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**U. S. Department of Housing and Urban Development**

Washington, D.C. 20410-8000

September 13, 1995

OFFICE OF THE ASSISTANT SECRETARY

FOR HOUSING-FEDERAL HOUSING COMMISSIONER

**MORTGAGEE LETTER 95-40**

TO: ALL APPROVED MORTGAGEES

**SUBJECT:** Single Family Loan Production - Revisions to the 203(k)

Rehabilitation Mortgage Insurance Program

This Mortgagee letter describes additional changes undertaken by the

Department to further streamline the Section 203(k) Rehabilitation
Mortgage

Insurance program. Since increasing the supply of affordable housing
through

rehabilitation and repair of eating housing stock is one of the primary
goals

of FHA, we intend to continue to support the Section 203(k) program and
the

lenders that participate in it.

The revisions described below are the result of a Working Group that met

in June 1995, consisting of HUD Offices, lenders, non-profit
organizations

and government agencies. These changes are effective immediately.

I. THE CONSULTANT

Responsibility: The home inspection and completion of the work write-up

and cost estimate are essential elements in processing the Section

203(k) insured loan, in addition to the underwriting steps applicable to

a regular mortgage. Therefore, when a consultant is used, it is the

responsibility of the consultant, as well as the local HUD Office and

the lender to assure that the architectural exhibits are properly

prepared. Mortgagee Letter
[[94-11]{.underline}](http://www.hudclips.org/sub_nonhud/cgi/nph-brs.cgi?d=MLET&s1=94-11%5Bno%5D&SECT1=TXTHLB&SECT5=MLET&u=&p=1&r=1&f=G)
explains the role of consultants to

borrowers under the 203(k) program.

Each HUD Office must assure that the consultants and plan reviewers are

properly trained. On a representative sampling, a consultant\'s work

write-ups and cost estimates are to be desk reviewed by the HUD Office;

a field review may also be necessary. Results of the reviews should be

forwarded to the consultants, plans reviewers and lenders. These reviews

are also integral parts of the annual re-certification sessions for

consultants, plans reviewers, and inspectors.

When acceptable by the local HUD Office, the consultant can also perform

inspections during the construction period. A Direct Endorsement (DE)

staff consultant can also do the inspections for that lender as well as

its correspondent lenders. A checklist designed to help the consultant

in preparing the architectural exhibits is included as Attachment 1.

2

Qualifications: HUD requires at least three years experience as a

remodeling contractor, general contractor or home inspector in order to

quality as a 203(k) consultant. The consultant must be able to perform

home inspections, prepare the necessary architectural exhibits, and be

able to complete the draw inspections on the property during the

construction phase of the project. A state licensed architect or

engineer may also be accepted. To apply for HUD acceptance, the

consultant must submit his or her qualifications (resume\') to the local

HUD Office and be trained.

In addition, on a demonstration basis through January, 1996, we will

also grant automatic acceptance of consultants meeting the above

experience requirements and trained and certified by either Countrywide

(818-304-5602) or CrossLand Mortgage Corporation (410-825-5700). Both

Countrywide and CrossLand will provide lists of trained individuals to

the appropriate HUD Offices and to HUD Headquarters. Consultants trained

by either Countrywide or CrossLand (or other trainers acceptable to the

local HUD Office) should provide a copy of the training certification

stating that they have acceptably completed the 203(k) Consultants

Training Course. Consultants approved by either are allowed to do

business with other lenders and within any HUD jurisdiction and are also

approved to do Section 203(k) inspections.

Fees charged by consultants: The fee charged by the consultant can be

included in the mortgage as a part of the cost of rehabilitation. The

consultant must enter into a written agreement with the borrower that

completely explains what services will be rendered and the fee charged.

Neither HUD nor the lender will be responsible to the consultant for

fees owed by the borrower.

A fee of \$400 is acceptable for a property with repairs less than

\$7,500; \$500 for repairs between \$7,501 and \$15,000; \$600 for
repairs

between \$15,001 and \$30,000; and \$700 for repairs between \$30,001
and

\$50,000; \$800 for repairs between \$50,001 and \$75,000; \$900 for
repairs

between \$75,001 and \$100,000; and \$1,000 for repairs over \$100,000.
An

additional fee of \$25 can be charged for each additional unit in the

property under the same PHA case number. For this fee, the consultant

inspects the property and provides all required architectural exhibits.

