7375.01 REV-2

CHAPTER 3. ELIGIBLE SECTION 312 LOAN COSTS

This chapter details the types of costs which must be included in
projects

assisted with Section 312 Loan funds (including items which must be

included in the Section 312 Loan and items which may be included in the

Section 312 Loan), as well as additional costs which may be included in

Section 312-assisted projects and Section 312 Loans, and costs which
cannot

be included. It also describes the conditions under which refinancing is

an eligible Section 312 cost.

3-1. ITEMS WHICH MUST BE INCLUDED IN PROJECTS ASSISTED WITH SECTION 312

LOAN FUNDS

a\. Items Which Must be Included in the Section 312 Loan. The

following items must be included in projects assisted with Section

312 funds, and, if the conditions detailed in this Paragraph 3-1-a

are met, must also be included in the Section 312 Loan.

\(1\) Accrued Interest on Section 312 Loan. Interest on Section

312 Loan drawdowns which will accrue during the construction

period, from the first draw through the Amortization

Effective Date, must be included in the Section 312 Loan.

(See Chapter 7 for additional information on accrued

construction interest.)

\(2\) Real Estate Taxes and Hazard and Flood Insurance. Real

estate taxes and hazard and flood insurance premiums coming

due during construction, and the amounts that accrue for

those items between loan settlement and the AED, must be

included in all Section 312-assisted projects. In addition,

these items must be included in the Section 312 Loan if the

borrower qualifies for a three percent (3%) Section 312 Loan

and appears unlikely to be able to pay these expenses on

his/her own. The costs for these items must be included in

Section 312-assisted projects even if they are not eligible

Section 312 expenses. (See Paragraph 2-3-a of this Handbook

for additional information on qualifying for three percent

loans, Paragraph 9-2-e of this Handbook for details about

escrows for real estate taxes and hazard insurance premiums,

and Paragraph 3-2-g for additional information on using

Section 312 funds to reimburse a borrower for an initial

hazard or flood insurance premium.)

\(3\) Liability and Worker\'s Compensation. The cost of liability

and worker\'s compensation insurance during the construction

period for borrowers who are non-professional contractors

acting as their own general contractors must be included in

the Section 312 Loan if the borrower has not paid for these

items prior to settlement to cover him/her for the entire

estimated construction period. (See Paragraph 6-2-a for

additional

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7375.01 REV-2

insurance requirements applicable to all contractors

participating in the Section 312 program.)

\(4\) Section 312 Application Fee. The application fee (\$200 for

borrowers for one-to-four unit properties or \$300 for all

other borrowers) must be included in the Section 312 Loan,

unless the borrower chooses to pay this fee in full with

his/her own funds or supplemental funds prior to settlement.

(See Paragraph 2-4-a of this Handbook for additional

information on the application fee.)

b\. Costs Which Must be Included in Section 312-Assisted Projects and

Which May be Included in Section 312 Loans

\(1\) Local Rehabilitation Standards. At a minimum, borrowers in

all projects assisted the Section 312 funds must complete all

work necessary to correct any deficiencies in the property

under applicable Local Rehabilitation Standards. This

includes completing additions to the property, if necessary

to meet Local Rehabilitation Standards or to meet minimum

living space requirements for current or planned occupants.

The cost for these items may be included in a Section 312

Loan. (See Chapter 1 for a definition of Local

Rehabilitation Standards.)

\(2\) Cost Effective Energy Standards. All properties being

rehabilitated with Section 312 funds must meet Cost Effective

Energy Standards (as set forth in 24 CFR Part 39). The Cost

Effective Energy Standards set forth energy conservation and

efficiency standards which must be met, as long as the

modifications are financially feasible and do not require

work on elements that would not ordinarily become exposed

during the rehabilitation. The cost associated with meeting

these standards may be included in a Section 312 Loan.

\(a\) Assessing Energy Needs. LPA\'s must determine, by using

their own staff or an outside, professional firm, what,

if any, improvements must be made to the property so

that it meets the Cost Effective Energy Standards. If

the LPA determines that an official energy audit,

conducted by an outside, professional firm, is

necessary, the cost of this audit may be included in the

Section 312 Loan.

