4555.1 CHG 2

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

CHAPTER 1. ELIGIBILITY REQUIREMENTS

\*1-1. PURPOSE. Section 220 is to help eliminate slums and blighted

conditions and prevent deterioration of residential property by

financing construction or rehabilitation where comprehensive

revitalization has been undertaken by local government.

1-2. Eligible Areas. Certain areas have been designated by statute

and implementing regulations as automatically eligible for

Section 220 mortgage insurance. Also, local governments may

ask HUD to designate concentrated development areas,

case-by-case. The area eligibility criteria for Section 220 are:

a\. Existing slum clearance and urban redevelopment projects

covered before the effective date of the Housing Act of

1954 by a Federal-Aid contract.

b\. An approved urban renewal area under Title I of the Housing

Act of 1949.

c\. Disaster urban renewal projects assisted under Section III

of the Housing Act of 1949, as amended.

d\. An area of concentrated code enforcement being carried

out under Section 117 of the Housing Act of 1949.

e\. Concentrated Development Areas. Local governments must submit

to HUD Field Offices a coordinated strategy that:

1\) Provides physical improvements, necessary public

facilities and services, housing programs, private

investment and citizen self-help activities appropriate

to area needs.

2\) Coordinates public and private development.

3\) Ensures substantial long-term improvements by a reasonable

time considering the severity of the area\'s problems.

1-3. HUD Review of Concentrated Development Areas.

a\. The local government\'s request for Section 220 special

eligibility must cover:

1\) The boundaries and current general conditions of the

area proposed for eligibility. \*

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

1-1 8/84

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

4555.1 CHG-2

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

\* 2) The plan for neighborhood improvement, conservation

and/or preservation.

3\) The status of concentrated housing, physical development,

and public service programs in the area or a schedule

for providing them.

b\. The Director of Housing Development must assign the appropriate

technical staff to review requests. The Housing staff should

coordinate their review with the Community Planning and

Development Division when necessary.

1-4. APPLICATION AND INSPECTION FEES. These fees are the same for

Section 220 as for HUD\'s other multifamily mortgage insurance

programs (207, 221(d)(3), 221(d)(4) and 231).

1-5. MORTGAGEE FEES AND CHARGES. Mortgagees may collect from mortgagors

an initial service charge not to exceed 2% of the face amount of

the mortgage and a 1 1/2% commitment (or placement) fee. These

are the only fees and charges by the mortgagee that may be included

in the estimated replacement cost of the project.

1-6. ELIGIBILITY REQUIREMENTS FOR MORTGAGORS.

a\. You may be a private, profit-motivated or public body as set

forth in Section 220.505 of the Regulations.

b\. Form HUD 2530, Previous Participation Certificate.

This exhibit is submitted with the request for Feasibility or

Site Appraisal and Market Analysis (SAMA), or immediately

when you first become associated with the project.

c\. Equal Opportunity in Housing. Federal law and HUD regulations

require that neither you nor your authorized agent decline to

sell, rent, or otherwise make available properties or housing

in a multifamily project to a prospective purchaser or tenant

because of race, color, creed, sex, or national origin. You

must further agree to comply with State and local laws

prohibiting discrimination.

d\. Cost Certification. This is required by Section 227 of the

National Housing Act and HUD Regulations for all rental housing

projects, except those of 11 or fewer units that were

processed under a home mortgage program. The Field Office

determines the maximum insurable mortgage based on actual

cost of the completed project and the amount of any reduction

of the initially endorsed mortgage. See Reference (5) of

the Foreword for a more complete discussion of cost

certification. \*

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

8/84 1-2

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

4555.1 CHG-2

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

\*1-7. ANNUAL FINANCIAL STATEMENTS. Mortgagors must keep their books

and accounts according to Handbook 4370.2 Financial Operations

and Accounting Procedures for Insured Multifamily Projects.

They must also provide annual financial reports meeting the

requirements in reference (7) of the Foreword.

1-8. REGULATORY AGREEMENT. The Secretary\'s control over the mortgagor

is exercised by a Regulatory Agreement, Form FHA 2466, which is

signed at initial closing.

1-9. ELIGIBLE PROPOSALS.

a\. A proposal is not eligible for insurance if the sole or

primary purpose is either to refinance an existing project,

or acquire a completed project that involves no substantial

rehabilitation.

b\. To be eligible for insurance under the unsubsidized rental

housing programs, a proposal must fit one of the following

categories:

1\) The project consists of not less than two rental

dwelling units on one site. It may be: detached;

semi-detached; row houses; or a multifamily building.

The site may consist of two or more non-contiguous

parcels of land if the Field Office Manager determines

the parcels:

\(a\) Comprise a readily marketable real estate entity

and,

\(b\) Are in a small enough area for convenient,

efficient management.

(See Section 220.506 of the HUD regulations.)

