4561.1

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CHAPTER 12. INITIAL CLOSING - COINSURED CONSTRUCTION ADVANCES

12-1. PREPARATION FOR INITIAL CLOSING. Required for coinsurance of

advances cases only. (See Chapter 15 for coinsurance on completion

requirements.)

A. Firm commitment conditions. The lender must ensure that the

mortgagor complies with all conditions of the firm commitment.

B. Closing site. Any place agreed to by lender and mortgagor

except a HUD field office.

C. Initial advance of mortgage proceeds. The first coinsured

advance is usually made at initial closing to cover costs

incurred before construction or otherwise due and payable, such

as land acquisition, design architect fees, initial service

charge, MIP, etc. (See Chapter 10).

NOTE: No construction of any kind may begin before initial closing and

recording of the mortgage (except in the limited case described

in paragraph 12-7).

12-2. PRE-CONSTRUCTION CONFERENCE. Required for every project; usually

held at initial closing. It may be earlier or later but must

precede actual construction start. (See paragraph 13-7, Chapter 7,

and Handbook 1344.1 Federal Labor Standards Compliance in Housing

and Community Development Programs, for labor standards requirements

during construction.)

A. Who must attend

\- Representative(s) of mortgagor

\- General contractor

\- Major subcontractors

\- Lender\'s construction inspector

\- Lender\'s labor standards specialist

NOTE: You must keep an attendance list for each

pre-construction conference for the permanent project

file.

B. The lender must:

1\) Outline HUD\'s contract requirements on: labor standards;

prevailing wage procedures; and equal employment.

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4561.1

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(12-2) 2) Explain Form HUD-2554, Supplementary Conditions of the

Contract for Construction, including:

a\) Contractual obligations of general contractor or

subcontractors.

b\) Statement of sanctions imposed for non-compliance with

supplemental conditions.

3\) Requirement that the HUD-2554 be part of all contracts

with a subcontractor.

3\) Give copies of the Equal Opportunity poster to the general

contractor and each subcontractor for posting in conspicuous

places on the construction site.

4\) Give extra copies of the HUD-2554 to the general contractor

for any absent subcontractors.

5\) See that a current wage determination is delivered to the

general contractor and subcontractors and emphasize

importance of prevailing wage payments, prompt payroll

submissions, and record keeping.

6\) Indicate lender staff who will review for labor standards

compliance.

7\) Explain cost certification requirements for mortgagor,

general contractors and, if applicable, subcontractors.

12-3. REVISION OF FORMS.

A. The HUD and FHA forms and formats listed in Appendix 1 must be

used as follows:

1\. Required. You must use required forms and formats with no

changes, unless HUD Headquarters approves changes in

writing. You may print them on your letterhead.

2\. Equivalent. You may revise equivalent forms and formats or

devise your own equivalent subject to prior HUD Headquarters

written approval. Until HUD approval, you must use the

required forms and formats.

B. Closing documents. The rules of paragraph A, above, apply. You

may submit a complete package of your proposed closing documents

with any modifications directly to HUD Headquarters, Office of

General Counsel, Office of Insured Housing and Finance

(Multifamily Mortgage Insurance) for review.

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4561.1

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12-4. USE OF LETTERS OF CREDIT.

A. You may accept letters of credit instead of cash to set up many

of the escrows required at initial and final endorsement or

during construction. When a letter of credit is permitted by

this handbook, it must always be:

1\. Unconditional and irrevocable

2\. Issued by a banking institution

3\. Valid and collectible

B. You, as lender of record, may not be the issuer of any letter of

credit without prior written consent of HUD Headquarters.

C. If a demand under any letter of credit is not met immediately,

you must provide the cash equivalent to the undrawn balance

under the letter of credit.

12-5. INITIAL CLOSING DOCUMENTS. The forms and documents listed below
are

self-explanatory except as noted in the paragraphs that follow the

list. Required forms are starred (\*). At closing, the lender must

collect an original for its files or a completely legible copy

(certified true and correct) if the original is unavailable because

of filing or recording requirements.