\(b\) Required Work. If the LPA determines through the

assessment described in Paragraph 3-1-b-(2)-(a) of this

Handbook that improvements must be made to the property

so that it meets the Cost Effective Energy Standards,

these improvements must be made unless otherwise

specifically determined by HUD.

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7375.01 REV-2

\(3\) Historic Preservation Standards. For all Section

312-assisted projects, LPA\'s must ascertain if the property

is on the National Register of Historic Places or eligible

for inclusion on the National Register of Historic Places.

If so, the rehabilitation must be done in accordance with

standards set by the U.S. Secretary of the Interior, and the

rehabilitation costs associated with meeting these standards

may be included in the Section 312 Loan. See Paragraph 12-8

for additional information on historic preservation

requirements.

\(4\) Other Costs Which Must be Included in Section 312-Assisted

Projects, and Which May be Included in Section 312 Loans

\(a\) The reasonable cost of rehabilitating the property so

that it conforms to environmental requirements. (See

Paragraph 12-8 of this Handbook for additional

information on environmental requirements.)

\(b\) The cost of flood proofing required by Executive Order

11988 and the National Flood Insurance Program. (See

Paragraph 12-4 of this Handbook for additional

information on flood insurance requirements.)

\(c\) The cost of remedying identified lead-based paint

hazards for the property. (See Paragraph 12-9 of this

Handbook for additional information on lead-based paint

requirements.)

\(d\) The cost of rehabilitating the property so it is

accessible to the physically handicapped. (See

Paragraph 12-12 of this Handbook for requirements on

making properties accessible to the handicapped.)

\(e\) The cost of remedying structural problems caused by

termite infestation, and of eliminating the infestation

itself, if there is evidence of such infestation, as

determined by an inspection of the property by a

qualified LPA official and/or an outside expert. In

addition, if the LPA determines as part of its initial

inspection of the property that it is possible that the

property has termite infestation, but that the LPA staff

is not qualified to properly inspect the property for

termite damage, the LPA must obtain a termite inspection

of the property from an outside termite inspector or

extermination company. The fee for this termite

inspection is an eligible Section 312 Loan cost, so long

as it is reasonable and customary.

3-2. ITEMS WHICH MAY BE INCLUDED IN SECTION 312-ASSISTED PROJECTS AND

SECTION 312 LOANS. Within the maximum loan amounts, Section 312

Loans may also include the following;

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7375.01 REV-2

a\. Removing Incipient Deficiencies. Section 312 Loans may include

the cost of rehabilitating the unit to correct or remove incipient

problems or defects which, if not repaired, would reasonably be

expected to deteriorate into deficiencies of Local Rehabilitation

Standards within two (2) years. LPA\'s should encourage borrowers

to include such work, but borrowers must not be forced to do so.

However, if the property will not be sound enough after the

proposed rehabilitation to be considered an acceptable

underwriting risk, the loan must not be approved. (See Chapter 7

for additional details about underwriting standards and the value

of the security.)

b\. Making General Property Improvements

\(1\) General Requirements. General Property Improvements (GPI\'s)

are improvements other than the required improvements listed

in Paragraph 3-1-b of this Handbook or Incipient Violations

described in Paragraph 3-2-a, but which are nevertheless

necessary to put the property in a generally good and readily

maintainable condition. General Property Improvements are

eligible Section 312 Loan costs so long as all required

improvements are completed, and the General Property

Improvements are reasonable and customary for the area and

are not considered luxurious. (See Paragraph 3-4-e of this

Chapter for a more detailed discussion of \"luxury\" items; if

LPA\'s have any questions about whether a GPI is a luxury

item, the HUD area Office Rehabilitation Management

Specialist should be consulted.) In addition, the total cost

of General Property Improvements must not exceed forty

percent (40%) of the total amount of the Section 312

Rehabilitation Loan.

\(2\) Examples of Eligible GPI\'s. Eligible General Property

Improvements include but are not limited to the following:

\(a\) Work which will result in reduced maintenance and/or

will extend the useful life of a part of the property.