2\) The project needs substantial rehabilitation. Mortgage

proceeds may be used to buy the project and satisfy any

previous existing mortgage. \*

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

1-3 8/84

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

4555.1 CHG-2

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

\* 3) The proposal is to complete construction of a project

acquired as a result of bankruptcy or foreclosure.

1-10. MAXIMUM MORTGAGE AMOUNTS. Mortgage principal must not exceed

the lesser of:

a\. Amount per family dwelling unit - Field Offices may

increase the following amounts by up to 75%, based

on prevailing costs in the area. Increases beyond

this, which may go as high as 140%, require Headquarters

approval on a case-by-case basis. (For specific

high-cost determinations for Alaska, Guam, and Hawaii,

call the appropriate Field Office.)

Non-Elevator Elevator

0-bedroom \$19,500 \$22,500

1-bedroom \$21,600 \$25,200

2-bedroom \$25,800 \$30,900

3-bedroom \$31,800 \$38,700

4-bedroom \$36,000 \$43,758

b\. For approved new construction - 90% of the estimated

replacement cost of the property when the proposed

improvements are completed. (This percentage includes

a 10% Builder\'s and Sponsor\'s Profit and Risk Allowance

(BSPRA); see Paragraph 1-13e for an explanation of BSPRA.)

c\. For rehabilitation - 90% of: the estimated cost

of repair and rehabilitation and the estimated value of

the property before repair and rehabilitation. \*

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

8/84 1-4

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

4555.1 CHG-2

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

\* 1-11. INCREASED MORTGAGE AMOUNT - OPERATING LOSS. Pursuant to the

provisions of Section 223(d) of the National Housing Act, the

mortgagor may request and the Assistant Secretary-Commissioner

may insure an operating loss loan to cover the excess of taxes,

interest, mortgage insurance premiums, hazard insurance premiums,

and the expense of maintenance and operation of the project over

project income during the first two years following the date of

completion of the project. Mortgage credit processing shall be

completed in accordance with instruction for Operating Loss

Loans - Two Year Operating Losses (See Reference (5) of the

Foreword).

a\. Maximum Term of Loan. The mortgage term cannot exceed the

lesser of 40 years or 3/4 of the remaining economic life of

the project.

b\. Maximum Interest Rate. The interest rate is negotiated

between the mortgagor and mortgagee.

c\. Mortgage Covenants. The mortgage will contain covenants

which:

\(1\) Prohibit any form of discrimination on the basis of

race, color, creed, sex, or national origin in connection

with the occupancy of the mortgaged property;

\(2\) Prohibit the use of the mortgaged premises for any

purpose other than for which it is intended at the date

the mortgage was executed;

\(3\) Prohibit the creation by the mortgagor of liens against

the property superior or inferior to the liens of the

mortgage; and

\(4\) Bind the mortgagor to keep the property insured by a

standard policy or policies against fire and such

other hazards as the Field Office Director may

stipulate. \*

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

1-5 8/84

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

4555.1

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

1-12. ELIGIBLE MORTGAGEES. To be eligible to apply for and receive a

commitment for mortgage insurance under any section of the Act

a lender must be a HUD-approved mortgagee. Also, if it is

contemplated that the mortgages will be sold to FNMA or GNMA,

the lender should also be an approved FNMA/GNMA seller-servicer.

1-13. OBLIGATIONS OF GENERAL CONTRACTOR.

a\. Prevailing Wages and Equal Employment Opportunity

\- Pre-Construction Conference. In the pre-construction

conference, labor standards, prevailing wage procedures, and

HUD\'s Equal Employment Opportunity Policy are outlined to all

interested persons. The principal contractor must certify that

all laborers and mechanics will be paid not less than the

prevailing wages in the area where the project is to be located

and that he accepts the responsibility for such payment by

all subcontractors.

\(1\) A copy of Form FHA 2554, Supplementary Conditions of

the Contract for Construction, is to be given to

every contractor and subcontractor at the conference.

The contractor will be instructed to insert the form as

part of every sub-contract entered into. Each contractor

should be given additional copies to pass to absent

subcontractors who will work on the project. This

publication explains in more detail some affirmative

steps he should take to asure an effective, and therefore

acceptable, program of Equal Employment Opportunity.

\(2\) Copies of the Equal Opportunity poster which each

contractor and subcontractor must agree to post in

conspicuous places available to employees and applicants

for employment, will be given to the contractors and

subcontractors present, and additional copies will be

furnished each general contractor to be given to any

subcontractor not present who will work on the project.

b\. Inspection. Inspections of multifamily housing projects are

made to insure that a project is being constructed in

accordance with the identified drawings and specifications

and any approved construction changes. Failure on the part

of the contractor to remedy any unacceptable work practices

will result in either a reduction in the amount of the

insured mortgage or a notification to the mortgagee that the

project will be considered unacceptable for insurance unless

correction is made.