Mortgagor\'s organizational documents

Lease (if there is a leasehold - see Form PHA-2070 for required

lease provisions) (Appendix 66)

Survey

\* Surveyor\'s Certificate (FHA-2457) (Appendix 13)

Evidence of zoning compliance

Building permits

\* Mortgage (Deed of Trust)

\* Note

\* Coinsurance Regulatory Agreement (Appendix 36)

\* Building Loan Agreement (Appendix 32)

\* Mortgagor\'s Certificate (Appendix 34) and Mortgagor\'s Attorney\'s

Opinion

\* Mortgagor\'s Oath (Appendix 35)

Title Policy

Hazard insurance policy

\* Construction contract (Appendix 26)

\* Owner-Architect Agreement (Use AIA Document B181 and HUD amendment

in Appendix 70.)

\* Assurance of Completion:

\- Performance Bond (FHA-2452), (Appendix 27a)

\- Completion Assurance Agreement (HUD-92450), or (Appendix 27b)

\- Personal Undertaking (FHA-2459) (Appendix 27c)

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4561.1

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(Initial closing documents - con\'t.)

(12-5) \* Escrow Agreement for Offsite Facilities (FHA-2446) (Appendix
28)

\* Assurance of funds to meet operating deficits (FHA-2476

(Appendix 29a), FHA-2477 (Appendix 29b) and FHA-2476a

(Appendix 29c))

\* Agreement and Certification (Appendix 33a)

A. Mortgage (or Deed of Trust)

1\) Must be on an FHA or HUD form or substitute approved in

writing by HUD for use in the project jurisdiction.

2\) Must be a first lien on the entire property.

B. Note

1\) Must be on HUD-FHA form or substitute approved in writing

by HUD for use in the project jurisdiction.

2\) Must have a maturity of the earlier of 40 years or 75

percent of the estimated remaining economic life of the

physical improvements.

3\) Must identify on the panel of the note:

a\) The section of the Act and the regulations under which

the mortgage is coinsured.

b\) Percentage of loss assumed b the lender and HUD,

computed after allowance for the 5 percent deductible.

4\) May contain prepayment provisions as follows:

a\) Lender and mortgagor may agree to reasonable conditions

or penalties for prepayment as long as mortgagor\'s

basic right to prepay upon 30-days notice is maintained

subject to exceptions in paragraph c, below.

b\) Lender may collect a late charge not to exceed \$.04 per

\$1.00 for each payment to interest and principal more

than 15 days late (or other charge agreed to by the

lender and HUD). Late charges must be separately

charged to and collected from the mortgagor and cannot

be deducted from any aggregate monthly payment.

c\) Exceptions:

1\. Bond-financed cases. The note may contain a

prepayment restriction and prepayment penalty

charge acceptable to HUD as to term, amount and

conditions.

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4561.1

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(Initial closing documents - con\'t.)

(12-5) 2. Projects subsidized under Section 8 of the U. S.

Housing Act of 1937 or other Federal law or subject

to GNMA purchase, assignment, or other transfer must

meet the prepayment restrictions of these programs.

5\) The note and mortgage may contain standard exculpatory language

acceptable to HUD. Among other things, any such language must

specifically refer to the retained obligation of the

individuals under the regulatory agreement.

C. Coinsurance Regulatory Agreement. Must be incorporated by

reference into the mortgage. The lender may regulate and restrict

the mortgagor (with prior HUD Headquarters written approval) on

other matters as long as they do not conflict with HUD

requirements.

D. Building Loan Agreement. Sets out responsibilities and operating

terms and conditions between lender and mortgagor, including the

bases under which coinsured advances may be made during

construction.

E. Mortgagor\'s Certificate. Obligates mortgagor to comply with

various requirements, including civil rights, during the

coinsurance period.