\(b\) Work to expand livable space and eliminate inefficient

design, such as moving or removing walls.

\(c\) Installation of permanent work-saving elements which are

customary for the locality, such as garbage disposals

where permissible but not required, built-in

dishwashers, and other permanent elements which benefit

the health and safety of the residents of the property,

such as security systems.

\(d\) Remodeling a kitchen, bathroom or currently

under-utilized space to improve efficiency, to modernize

and/or to make it aesthetically pleasing.

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7375.01 REV-2

\(e\) Non-luxurious items, where rental properties are

involved, which will render the units in marketable

condition for the particular area.

\(3\) Encouraging Quality Repair. LPA\'s should encourage borrowers

to undertake rehabilitation work that goes beyond the bare

minimum of correcting deficiencies in Local Rehabilitation

Standards, so long as they can afford the additional cost and

the higher grade materials and workmanship are reasonable and

customary for the area and not a luxury item and the total

cost of General Property Improvements do not exceed forty

percent (40%) of the total Section 312 Rehabilitation Loan.

In encouraging these quality repairs, LPA\'s will be helping

to insure that improvements financed with Section 312 Loans

have as long as economic life as possible, thereby

contributing to the security of the loan.

For instance, while a standard-grade linoleum might correct

deficiencies of Local Rehabilitation Standards regarding

flooring, borrowers may use higher quality floor tile if they

so desire as long as they can afford the additional cost and

the higher quality floor is reasonable and customary for the

area and the total cost of General Property Improvements does

not exceed forty percent (40%) of the total Section 312

Rehabilitation Loan.

\(4\) Determining if GPI\'s Exceed 40% of the Section 312 Loan. For

GPI\'s that are not required, in part, to correct deficiencies

or incipient deficiencies in Local Rehabilitation Standards,

the entire cost of the improvement must be counted towards

the forty percent limit. When the GPI constitutes the use of

higher grade materials or workmanship, rather than the

standard grade, to correct deficiencies or incipient

violations of Local Rehabilitation Standards, the cost of the

GPI may be calculated as the difference between the standard

grade improvement and the upgrade. For instance, if a

property has deficiencies in Local Rehabilitation Standards

concerning flooring, and if the borrower chooses to use a

higher grade flooring to solve the problem rather than the

standard grade, and if the higher grade is an otherwise

eligible GPI, the cost of the GPI may be calculated as the

difference between the standard grade and the upgrade.

c\. Land Acquisition. The cost of purchasing a small parcel of

adjacent land, but only if required to bring the property into

conformance with local code requirements for minimum lot size and

dimension, is an eligible Section 312 cost.

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7375.01 REV-2

d\. Professional Services. The reasonable and customary costs of

architectural, engineering and related professional service

required in the preparation of rehabilitation plans, drawings,

write-ups, or specifications of work, if those services are beyond

those normally provided by the LPA or the borrower, are eligible

Section 312 costs.

e\. Processing and Settlement Costs. The cost of processing and

settling the loan, other than those services normally provided by

the locality, the costs necessary to obtain security for the loan,

are eligible Section 312 costs. These costs may include but are

not limited to:

\(1\) The cost of building permits and related fees, required to

carry out the proposed rehabilitation work, if not included

in contractors\' bids.

\(2\) Origination fee, if the loan is originated by a private

financial institution.

\(3\) Credit Reports.

\(4\) Fees for acceptable title evidence, reasonable corrective

title work and other legal fees related to giving HUD an

acceptable title report.

\(5\) Fees for recording and filing legal documents related to the

loan.

\(6\) Appraisal fees.

\(7\) Fees for an independent rehabilitation cost estimate.

f\. Contingency Reserve. A contingency reserve fund may be included

in the Section 312 Loan to cover unanticipated construction

interest or construction costs or to cover increases in other

eligible loan costs. (See Paragraph 7-3-b regarding the

calculation of construction interest.) Contingency reserves of up

to ten percent (100%) of the total Section 312 Loan amount may be

included in a Section 312 Loan, except in the case of

self-help/sweat equity projects, in which case the contingency

included in the Section 312 Loan may be up to fifteen percent

(15%) of the total Section 312 amount.