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

3/73 1-6

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

4555.1

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

(1-13) c. Builder\'s Fee. HUD-FHA provides for a builder\'s fee, which

consists of two basic considerations: (1) general overhead,

which represents expenses necessary for the continued

operation of a construction business and (2) builder\'s

profit, which is the return typically anticipated by

builder\'s performing their services under competitive

conditions in its computation of the total cost of

construction.

d\. General Overhead will be computed by applying 2% of the

subtotal for construction which includes the cost of land

improvements, structures and general requirements. The total

builder\'s fee will be determined from data obtained from

builders of multifamily housing projects. The data will

reflect the risk and responsibility inherent in the type

of construction proposed and also will take into consideration

the location in which the project will be built. The

percentage remaining after subtracting 2% allowance for

general overhead will be the builder\'s profit. The profit

percentage will then be applied to the same subtotal as the

overhead percentage. The allocation for general overhead

expense will be allowed in all cases regardless of the total

construction cost or the size of the project.

e\. Builder\'s and Sponsor\'s Profit and Risk Allowance. Where

there is an identify of interest between builder and

mortgagor, and provided that no more than 50% of the actual

cost of construction (exclusive of builder\'s fee, general

overhead, and architect\'s fee) is subcontracted with any

one contractor or subcontractor; and no more than 75% with

three or less contractors or subcontractors, a builder\'s

and sponsor\'s profit and risk allowance not to exceed 10% of

all items entering into the term \"actual cost\" (except land

or amounts paid for the acquisition of a leasehold) shall

be included in the replacement cost estimate of the project

in lieu of a builder\'s profit. The division of the profit

and risk allowance between mortgagor and contractor is a

matter of no concern to HUD-FHA and any savings clauses or

similar arrangements are also a matter of indifference to

HUD-FHA, provided that no such arrangement will be allowed

to operate to increase the amount allowable to profit and

risk beyond 10% of the actual cost, exclusive of land.

Where more than 50% of the actual construction cost is

subcontracted with any one contractor or subcontractor, or

more than 75% with three or less contractors or

subcontractors, the profit and risk allowance will be

treated as if there were no identity of interest and computed

as shown below:

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

Page 1-7 3/73

HUD-Wash., D. C.

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

4555.1

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

(1-13) (1) Exception to Rule. The \"50% -75%\" rule shall not be

applicable when factory built (including a temporary

factory set up on the site) modular units or components

are involved in the construction of a project.

\(2\) Computation Where no Identity of Interest. Where there

is no identity of interest between mortgagor and builder,

a 10% sponsor profit and risk allowance will be computed

on the sum of (a) allowable architectural fees (b)

allowable carrying charges and financing (c) allowable

legal and organization expenses, and (d) allowable

off-site costs.

f\. Requirements on Job Overhead. Job overhead is an allowance

for miscellaneous items encountered in the construction of,

and directly pertaining to, a specific project. Items of cost

to be considered in the allowance include but are not limited

to: supervision, field engineering, Field Office expense

(including job clerical employee\'s wages), temporary heat,

water, light and power for construction, equipment rental (if

not included in the trade item costs), clean-up and rubbish

disposal, building permit, watchmen\'s wages and/or theft

and vandalism insurance (or allowances for such losses),

medical and first-aid facilities, temporary walkways and

fences, sidewalk and street rental, temporary roads, sidings

and docking facilities. Items will vary due to project type,

location and site conditions.

g\. Builder\'s Fee Factory Built Modular Units, \"50% - 75% Rule\"

\- (BSPRA). This method of construction is defined as the

utilization of panels or components, assemblies or complete

subsystems, which are manufactured to use for or provide

a space enclosing unit.

\(1\) It is recognized that the builder is fully responsible

for the total amount of the contract and acceptable

completion of the project. However, until this method

of construction has become more widely used and factual

information can be obtained, the following will be

considered when determining an appropriate builder\'s

fee:

\(a\) On site construction time should be substantially

reduced.

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

Page 1-8

3/73

HUD-Wash., D. C.

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

4555.1

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

(1-13). (b) The number of subcontractors and on-site work

relating to the structure is much less.

\(c\) The risk of construction delays is reduced due

to the controlled conditions inherent in manufacturing,

and the reduced on-site construction time they

create.

\(d\) Many of the interim responsibilities such as

compliance with various local, state and federal

codes relating to the use and acceptability of

materials and also structural requirements are

assumed by the manufacturer.

\(2\) Bearing the above in mind, the same guidelines will be

followed as outlined in subparagraph c., above Builder\'s

Fee, in establishing a reasonable fee. Full consideration

must be given to the work the builder actually

directs and performs and to the risk and responsibility

he retains. In so doing it is expected that a total

fee will be developed which is commensurate with this

method of construction. The fixed percentage of 2%

for general overhead will apply and the difference

between it and the total percentage developed for the

builder\'s fee will constitute profit. These percentages

will be applied to the total construction costs including

general requirements.

