4240.3

Chapter 3. MORTGAGE CREDIT PROCESSING

3-1. INTRODUCTION - Section 203(n) of the National Housing

Act gives recognition to the real estate rights which

the member/owner has in a project. It provides a

financing vehicle whereby these estate rights can

be readily purchased and financed by the member/owner.

Mortgage Credit processing will begin at the

conditional commitment stage and involves a determination

of the amount and amortization of the loan; analysis

of the acceptability of the applicant; and evaluation

of the applicant\'s ability to meet current project

carrying charges apportioned to the property being

sold, as well as the additional payment on the Section

203(n) mortgage. The Mortgage Credit procedures and

analyses are to be completed in accordance with

reference (5) of the Foreword, except as modified

herein, and applied equally to all mortgagors,

regardless of race, color, creed, age, national origin,

sex or marital status.

3-2. MEMBER/OWNER

a\. Definition. Any person, persons or family

who meets the criteria established by

regulation and the credit and income

requirements in this Handbook is eligible for this

program.

b\. Owner-occupant. The member/owner must be an

owner-occupant of the unit being financed.

c\. Corporate Certificate. The member/owner can

own no more than one Corporate Certificate

and that certificate must entitle him/her to

the right to occupy a specific one-family unit

in the cooperative in compliance with the terms

of the bylaws of the corporation and the

occupancy agreement entered into between the

member/owner and the corporate entity.

d\. New Ownership. It is the responsibility of

the new member/owner acquiring a mortgage

insured under Section 203(n) and the mortgagee

to obtain a new Corporate Certificate and

Occupancy Certificate representing the new

ownership.

Page 3-1 6/79

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4240.3

3-3. GENERAL - Mortgage Credit analysis of the mortgage

transaction proceeds logically in the steps listed

below:

a\. Determination of the amount and amortization

period of the loan.

b\. Analysis of the acceptability of the member/

owner.

3-4. MORTGAGE AMOUNT. Analysis of the credit risk is

premised upon a loan for a definite amount and

amortization period, subject to the following

limitations:

a\. Principal Obligation. The mortgage shall

involve a principal obligation in an even

multiple of \$50 and for a term of 5, 10, 15,

20, 25 or 30 years providing for 60, 120, 180,

240, 300, or 360 monthly payments.

b\. Amount of Loan. The maximum loan will be:

\$60,000 minus an amount equal to the portion

of the unpaid balance of the blanket mortgage

covering the cooperative attributable to the

dwelling unit being sold.

or

97% of the first \$25,000 of HUD

estimate of value of the dwelling unit

including closing costs as of the date

the mortgage is accepted for insurance

plus: 95% of such value including

closing cost in excess of \$25,000.

minus: an amount equal to the portion

of the unpaid balance of the blanket

project mortgage attributable to the

dwelling unit being sold.

or

The total cost of acquisition minus

the mortgagor\'s investment in the

property of at least:

6/79 Page 3-2

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4240.3

3% of the first \$25,000 of the total cost

of acquisition plus 5% of such cost of

acquisition in excess of \$25,000 minus

an amount equal to the portion of the

unpaid balance of the blanket mortgage

attributable to the dwelling unit being

sold. (The cost of acquisition is the

total cost to the member/owner of the

property securing the mortgage, including

the cost of any repairs, alterations and

additions to such property and the cost

incidental to closing the transaction,

but not including payments for accrued

or unaccrued taxes, assessments, or

insurance premiums.)

Whichever is less

Note: For a qualified veteran, the ratio

would be 100 percent of first \$25,000 of

such value instead of 97 percent in accordance

with Section 203.18(a) of the Regulations.

c\. Determination of Maximum Insurable Mortgage

Amounts.

Example: Known: Unit proportionate share

of outstanding project mortgage: \$20,000

\(1\) Statutory:

\$60,000 less \$20,000 (unit share

of outstanding project mortgage):

\$ 40,000

\(2\) Loan-to-Value Ratio:

HUD Appraised Value \$40,000

Closing Cost 1,000

\_\_\_\_\_\_\_

Total \$41,000

97% of first \$25,000 \$24,250

95% in excess of \$25,000 15,200

\_\_\_\_\_\_\_

Total \$39,450

Minus:

Unit share of outstanding

project mortgage

balance \$20,000

\_\_\_\_\_\_\_

Maximum Mortgage Amount \$19,450

Page 3-3 6/79

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4240.3

\(3\) Cost of Acquisition:

Sales Price \$37,000

Repairs 1,000

Closing Cost 1,000

\_\_\_\_\_\_\_

Total cost of

acquisition \$39,000

3% of \$25,000 \$ 750

5% of \$14,000 700

\_\_\_\_\_\_\_

Investment 1,450

Total Cost of Acquisition \$39,000

Minus:

Minimum Cash Investment 1,450

Unit share of outstanding

project mortgage

balance \$20,000

\_\_\_\_\_\_\_

Maximum mortgage amount \$17,550

Maximum Mortgage

Amount is the Lesser

of 1, 2 or 3: \$17,550

\_\_\_\_\_\_\_

3-5. CASH INVESTMENT - The mortgagor\'s investment in

the property must be equal to the difference

between the total cost of acquisition and the

amount of the mortgage to be insured, less the

proportionate cost of the unpaid balance of the

blanket project mortgage covering the cooperative

attributable to the dwelling unit being sold but

not less than 3% of the first \$25,000 of the total

cost of acquisition, plus 5% of such cost in excess

of \$25,000.