LPA\'s should use a great deal of care in dealing with contingency

reserves. Contingencies need to be high enough to cover

unforeseen expenses so that default does not occur if additional

work is found to be necessary and there is no source of funds to

pay for it. (HUD has no obligation to increase a loan beyond the

amount approved and stated in the Promissory Note and, in fact,

may be unable to do so because of the statutory loan limits. See

Paragraph 9-2-a of this Handbook concerning the Promissory Note,

and Paragraph 9-9 on

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7375.01 REV-2

increasing the loan amount.) On the other hand, LPA\'s should not

authorize a contingency amount that is higher than necessary so as

not to increase the borrower\'s monthly payment unnecessarily.

g\. Reimbursement for Initial Premium for Hazard or Flood Insurance.

Section 312 funds may be used to reimburse a borrower at or after

loan settlement for an initial hazard or flood insurance premium

paid just prior to loan settlement, but only if this insurance is

required for the Section 312 Loan and if the borrower qualifies

for a three percent (3%) Section 312 Loan. (See Paragraph

3-1-a-(2) for additional information on using Section 312 funds

for hazard or flood insurance, Paragraph 2-3-a for additional

information on qualifying for a three percent loan, and Paragraph

9-2-e for additional information about escrows for hazard

insurance premiums.)

3-3. SPECIAL REQUIREMENTS FOR REFINANCING. Under limited circumstances.

the cost of refinancing an existing debt secured by the property to be

rehabilitated is an eligible Section 312 Loan expense, provided it is

within the prescribed loan limits, the property is to be used for

single family residential purposes after rehabilitation, and the

refinancing meets all the other requirements in this Paragraph 3-3.

The purpose of refinancing is to allow low and moderate income

owner-occupants with large existing housing debt, who would be unable

to afford a rehabilitation loan in addition to this debt, to

rehabilitate their homes and thereby contribute to the revitalization

of their neighborhoods.

a\. Eligible Refinancing Costs. A Section 312 Loan may be used to

refinance an existing loan debt secured by the property to be

rehabilitated including:

\(1\) The unpaid principal and accrued interest on a mortgage, deed

of trust, or similar security instrument or the balance due

under a land sales contract eligible for refinancing. (See

Paragraphs 3-3-b-(2) and (8).)

\(2\) Termination fees, prepayment penalties, revenue stamps, or

state or local transaction-related taxes (such as transfer

taxes, recordation taxes and the like) required in connection

with the release or renewal of a mortgage or transfer of

title.

\(3\) Property taxed, including back taxes, may not be paid through

refinancing with Section 312 funds, except as otherwise

eligible pursuant to Paragraphs 3-1-a-(2) and 3-2-g of this

Handbook. (Delinquent property taxes are the borrower\'s

personal responsibility, and must be corrected before any

Section 312 Loan is made.)

b\. Requirements

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7375.01 REV-2

\(1\) Approval by Field Office. All Section 312 cases in which

refinancing is involved must be approved by the Director of

Community Planning and Development in the HUD Field Office.

\(2\) The applicant must own and occupy the one- to four-unit

property being rehabilitated, or be the purchaser-occupant

under a written installment land sales contract which has

been in effect for at least 180 days prior to application.

Investor-owners are ineligible for refinancing.

\(3\) The applicant\'s income must not exceed ninety-five percent

(95%) of the median income for the area.

\(4\) The amount being refinanced must not exceed fifty percent

(50%) of the total Section 312 Loan amount.

\(5\) Statutory Twenty Percent Rule. Refinancing may occur only

when the monthly payment for principal, interest and risk

premium for the loan for rehabilitation costs, plus the

monthly payments for principal and interest on all existing

debt secured by the property (ie., if the existing debt were

not refinanced), would exceed twenty percent (20%) of the

applicant\'s total monthly income. It must be noted that

refinancing may be approved if the applicant\'s total monthly

payments for principal and interest after refinancing the

existing debt also exceeds twenty percent (20%) of total

monthly income, as long as the underwriting requirements

detailed in Chapter 7 are met.

