Line 10. Not applicable.

k Line 11. Not applicable.

1 Line 12, Total Estimated Cash Requirement. Add the

amounts in lines 7, 8, and 9 and enter the total. This

figure represents the estimated difference between the

mortgage amount and the estimated total cost of effecting

the transaction.

m Front Money Escrow. Not applicable.

e\. Section III, Source of Funds to Meet Cash Requirements. Enter

the results of the financial statement analyses. Further,

identify and enter any amounts already on deposit or expended by

the mortgagor to cover the requirements listed above. This is

done in order to provide the mortgagor with credit for funds

already invested to satisfy cash requirements, e.g., the deposit

on the purchase of the land, the Reserve for Replacements escrow

already on deposit with the lender, etc.

If the mortgagor has submitted a financing plan which indicates

that promissory notes will be used to meet the cash requirements,

the amount of the notes, provided it does not exceed the amount

allowable in accordance with paragraph 9-9, will also be entered

under this section. Complete the format which appears as

Appendix 15 to determine the maximum amount permitted to be

financed through promissory notes.

f\. Section IV, Recommendations, Requirements and Remarks.

Remarks. Show itemization of figures included in the total

reflected in Section II, Part A, Line 1, and any

other appropriate comments.

g\. Refinance transactions. Instructions for completing Form

HUD-92264A for refinance transactions are, for the most part,

the same as those to be followed in a purchase transaction,

except as set forth below.

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1/84 9-20

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4566.1 REV-1

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h\. Section I, Determination of Maximum Insurable Mortgage.

\(1\) Type of project. In addition to completing the other

applicable boxes, place an X in the first blank space

and enter \"Refinancing Transaction.\"

\(2\) Criteria. Apply limitations applicable to Refinancing

Transactions:

a Complete Criteria 1, 3, 4, 5, and add Criterion 10.

Note, however, that the format for computing certain

of the entries for refinancing transactions differs

from those used in a purchase transaction. For

example, see Appendix 16, Format to Compute Fees in a

Refinancing Transaction, and Appendix 13, Format to

Compute Fees in a Purchase Transaction.

b Additional information regarding these criteria is

set forth in HUD Handbook 4565.1, Mortgage Insurance

for the Purchase or Refinancing of Existing

Multifamily Projects, Section 223(f).

Add Criterion 10 in the blank spaces in the following

format and complete as follows:

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9-21 1/84

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4566.1 REV-1

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Criterion 10. AMOUNT BASED ON EXISTING INDEBTEDNESS, REPAIRS, AND

LOAN CLOSING CHARGES.

FORMAT Column 1 Column 2 Column 3

Item 10a. Total Existing

Indebtedness \$\_\_\_\_\_\_\_

Item 10b. Required Repairs \$\_\_\_\_\_\_\_

Item 10c. Other Fees \$\_\_\_\_\_\_\_

Item 10d. Loan Closing

Charges \$\_\_\_\_\_\_\_

Item 10e. Sum of Items a, b,

c, and d \$\_\_\_\_\_\_\_

Item 10f. Amount of Reserve

for Replacement on

Deposit under

Existing Mortgage \$\_\_\_\_\_\_\_

Item 10g. Item e minus Item f \$\_\_\_\_\_\_\_

Item 10h. 70% of Value \$\_\_\_\_\_\_\_

Item 10i. Greater of Item g or Item h \$\_\_\_\_\_\_\_

INSTRUCTIONS.

Item 10a. Enter the total outstanding existing indebtedness as

determined in accordance with paragraph 9-9 of this

Handbook.

The current indebtedness and a list of the betterments must

be furnished by the mortgagor in support of the request to

include this sum in the refinancing transaction.

Item 10b. Amount to be entered on this line will not exceed the

estimated cost of repairs as determined by the lender as a

result of the team visit to the project.

Item 10c. If costs will be incurred for municipality inspection

services or architectural and/or engineering services that

are required by the lender in addition to the basic

inspection enter the sum of these additional costs, which

appear in the \"Remarks\" Section of the Form HUD-92264.

Then, record an itemization of these costs in the \"Remarks\"

Section of the Form FHA-2264A.

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1/84 9-22

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4566.1 REV-1

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Item 10d. Disregard the amount appearing in Section G of the Form

HUD-92264. The amount to be entered on this line will be

the sum of the allowable costs for MIP, Exam Fee, Financing

Fee, FNMA Fee, Discounts, Initial Deposit to the Reserve

for Replacements Fund, and Title and Recording, Legal and

Organizational expenses (which expenses the Appraiser will

furnish to the MCE in the \"Remarks\" Section of the Form

HUD-92264), and will be computed as follows using the

format which appears as Appendix 16:

Step 1. Add the known dollar amounts for:

A. Existing Indebtedness

B. Repairs

C. Initial Deposit to Reserve for Replacements

D. Legal

E. Title and Recording

F. Organizational

G. Other Fees

Step 2. Deduct the amount of the Replacement Reserve

currently on deposit with the present lender.