In some cases, the borrower will request a feasibility study by a

consultant prior to submitting a sales contract to a seller. An

additional fee of \$100 can be included in the mortgage for this type of

service. Basically, the consultant will do a quick home inspection of

the property, with a \"rough estimate\" of the work that will be
necessary

to comply with HUD\'s requirements. Maximum fees for compliance

inspections on completed work will continue to be set by each HUD

Office.

If additional services are required of a state licensed architect or

engineer, then the fee is not restricted by the above schedule and can

be included in the mortgage as a cost of rehabilitation, provided the

fee is customary and reasonable for the type of project being

proposed.

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II\. LENDER ISSUES

Administration of the rehabilitation (construction) stage: DE lenders

approved for Section 203(k) are authorized to permit staff other than

its underwriters to sign draw requests and change orders. This

delegation of authority for properly managing the inspection and

disbursement functions of the 203(k) Rehabilitation Escrow Account must

be included in the lender\'s quality control plan.

Acceptance of DE staff consultants and inspectors: The increasing volume

of Section 203(k) loans has required many lenders to use staff

consultants and inspectors beyond the HUD Office jurisdiction in which

they were originally approved. In order to facilitate expansion of the

program, lenders may use staff consultants and inspectors acceptable to

any HUD Office without additional review by each office. The lender must

notify the HUD Office that it will be doing the consulting/inspecting.

HUD Offices will actively share any information that may be helpful in

preparing cost estimates, and will retain the right to reject

consultants or inspectors based on poor quality of work in that
Office\'s

jurisdiction.

Proposal for lenders to appoint authorized agents to underwrite 203(k)

loans: We are in the process of drafting a proposed rule to permit any

approved Non-supervised and Supervised Mortgagee to appoint an

Authorized Agent(s) to process and/or underwrite FHA insured mortgages.

If implemented, this will permit a lender with or without 203(k)

experience to use another lender with 203(k) experience for processing

and underwriting loans it originates.

Draw request administration and accounting of rehabilitation escrow

funds: lenders with unconditional Section 203(k) approval do not need to

send the construction documents (interim and final draw requests,

extensions, change orders, final release notice and the complete and

final accounting form) to the local HUD Office until the Final Release

Notice has been issued. At completion, the lender must send all to the

local HUD Office.

The 203(k) Maximum Mortgage Worksheet (HUD 92700) and the MCAW: The

mortgage credit analysis worksheet (MCAW, form HUD-92900WS) does not

lend itself to mortgage calculations for Section 203(k) loans. Form HUD-

92700 is used to calculate the mortgage amount while the MCAW is used to

qualify the borrower. Attachment 2 is provided to demonstrate those

sections of the 203(k) maximum mortgage worksheet that are to be

transferred to the MCAW.

III\. UNDERWRITING ISSUES

Qualifying Ratios (investment properties): The calculation of qualifying

ratios proceeds as described below:

o From the monthly net rental income of the subject property (gross

rents minus the 25 percent reduction or local office\'s percentage

reduction for vacancies and repairs), subtract the monthly payment

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(principal, interest, taxes, insurance). If this yields a positive

number, add it to borrower\'s monthly gross income; if negative,

consider it a recurring monthly obligation; then,

o Calculate the mortgage payment-to-income ratio (\"top ratio\") by

dividing the borrower\'s current housing expense (principal

residence) by the monthly gross income. (The monthly gross income

will include any positive cash flow from the subject investment

property.); and

o Calculate the total fixed payment-to-income ratio (\"bottom ratio\")

by dividing the borrower\'s total monthly obligations, including any

net loss from the subject investment property, by the borrower\'s

total monthly gross income.

Mixed Use Properties: If a portion of a residence is being devoted to

commercial purposes, the property value assigned shall be as if

completed for residential use, not commercial use. The local office\'s

residential appraisal fee schedule is to be used.

However, the income from the commercial space may be used to support the

mortgage as long as it is being currently used as a commercial

enterprise and there is a valid lease. This income is to be treated just

as is housing unit rental described above.