\(3\) The \"50% - 75% rule\" as set forth in subparagraph e., (1)

above will not apply when factory built (including

a temporary factory set up on the site) modular units or

components are involved in the construction of a

project, since and appropriate builder\'s fee is to be

reflected in processing for this method of construction.

\(4\) For projects involving this method of construction

which are entitled to a Builder\'s and Sponsor\'s Profit

and Risk Allowance (BSPRA), the normal 10% will be

allowed. The 2% general overhead also will be allowed.

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

Page 1-9 3/73

HUD-Wash., D. C.

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

4555.1

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

1-14. OCCUPANCY REQUIREMENTS AND RENTAL RATE.

a\. Occupancy Requirements. There is no restriction upon

occupancy by virtue of the tenant\'s income. The only

requirements are:

\(1\) In selecting tenants the mortgagor may not discriminate

against a family because of race, color, creed or

national origin or due to the fact that there are

children in the family;

\(2\) There may not be any leases executed for a period of

less than thirty days, nor can the mortgagor provide

occupants with customary hotel services such as room

service for food and beverages, maid services, furnishing

and laundering of linens, and bellboy services. The

intent of Congress is that housing built with the aid of

mortgage insurance is to be used principally for

residential purposes and not transient or hotel purposes.

b\. Rental Rates. The maximum rental that may charged is

determined on a project basis. Project owners may not

charge a gross rental in excess of that determined by

HUD-FHA as necessary to pay a fee for adequate management and

meet all expenses, reserve, mortgage obligations and provide

a reasonable profit. With prior HUD-FHA approval the rental

income maximum may be increased in response to demonstrated

increases in operating expenses.

1-15. PROPERTY REQUIREMENTS. To be eligible for insurance of the

mortgage the project must be located on real estate held in

fee simple, or subject to a lease for not less than ninety-nine

years which is renewable, or under a lease having a period of

not less than seventy-five years to run from the date the mortgage

is executed, or under a lease executed by a governmental

agency, an Indian or an Indian tribe for the maximum term

consistent with the legal authority for the execution of such

a lease, provided that the term of any such lease shall run

for a period of not less than fifty years from the date the

mortgage is executed. The property must be free and clear of all

liens other than that of the insured mortgage.

a\. Leaseholds. Whenever a proposal for the development of a

Section 220 project involves a leasehold which the Field

Office has determined to be freely marketable, it shall be

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

3/73 Page 1-10

HUD-Wash., D. C.

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

4555.1 CHG-2

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

explained to the sponsor that the maximum mortgage amount

will be subject to a reduction in an amount equal to the

capitalized value of the ground rent. Further, the annual

ground rent may not exceed 6% of HUD\'s determination of

the land value. If ground rent will be paid during

construction, it may be included as project cost and paid

from mortgage proceeds.

b\. Land Value Determination - Urban Renewal Sites.

1\) Redevelopment. For HUD mortgage insurance purposes

land value usually will have been established by the

HUD Agreement on Land Disposition Price for Residential

Land In Urban Renewal Projects.

2\) Field Office must review and may revise, upon receipt of

mortgage application, its appraisal on urban renewal land

that:

\- Was sold by law to the highest bidder and

that bid was higher than HUD\'s appraisal or

\- The value of the land has increased with area

development or passage of time.

1-16. PROPERTY DEVELOPMENT. (See Paragraph 1-9)

1-17. Commercial Facilities.

a\. Although Section 220 projects must be designed mainly for

residential use, they may include commercial facilities

that:

1\) Meet needs both of project occupants and other

residents of the redevelopment area, and

2\) Are consistent with local government\'s redevelopment

plan.

b\. Percentage of commercial space in the project must be

approved by HUD as follows:

1\) Up to 20% of total project square footage - Field

Office Manager approves.

2\) More than 20% - Director of Insured Multifamily Housing

Development, Headquarters approves.

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

Page 1-11 8/84

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

4555.1 CHG 2

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

\* 1-18. RESERVED.

1-19. REHABILITATION. Process Section 220 Project Rehabilitation-Loans

for mortgages of \$200,000 or more according to basic Section 207

rehabilitation instructions (Reference (1) of the Foreword),

except as modified here.

a\. Eligible Locations: As listed in Paragraphs 1-2 and 1-3.)

b\. Escrow for Delayed Replacement Items. In architectural

analysis of proposed rehabilitation include:

1\) Suitability of characteristics and conditions of

existing improvements.