F. Mortgagor\'s attorney\'s opinion. Must be on letterhead of the

mortgagor\'s attorney and state the following:

\"To: (Insert name of lender)

\"I am the attorney for the mortgagor and have prepared or

reviewed all of the documents on the organization of the

mortgagor entity for cases using Section 103(b)(4)(A)

tax-exempt bond financing, add here \"and the financing of the

mortgage with bonds tax-exempt under Section 103 of the

Internal Revenue Code ; the note, mortgage (deed of trust),

regulatory agreement and other collateral documents submitted

to you.

\"It is my opinion that:

\"1. The mortgagor is a valid existing legal entity; it has

authority to engage in the business contemplated by this

transaction; all incorporation fees and taxes have been paid;

all pertinent security requirements have been met; the note,

mortgage (deed of trust), regulatory agreement and other

collateral documents required by the lender to be signed by

the mortagor have been signed by the person(s) authorized

to do so and are instruments legally binding on the mortgagor;

and the mortgage (deed of trust) is a valid lien on the

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12-5 6/85

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4561.1

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(Initial closing documents - con\'t.)

(12-5) \"2. The building permit(s) has (have) been legally issued

and construction (rehabilitation) in accordance with the plans

and specifications is authorized by this (these) permit(s).

\"3. The proposed construction (rehabilitation) complies with

all applicable zoning laws and requirements. There is no

legal action pending and, to the best of my knowledge, there

is no threatened legal action or proposed changes in zoning

that would affect this transaction in any manner.

\"4. I certify that satisfactory arrangements have been made

for payment of my fees for services and that I will assert

no claim or lien because of such services against the

mortgaged premises, mortgage proceeds or income from the

premises.

\"5. Add for cases using Section 103(b)(4)(A) tax-exempt bond

financing Any contracts or other documents executed by the

mortgagor or any other arrangements agreed to by the mortgagor

in order to finance the mortgage with bonds exempt from

taxation under Section 103 of the Internal Revenue Code are

consistent with the mortgage, mortgage note, Regulatory

Agreement, Building Loan Agreement, Construction Contract,

and all other documents executed by the mortgagor and

submitted to the lender in connection with the mortgage

transaction.\"

G. Title policy. The lender must determine that marketable title to

the property is vested in the mortgagor on the date the mortgage

is recorded.

1\) The mortgagor must supply the lender with:

a\) Title insurance policy issued by a company in satisfactory

form that:

1\. Names as the insured the lender and the Secretary of

HUD as their interests may appear.

2\. Provides that, upon acquisition of title by the lender,

it will become an owner\'s policy running to the lender

and HUD as their interests may appear.

b\) Surveyor\'s Plat, certified as described on the back of the

Surveyor\'s Certificate (Form FHA-2457) and dated, signed

and sealed within 90 days of initial closing.

c\) Surveyor\'s Certificate, signed within 30 days of initial

closing by a licensed surveyor and bearing the surveyor\'s

professional seal.

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4561.1

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(Initial closing documents - con\'t.)

(12-5) 2) If, for reasons satisfactory to the lender, title insurance

cannot be supplied, the mortgagor must furnish:

a\) Abstract of title, prepared by an abstract company or

person engaged in the business of preparing abstracts of

title, and

b\) Legal opinion as to the quality of the title, signed by

an attorney experienced in the examination of titles.

H. Hazard insurance policy. All insurance polices must have a loss

payable clause with the lender and HUD named as their interest

may appear. The amount must at least equal the coinsured mortgage.

(See Chapter 8.)

I. Construction contract. You must use the HUD Construction Contract,

Form HUD-92442. The basis of payment under the contract depends

on whether there is an identity of interest between the mortgagor

and general contractor. (See Article 21 of the contract for

definition of identity of interest.) The lender must ensure that:

1\) The maximum cash amount payable is the same as the amount

on line 4 of the Form FHA-2283, Financial Requirements for

Closing, and the allowed construction period is not longer

than the number of months on line 52, Part G, Form HUD-92264.