Recently Acquired Properties (less than six months): If a borrower

(owner-occupant or investor) purchases a property with cash within the

previous six months, the original sales price may be used as the

estimate of value in determining the maximum mortgage amount for a

Section 203(k) loan. This will allow the borrower to replenish funds

used at the time of purchase. The original purchase price must be

documented with a copy of the HUD-1 Settlement Statement and sales

agreement. Also see Title Chain Evidence in IV below for additional

instructions.

Sales of HUD-owned properties: Since each local HUD office must adjust

for local conditions in the marketing of real estate owned, there will

always be differences among the local offices. However, to help bring

about a degree of uniformity with those elements that can be

standardized, we have adopted the following policies:

o Revised loan-to-value for investor purchase of HUD-owned

properties: The minimum cash investment for investor purchases of

HUD-owned properties using Section 203(k) financing is now

uniformly set at 15 percent nationwide. Previously, the maximum

percentage of financing on properties purchased from HUD and

repaired under Section 203(k) varied from 85 percent to 75 percent.

This revision will provide consistency on 203(k) investor

downpayment requirements throughout all office jurisdictions.

5

o Closing costs on HUD-owned properties: Since HUD has contractually

agreed to pay up to the amount specified in Line 5 of the Sales

Contract towards the purchaser\'s closing/financing expenses, a

listing of allowable items, or a price listing for those items,

normally will not be provided by HUD. The buyer is permitted to use

these funds for either financing costs or closing costs. The buyer

should indicate how these funds will be used at the time of loan

application. However, in the event a local HUD Office does elect to

specify either the specific closing/financing items, or the maximum

cost for such items for which HUD will pay, that HUD Office will

advise the lender.

o Appraisals on HUD-owned Properties: Local offices have been

instructed to provide lenders with a copy of the appraisal report

and a list of any required repairs on HUD-owned properties. These

appraisals may be used for up to one year from the date of the

appraisal.

o Heat loss/Heat gain calculations: When a new heating or cooling

system is proposed, heat loss/heat gain calculations will no longer

be required. The determination of the furnace size and type

requirements will be left to the buyer and contractor and will not

be imposed by FHA.

o Additional Escrow Commitment procedures: All funds in the

rehabilitation escrow account (contingency reserve, construction

savings, unused mortgage payments and inspection fees) that remain

unspent at the end of construction, will accrue to the escrow

commitment account in lieu of being applied to the principal

balance. If the assumption of the mortgage does not occur within 18

months, then the escrow commitment account will be applied to the

mortgage balance.

Occupant owners attempting to sell their home may refinance the

current mortgage with a 203(k) loan and make repairs and

improvements prior to placing the home up for sale. If the

purchaser of the rehabilitated property is a first-time

homebuyer,that buyer can assume the property without a downpayment.

(If the home is sold to an immediate family member, the loan-to-

value will be 85 percent.) Please note that unless the property

being rehabilitated becomes unoccupiable during construction,

mortgage payments will not be considered as a cost of

rehabilitation and therefore will not be allowed in calculating the

cost of rehabilitation.

When calculating the maximum mortgage amount for the escrow

commitment procedure on the 203(k) Maximum Mortgage Worksheet

(Attachment 4), please note a change on line E1 that requests the

input of the \"Assumptor\'s Estimated Closing Cost.\" This

closing

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cost includes the allowable assumption fee, title and recording

fees, cost of the credit report and attorney fees if applicable.

IV\. LOAN QUALITY ASSURANCE REVISIONS. Although most of our efforts with

regard to Section 203(k) mortgages are designed to enhance the ability

of lenders to process and close these mortgages, we are also aware that

certain elements, primarily those associated with investors and

identity-of-interest transactions may contribute to unacceptable risk.

The following are actions designed to help FHA as well as the lender

manage the risk inherent on Section 203(k) mortgages.

Partnerships: Only general partnerships will be acceptable in this

program. All partners must sign as individuals on the note. All parties

on the mortgage or deed- of trust must also sign the mortgage note.