2\) Whether proposed repairs, demolition and new work

can renew useful economic life. \*

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

8/84 1-12

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

4555.1 CHG-2

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

(1-19) (3) To the extent compatible with the intended market, and

provided that maintenance and operation should not

lead to inordinate expense to the project, existing items

of equipment or finish having a remaining useful life

may warrant acceptance for \"delayed replacement.\"

\(4\) Delayed replacement is feasible only when it can be

accomplished in the future without (a) prolonged

disruption of the use of the premises, or (b) serious

damage to structure and finish which would greatly

increase the cost of replacement and inconvenience to

the occupants, or (c) loss of appeal, convenience,

service, and modernity required to attract and hold

the desired class of occupant. For example, mechanical

elements such as wiring, piping or duct work embodied

in the concealed space of construction would not qualify

for delayed replacement. Existing ranges and refrigerators

which would not be objectionable to the market

and which are of suitable size or capacity could qualify

for delayed replacement.

In the consideration of proposals where the insured

mortgage will be more than \$200,000, the replacement of

items deemed to have a relatively short remaining useful

life, but whose condition does not warrant immediate

repair of replacement, may be provided for by an escrowed

amount which, together with scheduled deposits to the

reserve for replacement account, will provide for repair

or replacement when needed. The amount required to be

escrowed for deferred replacement items is to be

recognized in determining the cost of rehabilitation.

c\. Disposition of Balance in Existing Reserve for Replacement

Account. In connection with the establishment of the new

insured mortgage of more than \$200,000 on a project where

there is an existing insured mortgage, the balance of the

existing reserve account is to be applied to (1) the amount

required to be escrowed for reserve items scheduled for

delayed replacement and (2) the cost of reserve items being

replaced incident to rehabilitation. In the event there is

any balance remaining in the account, it shall be held as

a reserve for contingencies for release to the mortgagor

during the rehabilitation. If there is any balance remaining

in the account at the time of final endorsement, it

will be released to the mortgagor.

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

8/84

Page 1-13

HUD-Wash., D. C.

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

4555.1

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

(1-19) d. Working Capital Requirement. The minimum 2% working capital

requirement for proposed construction projects is modified

for rehabilitation projects to require only \"an amount

satisfactory to the Assistant Secretary - Commissioner\".

When determining the necessity for the amount of deposits

to be required, consideration should be given to the percentage

of occupancy anticipated during the period of rehabilitation

and at completion. Also, consideration should be given

to anticipated rental income to be available to cover working

capital items.

e\. Treatment of Net Income Prior to Beginning of Mortgage

Amortization. The provisions of HUD Regulation 207.19 (h)

are applicable. This Regulation requires that at least a

portion of any net income received prior to the beginning of

mortgage amortization shall be applied to advance amortization,

cost of capital improvements, or to the reserve for

replacements account. The following provisions are to be

applied:

\(1\) Project being Purchased for Rehabilitation. When

proceeds of the insured mortgage are being used by the

mortgagor in financing the purchase of a project, all

net income will be applied to advance amortization,

cost of capital improvements, or the reserve for

replacements account. None of the net income prior

to beginning of amortization will be released to the

mortgagor.

\(2\) Project Already Owned by Mortgagor. When the mortgagor

already owns the project, the determination whether

and in what amount net income will be released for use

of the mortgagor may be based in part upon the net

income of the project prior to beginning of

rehabilitation. In no case shall the mortgagor be

permitted to retain net income prior to the beginning of

amortization in excess of the rate it was being earned

from the project prior to the beginning of rehabilitation.

Also, in no case may the mortgagor retain more than 90% of

the net income earned during the period from the beginning

of rehabilitation to the beginning of mortgage

amortization.

\(a\) In each case, consideration must be given to the

effect the release of the income to the mortgagor

will have on the probable future financial stability

of the project.

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

3/73 Page 1-14

HUD-Wash., D. C.

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

4555.1

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

(1-19) (b) In any case when consideration is to be given to

allowing the owner to retain net income, the Field

Office Director is to require the mortgagor to

request in writing a specific monthly net income

allowance. The request must be supported by a

budget covering the expected period of rehabilitation

and by evidence satisfactory to the Director of the

net earnings of the project for at least one full

tax year prior to the beginning of rehabilitation.

A determination will be made whether any income

may be retained. If the decision is negative, the

mortgagor will be so advised. If it is determined

that some net income may be retained, the

determination will be set forth as a special

condition of the commitment, which will recite the

maximum percentage of the total net income which may

be retained and the maximum monthly amount approved

for retention.

f\. Prevailing Wage Requirements. The wage provisions of Section

212 (a) of the National Housing Act, as amended, are not

applicable to projects involving less than twelve units.

g\. Preapplication Analysis. The Purpose of the preapplication

analysis of Section 220 rehabilitation proposals is basically

the same as that for Section 207. However, as set forth

below, different procedures are applied, and the scope

of HUD-FHA participation in the preapplication stage

ordinarily is much more comprehensive.