\(6\) The cost of refinancing, when added to the cost of

rehabilitation, must not exceed the maximum loan amounts, as

permitted under Paragraph 2-5 of this Handbook.

\(7\) Using Other Funds if Available. Refinancing must not be used

if other sources of public or private financing are available

at terms and conditions comparable to those obtainable

through the Section 312 program.

\(8\) Except as noted in Paragraph 3-3-b-(2) of this Handbook,

refinancing must not be used as a method of financing the

purchase of property, directly or indirectly. Therefore, in

addition to ensuring that the requirements of this Paragraph

3-3-b are met, the LPA must be satisfied, before refinancing

is recommended to the Director of Community Planning and

Development in the HUD Field Office, that the applicant has

not acquired title through collusive pre-arrangements with

the intention of refinancing the purchase of the property by

means of the Section 312 Loan.

\(9\) No Partial Pay-off of Individual Loans. All existing debts

secured by the property, including, for the purpose of this

Section, eligible land sales contracts, need not be

refinanced.

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7375.01 REV-2

However, those that are refinanced must be refinanced in

their entirety. In addition, any individual existing

mortgage being refinanced must be entirely paid off and

released at the Section 312 Loan settlement. For example, in

a case where the property currently is encumbered by a first

lien with an outstanding balance of \$3,500, and a second lien

home improvement loan of \$1,000, refinancing can be used to

pay off either or both of the mortgages. It cannot, however,

be used to pay off \$2,000 of the first lien and/or \$500 of

the second.

c\. Procedure for HUD Field Office Approval. The LPA must include

documentation in the loan file supporting its opinion that

refinancing meets the requirements of this Chapter. The LPA must

also obtain approval from the Director of Community Planning and

Development in the HUD Field Office of all loans in which

refinancing is involved, whether or not the locality has local

loan approval authority.

\(1\) The LPA must complete the Refinancing Worksheet (see Exhibit

3-1), or a comparable form designed by the locality which

includes all the requirements detailed in Paragraph 3-3-b of

this Handbook, and must sign the form.

\(2\) The LPA must send the form to the Director of Community

Planning and Development in the HUD Field Office, along with

a letter requesting final approval. This may be included in

the loan approval package if Field Office approval of the

loan is otherwise required.

\(3\) Where the locality has local loan approval authority, the

Director of Community Planning and Development in the HUD

Field Office must respond, in writing, to the LPA before

local approval can be give.

\(4\) HUD Field Offices should refer to the Cash Management Notice

for procedures for authorizing draws for refinancing cases.

3-4. ITEMS WHICH MUST NOT BE INCLUDED IN SECTION 312 LOANS. The cost of

the following items must not be financed with Section 312 Loan funds:

a\. The cost of staffing or administering the loan program by the

locality or the LPA.

b\. Work so excessive as to be equivalent to new construction or

reconstruction of the property. (This does not exclude so-called

\"gut\" rehabilitation of a property if necessary, at least in part,

to meet Local Rehabilitation Standards.)

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7375.01 REV-2

c\. Developers fees and the costs of marketing newly rehabilitated

rental units.

d\. Costs associated with other rehabilitation loans which are used

together with Section 312 Loans, including interest costs,

settlement costs, and loan fees.

e\. Luxury items, i.e., fixtures, equipment, or landscaping of a type

or quality which substantially exceeds that customarily used in

the locality for properties of the same general type as the

property to be rehabilitated. While LPA\'s should encourage

borrowers to undertake high quality construction, even if it goes

beyond the Local Rehabilitation Standards, luxury items are not

eligible. The repair or construction of swimming pools (but not

the cost to fill in or eliminate a pool from the property) is

prohibited. LPA\'s should contact their HUD Field Office for

additional information on luxury items.

f\. Purchase, installation, or repair of furnishings of any kind, or

of personal property which does not add to the value of the real

estate itself, excluding refrigerators or ranges, or of trade

fixtures such as display cabinets or machinery.

g\. Payment of delinquent taxes or assessments related to the period

before loan closing.

h\. Funds to pay the borrower or family members residing in the same

household for their labor.

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