2\) The contract is acceptable, signed, and based on the Agreement

and Certification.

3\) A signed copy of Form FHA-2328, Contractor\'s and/or Mortgagor\'s

Cost Breakdown, is attached.

J. Owner-Architect Agreement. Use AIA Document B181 and HUD amendment.

(See Chapter 7 and Appendix 70.) Covers architectural services

during project design and construction. The architect during

construction (mortgagor\'s inspecting architect) can have no

identity of interest with the mortgagor or general contractor.

K. Assurance of Completion. The mortgagor must supply assurance of

completion of the project. The lender may set up more stringent

criteria but must at least require,

1\) Assurance by bonds issued by a surety company (Use Form

FHA-2452; see Appendix 27a) for payment and performance for

100 percent of the estimated construction or rehabilitation

cost (Any surety on the accredited list of the U. S. Treasury

published yearly in the Federal Register is acceptable up to

the bonding limit stated in the list.); or

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4561.1

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(Initial closing documents - con\'t.)

(12-5) 2) A completion assurance agreement (Use Form FHA-2450 in

Appendix 27b) secured by a cash deposit or letter of credit

for 15 percent of the estimated construction or rehabilitation

cost (or 25 percent for elevator structures of four or more

stories); or

3\) A personal indemnity agreement (Use Form FHA-2459; see

Appendix 27c) signed individually by the controlling principals

and the general contractor and their spouses where the

estimated cost of construction or rehabilitation is \$500,000

or less.

Determine the estimated construction or rehabilitation cost by:

\- Deducting the amount of architect\'s fees from total for all

improvements and other fees that are not contractor obligations.

\- Adding a typical builder\'s profit in BSPRA cases.

L. Completion assurance for off-site improvements. Except where a

public body has, by agreement acceptable to the lender, agreed

to install utilities and streets without cost to the mortgagor,

one of the following must assure installation of required offsite

public utilities and streets:

1\) A cash escrow deposited to you or an escrow agent acceptable

to you, or a letter of credit. The amount must equal the

greater of your estimate or the mortgagor\'s estimate of cost

of offsite facilities. Use Form FHA-2446, Escrow Agreement

for Offsite Facilities, in this case.

2\) Retention of a specified amount of mortgage proceeds. May be

used only when cash available to the mortgagor, as shown in

line 42 of Form FHA-2283, equals or exceeds the lesser of the

lender\'s estimate of as-is value or the actual latest

arms-length purchase price, plus the estimated cost of offsite

construction.

NOTE: As additional assurance, you may require a surety company bond

or bonds. You must use Form FHA-2479, Offsite Bond, in this

case. (See Appendix 31.)

M. Mortgagee\'s Certificate (See Appendix 37). Necessary to assure

HUD that the transaction has been properly accomplished, fees are

within acceptable limits and required escrows have been collected.

N. Assurance of funds to meet operating deficits. If an operating

deficit is projected on Form HUD-92264, you must require, without

exception, funding of that deficit. The mortgagor must supply

funds as a condition of the firm commitment to meet the deficit

using paragraph 1 or 2, below.

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6/85 12-8

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4561.1

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(Initial closing documents - con\'t.)

(12-5) 1) Agreement of Sponsors to Furnish Additional Funds, Form

FHA-2476. Must be accompanied by Bond Guaranteeing

Sponsor\'s Performance, Form FHA-2477. The bond must equal

the sum required for deposit by Form FHA-2476.

2\) Additional Contribution by Sponsors, Form FHA-2476a. The

amount required by the FHA-2476a may be:

\- cash

\- letter of credit

\- United States bearer bonds with market value of at least

115 percent of the required amount of the escrow

The acceptance of a letter of credit or U. S. bearer bonds

is solely your choice.

O. Agreement and Certification (Appendix 33a). Obligates mortgagor

to certify its actual costs of project construction or

rehabilitation costs and to disclose any identities of interest

among project participants.