\(1\) The HUD-FHA preapplication procedures for Section 220

rehabilitation proposals are designed to expedite

HUD-FHA analysis and processing, as well as to eliminate

unsound proposals at an early stage and to assist

sponsors in the proper development of worthwhile

proposals. The major features are:

\(a\) Early advice to the sponsor (after preapplication

analysis) concerning the tentative maximum mortgage

amount based upon debt service.

\(b\) Contractors are to provide certifications of their

costs. The rehabilitation work will be performed

under cost-plus contracts.

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

Page 1-15 3/73

HUD-Wash., D. C.

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

4555.1

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

(1-19) (c) To the extent mortgage limitations allow, amounts

escrowed for deferred replacement items may be

recognized as \"cost of rehabilitation\" and included

in the mortgage.

\(d\) A simplified cost estimation procedure which utilizes

bids to be obtained by sponsors from three reputable,

qualified contractors. However, under the

circumstances set forth below, the three bid-cost

estimate requirement need not be followed:

1 When the sponsor acts as general contractor,

2 When the sponsor has a continuing working

arrangement with a particular contractor, or

3 When the Field Office Director determines that

because of the circumstances peculiar to a

particular case, the bid procedure is not

practicable.

NOTE: In most situations the bid-cost estimation

procedure should be followed as it is

advantageous to both the sponsor and the HUD-FHA.

\(2\) For those applications on which the bid requirement is

inapplicable, the regular cost estimation procedure

will be followed.

\(3\) The determination of feasibility as well as the tentative

maximum mortgage amount will be based upon thorough

inspections of the site and structure, an analysis of

market, and a study of the information supplied by the

sponsor, particularly the supporting data on FHA Form

2013-R pertaining to the proposed rehabilitation work,

income and operating expenses. There will be no

attempt to estimate the cost of the proposed

rehabilitation. The estimates of cost provided by the

sponsor on Forms 2013 and 2013-R are for the purpose of

aiding the early detection and elimination of an obviously

unsound proposal.

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

Page 1-16

3/73

HUD-Wash., D. C.

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

4555.1

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

(1-19) (4) As in new construction proposals, it is expected that

the analysis will be supplemented by preapplication

conferences with the sponsor. Of particular importance

in rehabilitation proposals are conferences on the site

with the sponsor and his architect. Site conferences

are essential to the resolution of questions pertaining

to the quality and extent of the proposed rehabilitation.

Major deficiencies or substantial variations between the

sponsor\'s proposal and the HUD-FHA tentative findings

should be reviewed with the sponsor at preapplication

conferences to the extent that there is a general

understanding as to what will be required should the

sponsor proceed with the proposal.

h\. Section 220 Projects Rehabilitation Loans of \$200,000 or less.

\(1\) Introduction. Section 220 project rehabilitation loans

of \$200,000 or less (covering refinancing and cost of

rehabilitation) are to be processed in accordance with

the processing procedures prescribed for Section 207

(both insurance of advances and insurance upon completion),

except for deviations set forth herein and in the

several special forms designed for use with these loans.

The exception to Section 207 (Reference (1) of the

Foreword) procedures is occasioned by Section 220.525 of

the HUD-FHA Regulations, adopted to simplify the

administrative processing and loan closing procedures

and to relax controls over mortgagors in connection with

these relatively small rehabilitation loans. To achieve

the desired simplification, it has been determined that

HUD-FHA:

\(a\) Will accept any form of mortgagor entity without

examination of the documents relating to the

organization of the mortgagor.

\(b\) Will simplify the regulation or supervision of the

mortgagor. Major simplifications in this regard

are the elimination of HUD-FHA controls over capital

structure, rate of return, and rents and charges and

the abolition of the requirement for maintenance of

replacement reserves.

\(c\) Will not require a survey or surveyor\'s certificate.

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

3/73

Page 1-17

HUD-Wash., D. C.

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

4555.1

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

(1-19) (d) Will permit the use of simplified cost

certification procedure.

\(e\) Will reduce the number of documents required at

loan closing, through elimination of examination of

documents pertaining to the organization of the

mortgagor, and by requiring that documents relating

to cost certification, prevailing wages, etc., be

submitted and processed prior to closing.

\(2\) Prevailing Wage Requirements. Prevailing wage

requirements are mandatory and must be met with respect to

applications covering twelve or more units.

\(3\) Working Capital. The two percent (2%) minimum working

capital normally required in the case of insurance of

advances has been modified to require \"an amount

satisfactory to the Assistant Secretary-FHA Commissioner.\"

In establishing the amount of the required deposit,

consideration should be given to the rental income, if

any, received during rehabilitation. In some cases, the

estimate of income from occupancy during construction

could result in complete elimination of the deposit

requirement or the stipulation of an amount considerably

less than the two percent normally required for new

construction loans.

\(4\) Advance Amortization. It has been administratively

determined that advance amortization will not be required

for these small rehabilitation loans.