Bulk Sales: Borrowers must reveal bulk sales to both the lender and

local HUD office. When a borrower purchases properties through a bulk

sale of more than two properties (even if HUD is not the seller), each

bulk sale must be reviewed by the DE underwriter to assure the proper

distribution of the sales price for each property (bulk sale amount

divided by the number of properties purchased). An as-is appraisal will

be necessary to assure that the contract sales price is not greater than

the value of the property. We do not consider it a prudent practice to

allow staff appraisers to appraise the properties in bulk sale

transactions, therefore all such transactions will be reviewed, after

closing, by the local HUD Office.

Identity-of-interest: If there is an identity-of-interest between the

buyer and the seller of the property, the parties involved (and/or their

family members) cannot use any commission from the sale or listing of

the property for the downpayment. In addition, the loan-to-value will be

limited to 85 percent and an as-is appraisal of the property will be

required. On purchases by a partnership, there must be an arms-length

transaction between contractor and borrower to assure no conflict of

interest.

Also, there is to be no identity-of-interest between the lender and the

borrower on Section 203(k) mortgages. An exception may be made in those

situations where a mortgage lender is rehabilitating a property from its

real estate owned inventory for resale.

Chain of Title Evidence: The DE lender must obtain evidence of prior

ownership when a property was sold in the last year. Prior ownership

must be reviewed for undisclosed identity-of-interest transactions. The

203(k) mortgage must be based on the lowest sales price in the last

year.

V. APPROVAL OF NON-PROFIT AGENCIES. A non-profit agency, before it can
be

approved as an eligible mortgagor and obtain the same mortgage amount as

available to owner occupants on Section 203(k) mortgages, must

demonstrate its experience as a housing provider to HUD and meet

all

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other requirements described in HUD Handbook 4155.1 REV-4, paragraphs 1-

5\. (Otherwise, the non-profit is limited to 85 percent mortgages as any

other investor.) It must also be able to provide satisfactory evidence

that it has the financial capacity to purchase the properties.

Housing Provider Documentation Requirements. To obtain HUD approval, the

nonprofit agency must provide the local HUD office with the following:

1\) complete articles of incorporation and by-laws of the entity;

2\) corporate resolution delegating signature authority;

3\) an outline of current and future housing objectives;

4\) a marketing plan describing its methodology of renting the units or

transferring properties to homeowners through credit qualifying

assumptions or other means, if appropriate; and,

5\) a detailed description of the last two years\' experience as a

housing provider.

If a non-profit is approved by a HUD Office as eligible to participate

as a mortgagor based on its experience as a housing provider, this

approval is acceptable nationwide. However, the non-profit must advise

each local HUD Office of its intent to purchase properties within that

jurisdiction and provide the local office with a copy of the acceptance

letter as well as items 2, 3, and 4 above.

With regard to housing provider experience as well as \"rehabilitation\"

experience, the local Office may include alternate community-based

experience (housing counseling, etc.). HUD Offices may also allow

neighborhood-based nonprofit organizations to rehabilitate one or two

properties at a time until they are able to obtain the two years\'

experience necessary to take on more units.

A non-profit using the escrow commitment procedure may exceed the 18-

month time limit for assumptions if it is offering a lease-with-option-

to-assume transaction. In this type of transaction, non-profits are

allowed a period of 36 months to complete the assumption. We also

strongly recommend that the non-profit provide pre-purchase counseling

for the homebuyers, either in-house or from a qualified contractor.

Financial Capacity Documentation: Lenders must be capable of analyzing

a nonprofit\'s financial capacity. Since the application of qualifying

ratios is rarely appropriate in this analysis, the lender must be able

to otherwise conclude that the non-profit borrower will be able to

support the mortgages for which it has applied. (The individual signing

the loan application and other documents for the nonprofit agency is not

personally obligated on the loan.) In addition to the documents that

must be provided to HUD to determine the non-profit agency\'s

eligibility, the lender must obtain the following documents to determine

creditworthiness:

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1\) copies of last two years\' tax returns; and

2\) year-end financial statements fur most recent fiscal year and most

recent 90-day year-to-date financial statement prepared by an

accountant.