P. Collateral agreements. If any collateral agreements are

necessary for unusual conditions encountered at closing, the

mortgagor must submit signed duplicate copies acceptable to you.

12-6. HUD INITIAL ENDORSEMENT

A. After initial closing, the lender must submit the credit

instrument for initial endorsement to the HUD field office with

jurisdiction. The request for endorsement must be by letter

signed by a senior corporate official certifying that:

1\) The loan has been processed, underwritten, and closed in

full compliance with all program requirements and prudent

business practice.

2\) All parties requiring clearance under HUD\'s previous

participation procedures have received it.

3\) All conditions of the firm commitment have been satisfied.

4\) HUD written approval has been obtained for:

\- Environmental review and Finding of No Significant Impact

(FONSI)

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4561.1

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(HUD initial endorsement - con\'t.)

(12-6) - Affirmative Fair Housing Marketing Plan

\- Intergovernmental review (if applicable)

5\) Prevailing wages will be paid and all other labor standards

and equal employment requirements followed.

6\) You have (or have not) obtained reinsurance and, if so, the

amount.

7\) The project is (or is not) financed through the sale of

bonds.

B. Attach to the letter:

1\) Copy of your HUD 221(d) coinsurance preliminary approval

letter.

2\) If you have completed all pre-endorsement review

requirements, the HUD letter granting full underwriting

authority.

3\) Copy of appraisal and a limited plan package that includes:

a\) Site plan with topographics, site improvements and

buildings

b\) Front elevation

c\) First floor plan with dimensions

d\) Typical floor plan with dimensions

e\) Floor plans of all typical units

f\) Brief specification reflecting current proposed

specifications

g\) Calculations of: common areas; commercial spaces; any

special purpose areas; and cost not attributable

4\) Copy of firm commitment with signed copies of Forms

HUD-92264 and HUD-92264-A attached.

5\) Mortgagee\'s Certificate (Appendix 37) and Mortgagee\'s

Attorney\'s Opinion (Appendix 38).

6\) Your check for .65 percent of the face amount of the

mortgage for first year\'s MIP.

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4561.1

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(HUD initial endorsement - con\'t.)

(12-6) 7) Certified copies of mortgage (deed of trust) with attached

regulatory agreement, note, and duplicate original of title

policy. (If recorder-certified copies cannot be obtained in

time for HUD endorsement, HUD may accept copies certified

by the title company.) HUD will keep these documents.

8\) A statement signed by an authorized senior corporate

official that you have increased sound capital resources by

\$1 per \$300 of the mortgage amount to be initially endorsed.

9\) Completed Form FHA-290 (Closing Memorandum) (Appendix 25),

if required by HUD field office with jurisdiction.

12-7. START OF CONSTRUCTION/EARLY START. Construction cannot begin
before

the closing and recording of the coinsured mortgage. In extreme

circumstances where a construction delay could seriously jeopardize

the project, you may permit an early start if you determine that:

A. There is a valid firm commitment outstanding; there is every

reasonable assurance that closing will occur in the near future;

and early start of construction will not be to HUD\'s or your

detriment. Permission to start is granted by signing Form

FHA-2415 (contractor, mortgagor, and lender) without any changes

unless approved by HUD.

B. You may not grant permission to start unless you have approved

final drawings and specifications.

C. HUD has no coinsurance obligation for costs incurred during an

early start if the project does not reach endorsement (i.e., HUD

will not share in any loss).

12-8. DOCKET PREPARATION. After initial endorsement, compile a separate

docket for each coinsured mortgage for your permanent files

containing the following documents filed chronologically:

A. Original signed or, if an original is unavailable because of

filing or recording requirements, completely legible copies of

all documents and correspondence about the project.

B. All processing (including worksheets, updates, and revisions

clearly marked as such), internal memoranda, etc.

C. Initial endorsement documents,, filed in a separate section.

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