\(5\) Architectural Exhibits. The use of the words \"Drawings\"

and \"Specifications\" in the commitment and other

administrative Forms does not mean that drawings and

specifications prepared by a qualified architect are an

absolute requirement. Although this may be desirable

where the rehabilitation of a project includes major

structural changes, plans and specifications prepared

by other than a professional architect may be accepted

if they are adequate to the extent that they completely

describe the work to be performed and related conditions.

In those instances where rehabilitation is limited to

relatively minor modifications, such as: moving

partitions; plumbing fixtures; resurfacing floors; patching

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

3/73 Page 1-18

HUD-Wash., D. C.

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

4555.1

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

(1-19) plastered surfaces; rebuilding stairways; etc.;

sketches, line drawings, and/or narrative outlines of

the work may be considered adequate if they provide

ready identification of the work to be performed.

\"Drawings\" and \"Specifications\" described above, adequate

for HUD-FHA processing, will be considered as adequate

exhibits to the Mortgagor\'s Certificate, the Building

Loan Agreement and the contract documents.

\(6\) Administrative Forms To Be Used. Where deemed necessary,

special Forms have been designed and will be used. In

other instances, the regular project mortgage insurance

Forms will be used with the minor modifications required.

\(a\) FHA Form 2013, Application for Project Mortgage

Insurance, will be utilized for application purposes

with the modifications set forth below:

Part I - Mortgagor\'s Application.

Sec. B: Items 2 and 3: Require entry of

information as planned after

rehabilitation.

Sec. E: Disregard item entitled, \"Replacement

Reserve.\"

Sec. F: Require estimate of taxes after

rehabilitation.

Sec. G: Require the insertion of the Estimate of

Value of the Existing Improvements

immediately after the item entitled,

\"Land (Available Market Price).\"

Sec. H: For the item entitled, \"Land-Purchase

Price\", require entry of purchase price

of both land and existing improvements,

if to be purchased, or balance owed, if

already purchased.

Sec. M: Delete item #6, \"Request for wage

Determination\", if less than 12 units are

involved. Add item 10, \"FHA Form No.

2004-c-2, Agreement to Certify Actual

Costs.\"

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

Page 1-19 3/73

HUD-Wash., D. C.

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

4555.1

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

\(b\) Insurance of Advance.

1 FHA Form 2217, Commitment for Insurance Advances

(Section 220 Project Rehabilitation Loans of

\$200,000 or Less), shall be used in Lieu of

FHA Form No. 2432.

2 FHA Form 2218, Mortgagor\'s Certificate (Section

220 Project Rehabilitation Loans of \$200,000 or

Less), shall be used in Lieu of FHA Form No.

2433\.

3 FHA Form 2219 Mortgagee\'s Certificate, (Section

220 Project Rehabilitation Loans of \$200,000 or

Less), shall be used in Lieu of FHA Form No.

2434\.

4 FHA Form 2220, Mortgagor\'s Oath and Agreement,

(Section 220 Project Rehabilitation Loan of

\$200,000 or Less).

\(c\) Insurance Upon Completion.

1 FHA Form 2221, Commitment to Insure Upon

Completion (Section 220 Project Rehabilitation

Loans of \$200,000 or Less) shall be used in Lieu

of FHA Form No. 2453.

2 FHA Form 2222, Request for Endorsement of

Credit Instrument, Certificate of Mortgagee,

Mortgagor and Contractor, shall be used in

Lieu of FHA Forms Nos. 2455 and 2403-A.

3 FHA Form 2220, Mortgagor\'s Oath and Agreement,

(Section 220 Project Rehabilitation Loans of

\$200,000 or Less).

1-20. SECTION 220 (h) - PROCESSED UNDER SECTION 207 REHABILITATION

PROCEDURES.

a\. Section 220 (h) Five or More Units Insured Project Improvement

Loans for \$200,000 or Less To Be Processed Under Section

207 (Rehabilitation Procedures). If a proposal is made which

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

3/73 Page 1-20

HUD-Wash., D. C.

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

4555.1

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

(1-20) would involve a loan in excess of \$200,000, processing will

be deferred and all facts pertaining to the case are to be

reported to the Director, Office of Unsubsidized Insured

Housing Programs.

Insured project improvement loans under Section 220(h) Chapter

3 Paragraph 3 (j), infra are limited to properties in urban

renewal areas. An application covering five through eleven

units may be accepted and processed under either the home

mortgage procedures or the multifamily project procedures.