Value of Property \$40,000

Closing Cost 1,000

\_\_\_\_\_\_\_

Total (for Mortgage

Insurance Purposes) \$41,000

Maximum Mortgage Amount \$39,450

Page 3-4

4/79

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4240.3

Example

Sales Price

(Equals Value

of Property) \$40,000 3% of \$25,000 = \$ 750

Closing Cost 1,000 5% of \$16,000 = 800

\_\_\_\_\_\_\_ \_\_\_

Total cost of

acquisition \$41,000

Minimum cash

investment 1,550 1,550

\_\_\_\_\_\_\_

\$39,450

Unit Share of

Outstanding

project

mortgage -20,000

\_\_\_\_\_\_\_

Maximum Mortgage

Amount \$19,450

3-6. BASIC PRINCIPLES OF ANALYSIS.

a\. Member/Owner Credit Analysis. It is necessary to

examine the credit report of the proposed member/

owner and analyze the financial ability (submitted

on Form FHA 2900, with required documentation)

in order to determine the credit characteristics,

ability to pay, and stability of employment.

b\. Stability of Effective Income and Cash Investment

Requirements. Stability of effective income

is related to the early period of mortgage risk.

Cash requirement is the amount required for

investment.

c\. Net Effective Income. An estimate of the net

effective income of each member/owner shall be

made and compared with the prospective monthly

payment for the purchase of the corporate

certificate. The stability of the member/owner\'s

effective income will be related to the early

period of risk under the mortgage.

d\. Relationship of Prospective Monthly Housing

Expense to Net Effective Income. One of the

problems in mortgage credit analysis is to

determine whether a mortgage obligation will be

within the mortgagor\'s financial ability to pay.

As a general guideline, if the total housing

Page 3-5 6 /79

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4240.3

expense does not exceed 35 percent of net

effective income, the relationship of prospective

housing expense to net effective income

shall be considered acceptable, unless the

member/owner has already demonstrated an inability

to manage its affairs with a housing expense

at or below this ratio. A ratio in excess of

35 percent may be acceptable where favorable

compensating factors are present.

e\. Relationship of Total Obligations to Net Effective

Income. Member/owners having the same net effective

income and the same housing expense will have

different total obligations which will affect

their financial capacity. The total obligations

of a mortgagor include, in addition to the

prospective monthly housing expense, other

recurring charges such as State income taxes,

retirement deductions, life insurance premiums,

payments on loans and accounts, plus the monthly

payment towards the purchase of the Corporate

Certificate which represents the member/owner\'s

real estate interest in the cooperative. In some

cases, the burden of total obligations of the

mortgagor may seriously affect the ability

to pay.

\(1\) As a general guideline, if the combined

total of prospective housing expense and

other recurring charges does not exceed 50

percent of net effective income, the

relationship of total fixed obligations to net

effective income should be considered

acceptable, unless the member/owner has

already demonstrated inability to manage

affairs with total fixed obligations at

or below this ratio.

\(2\) A ratio in excess of 50 percent may be

acceptable where favorable compensating

factors are present.

f\. Exhibits to be Submitted with Application.

\(1\) Application, Form FHA 2900

\(2\) Credit Report

6/79 Page 3-6

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4240.3

\(3\) Form FHA 2004-F, Verification of Deposit

\(4\) Form FHA 2004-G, Verification of Employment

\(5\) A signed/certified true copy of the Sales

Contract (see paragraph 1-4 of Chapter 1

of this Handbook)

\(6\) A current balance sheet and operating

statement, if mortgagor\'s principal income

is from own business

\(7\) A statement, signed by the applicant,

that he/she has received a copy of

FHA Statement of Appraised Value,

a copy of the Addendum to the Statement

of Appraised Value, and HUD Fact Sheet

321-F-(5)

\(8\) A signed or certified copy of the

Occupancy Agreement

g\. Financial Capacity of Project. A current

financial statement of the cooperative/project

prepared by the authorized officer of the

management group must be submitted by the

mortgagee with the application for mortgage

insurance. The statement must contain

the normal financial information in addition

to current vacancies and vacancy losses. Also

there must be a statement of the number of

units owned and rented by the cooperative

corporation. The information is submitted

with the application for conditional commitment.

It is reviewed by the mortgage credit examiner

who uses the information to complete a

memorandum detailing the financial condition of

the project. The Mortgage Credit examiner

must coordinate the review with the Housing

Management staff to assure that all potential

problems are identified and called to the

attention of the processing appraiser. Such

problems include unusual number of vacant

units, inadequate replacement reserves, etc.

h\. The basic instructions for analysis of Mortgage

Credit Risk are contained in Reference (2) of

the Foreword.

Page 3-7 6/79