Step 3. Add the known percentages for:

A. Financing Fee (Initial Service Charge)

B. MIP (1%)

C. Exam Fee

D. Permanent Placement Fee (not to exceed 1

1/2%) E. Discounts, if allowable

Step 4. Subtract the sum from Step 3 from 100 percent.

The result will be the percentage of the mortgage

represented by the known fees.

Step 5. Divide the sum from Step 2 by the result from

Step 4. The quotient, rounded down to the

nearest hundred, becomes the mortgage amount

supportable by this criterion.

Step 6. Using the percentages from Step 3, compute and

total the actual fees based on the mortgage

amount determined in Step 5 for the following

items:

A. Financing Fee

B. MIP (1%)

C. Exam Fee

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9-23 1/84

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4566.1 REV-1

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D. Permanent Placement Fee

E. Discounts, if allowable\*

Step 7. Add to the total derived from Step 6 above, the

allowable amounts for Legal, Organizational,

Initial Deposit to the Reserve for Replacements

Fund, and Title and Recording.

The result from Step 7 will be transferred to

Item 10d.

The MCE will prepare a worksheet showing the

computation of the loan charges as indicated

above and attach it to the completed Mortgage

Credit copy of the Form HUD-92264A.

Item 10e. Self-explanatory.

Item 10f. Enter the amount of the Replacement Reserve presently on

deposit with the lender under the existing mortgage. The

lender must furnish verification of the dollar amount.

Item 10g. Self-explanatory.

Item 10h. Self-explanatory.

Item 10i. Self-explanatory.

i\. Section II, Total Requirements for Settlement.

\(1\) Part A.

a Development Cost. Delete \"Development Cost\" and enter

\"Existing Indebtedness Including Loan Closing

Charges.\" The amount to be entered on this line will

be the amount reflected in Item 10a, plus the \"Other

Fees\" reflected on Line 10c, plus the amount of loan

closing charges based on the maximum insurable

mortgage. The MCE will compute the fees based on the

maximum insurable mortgage

\*The instructions regarding the eligibility of discounts are set forth
in

paragraph 9-12. After establishing whether the discounts are eligible
for

inclusion in the determination of the maximum insurable mortgage, the
MCE

will determine the amount to be allowed. Using data based on prevailing

market conditions, the MCE will evaluate the amount of the requested

discounts for reasonableness.

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1/84 9-24

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4566.1 REV-1

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and list a breakdown of these fees and other loan

charges (Legal, Organizational, Title and Recording,

Initial Deposit to Reserve for Replacements and

Permanent Placement Fee) in the \"Remarks\" Section of

the Form FHA-2264A.

b Land Indebtedness. Delete \"Land Indebtedness\" and

enter \"Required Repairs.\" The amount to be entered on

this line will be the amount reflected in Item 10b of

Criterion 10.

c Mortgage Amount. Enter the amount of the coinsurable

mortgage.

d Fees Not to be Paid in Cash. Not applicable to 223(f)

coinsurance.

e Initial Operating Deficit. Compute the operating

deficit following the format which appears as Exhibit

14, and enter the required deposit on this line.

Attach a copy of the worksheet showing the computation

of the operating deficit to the completed copy of the

Form HUD-92264A.

f Commitment, Marketing Fees, Discounts. Transfer amount

entered in Part B, No. 2.

g Working Capital. Delete \"Working Capital\" and enter

\"Other Indebtedness.\" The amount to be entered on this

line will represent any notes payable or recorded

indebtednesses which were not eligible for inclusion in

the determination of the mortgage amount. Other

indebtedness is not to include accounts payable as

these items are normally ongoing operating expenses.

h Total Estimated Cash Requirements. The total entered

here is the amount over and above the mortgage which

the mortgagor must provide either by way of cash or

promissory notes. See Appendices 12 and 15 for

computing maximum amount of promissory notes permitted.

j\. Section III, Source of Funds to Meet Cash Requirements. Enter

the results of the financial statement analysis. Further,

identify and enter any amounts already on deposit or expended

by the mortgagor to cover the requirements listed above. This

is done in order to reflect a credit for funds already invested

to satisfy the cash requirements, e.g., the Reserve for

Replacements escrow already on deposit with the lender, repairs

already made, etc.

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9-25 1/84

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4566.1 REV-1

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If the mortgagor has submitted a financing plan which indicates

that promissory notes will be used to meet the cash requirements,

the amount of the notes, provided it does not exceed the amount

allowable in accordance with paragraph 9-9, will also be entered

under this section. Complete the format which appears as

Appendix 17 to determine the maximum amount permitted to be

financed through promissory notes.

The financing plan will be attached to the Form HUD-92264A.

k\. Section IV, Recommendations, Requirements and Remarks.

Remarks. Show itemization of figures included in the total

reflected in Section II, Part A, Line 1 and other

appropriate comments.

l\. The form must be dated and signed by the preparer.

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1/84 9-26