A loan in excess of \$40,000, or a loan to cover twelve or

more units, must be applied for as a project improvement loan

and must be processed under Section 207 (Rehabilitation)

procedures except as amended herein.

b\. Prevailing Wage Requirements. Prevailing wage requirements

are mandatory and must be met with respect to applications

covering twelve or more units. The requirements do not

apply to five through eleven units, and any printed provisions

or conditions relating to prevailing wage requirements

contained in the commitment, mortgagee certification,

mortgagor certification and other Forms should be amended. FHA

Form 2482-A, General Contractor\'s and Subcontractor\'s

Statement, will be required in all cases.

c\. Cost Certification. In every case involving the improvement

of structure containing five or more dwelling units, cost

certification is required.

d\. Types of Commitment. Commitments may be applied for and

issued for either insurance of advances, or insurance

upon completion if the amount of the loan is in excess of

\$40,000. If the amount of the loan is \$40,000 or under,

only commitments to insure upon completion may be issued.

e\. Charge for Loan Origination and Closing. The lender may

make a charge of an amount not to exceed one and one-half

percent (1 1/2) of the original principal amount of the loan

for services rendered in the origination and closing of the

loan. Although the Regulations state, \"Any additional

charges shall be subject to prior approval of the Assistant

Secretary-FHA Commissioner,\" it has been determined that

as a matter of policy no additional charges will be

allowed.

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

Page 1-21 3/73

HUD-Wash., D. C.

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

4555.1

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

(1-20) f. Eligibility of Title and Title Evidence.

\(1\) When the principal amount of the loan exceeds \$40,000,

evidence that the title to the property or the leasehold

covering such property is vested in the borrower as of

date the security instrument is filed for record must

be submitted. A HUD-FHA attorney will close all loans

in excess of \$40,000 and will determine the eligibility

of title prior to endorsement of the loan for insurance.

Title evidence submitted will be in accordance with

the applicable Regulations.

\(2\) Title evidence will not be required for loans of \$40,000

or less, and the printed conditions in the commitment

and other forms relating to title evidence will be

stricken. Reliance will be placed upon the borrower\'s

certification as to outstanding liens submitted with

the application.

g\. HUD-FHA Supervision of Borrower. It has been administratively

determined that except for the provisions of the President\'s

Executive Order No. 11063, entitled \"Equal Opportunity

in Housing,\" and the FHA Regulations issued pursuant thereto,

the right to supervise borrowers will not be exercised with

respect to loans of \$200,000 or less. Therefore, the printed

provisions relating to corporate charter, regulatory agreement,

maintenance of replacement reserves, control of rents,

and other such restrictions and controls contained in the

commitment and other Forms should be deleted.

h\. Working Capital. Due to the nature of the loan transaction

and the fact that in most instances income is being derived

from the project, the working capital, normally provided

for in connection with new projects will not be required

with respect to project improvement loans. Therefore, the

printed conditions regarding working capital on the

commitment and other Forms will be stricken.

i\. Location in Urban Renewal Area. Section 220 (h) improvement

loans are eligible only for properties situated in an

approved urban renewal area.

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

3/73 Page 1-22

HUD-Wash., D. C.

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

4555.1

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

(1-20) j. Consent by Holders of Prior Liens. Generally, there will be

a lien or liens paramount to the HUD-FHA insured lien and

such liens may prohibit alterations or modifications to the

property or a transaction similar to the improvement loan.

Therefore, it is essential that the borrower obtain the

consent of holders of any prior liens. A signed copy of the

letter(s) from the paramount lien holder(s) stating that

there are no objections to the proposed improvement or the

loan transaction must accompany the application for the

insured loan. This clearance may save the borrower

unnecessary expense and later difficulties. The importance of

this requirement should be emphasized during the

preapplication conference.

k\. Loan Amortization. Amortization periods may be 5, 10, 15 or

20 years. The methods of amortization will be limited to

the level annuity monthly payment plan as reflected in FHA

Form 3010 Reference (1) of the Foreword.

l\. Architectural Exhibits. The use of the words \"Drawings\"

and Specifications\" in the commitment and other administrative

Forms does not mean that drawings and specifications

prepared by a qualified architect are an absolute requirement.

Although this may be desirable where the rehabilitation of

a project includes major structural changes, plans and

specifications prepared by other than a professional

architect may be accepted if they are adequate to the extent

that they completely describe the work to be performed and

related conditions. In those instances where rehabilitation

is limited to relatively minor modifications (such as moving

partitions, cutting openings in existing walls, changes in

utilities, installation of new plumbing fixtures, resurfacing

of floors, patching of plastered surfaces, rebuilding of

stairways, etc.), sketches, line drawings and/or narrative

outlines of work may be considered adequate if they provide

ready identification of the work to be performed. \"Drawings\"

and \"Specifications\" described above as adequate for HUD-FHA

processing, will be considered as adequate exhibits to the

Mortgagor\'s Certificate, the Building Loan Agreement and

the contract documents.

m\. Administrative Forms to be Used. In processing a project

improvement loan under Section 220 (h) existing multifamily

processing Forms with appropriate modifications, will be

used.

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

Page 1-23 (and 24) 3/73

HUD-Wash., D. C.