3\) credit reports on all principals of the non-profit organization

Unless the local HUD Office, in consultation with the mortgage lender,

has agreed that the non-profit has demonstrated its financial capacity

through alternate qualifying methods, the following underwriting

criteria must be used by the lender for each loan application:

The non-profit agency must provide the lender financial statements for

the most recent two years\' documenting unrestricted cash flows or

unrestricted and unencumbered reserves, exclusive of rental income from

the financed properties, to meet the greater of:

\(a\) 10% (ten percent) of principal, interest, taxes, and insurance

(PITI) payments due each month on all mortgages for a minimum of

six months; or

\(b\) total PITI payments for the single largest mortgage for a minimum

of six months.

\[As an example of the above, a non-profit agency is considering

purchasing an inner-city property for lease to low- and moderate-income

families. The estimated monthly PITI on the mortgage will be \$1000; the

agency has four other rental properties each with mortgages of \$1000
per

month To qualify for FHA-insured financing, analysis would proceed as

follows:

o Sum of PITI of all properties, including the property being

purchased: \$5000.

o (a) \$5,000 x 10% x 6 months= \$3,000

\(b\) \$1,000 x 6months= \$6,000

The non-profit agency would need to have an unrestricted cash flow of at

least \$6,000 per month, or unobligated cash reserves of at least

\$6,000.\]

VI\. ENERGY EFFICIENT MORTGAGE (EEM) PROGRAM AND SECTION 203(k).
Effective

immediately, Section 203(k) loans are eligible under the Energy

Efficient Mortgages program. Refer to Mortgagee Letter 93-13 (May 24,

1993), for instructions on the basic program requirements for

calculating an EEM. Properties of up to four units are eligible for an

EEM under Section 203(k).

Under the FHA EEM Program, a borrower can finance into the mortgage 100

percent of the cost of eligible energy efficient improvements, subject

to certain dollar limitations, without an appraisal of the energy

improvements and without further credit qualification of the borrower.

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To be eligible for inclusion into the mortgage, the energy efficient

improvements must be \"cost effective,\" i.e., the total cost of the

improvements (including maintenance costs) must be less than the total

present value of the energy saved over the useful life of the

improvements. The mortgage, subject to the specific underwriting

criteria described in ML 93-13, may include the cost of the energy

efficient improvements in addition to the usual mortgage amount

permitted by regulations. The FHA maximum loan limit for the area may be

exceeded by the cost of the eligible energy efficient improvements.

However, the entire mortgage cannot exceed 110% of the value of the

property.

The cost of the energy improvements and the estimate of the energy

savings must be determined based upon a physical inspection of the

property by a home energy rating system (HERS) or energy consultant. For

a 203(k) loan, the entire cost of the HERS or the energy consultant can

be included in the mortgage.

On new construction (an addition or new building on an existing

foundation), the energy improvements must be over and above those

required for compliance with the current FHA energy conservation

standards for new construction. The estimate of the energy savings in

new construction must be based upon a comparison of plans and

specification of the house with the additional energy saving

improvements to those of the basic house which complies with the current

FHA energy conservation standards. Presently, these standards are those

of the 1992 CABO Model Energy Code (MEC).

The energy inspection of the property must be performed prior to

completion of the work writeup and cost estimate to assure there is no

duplication of work items in the mortgage. After the completion of the

appraisal, the cost of the energy improvements are calculated by the

lender to determine how much can be added to the mortgage amount.

Example:

The existing property sold for \$60,000. The borrowers wish to install

\$2,000 worth of energy-efficient (EE) improvements that have a useful

life of 7 years and will save \$35 in monthly utility costs. The

borrowers\' closing costs total \$1,200, including the \$250 charge for
the

HERS inspection report. The interest rate on the 203(k) mortgage is

8.00%. The cost of rehabilitation estimated by the 203(k) consultant is

\$20,000. The after-improved value of the property is \$90,000.

\$60,000 Sales price

20,000 Cost of rehab

\+ 1200 Closing costs

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\$81,200 Mortgage Basis

x97/95% Max. Loan-to-Value Ratio

\$77,600 Loan Amount

Please refer to Mortgagee Letter 93-13 for details.

\$2,000 Installed Cost of EE Improvements

7 Years Expected Life of Improvements

\$35 Expected Monthly Savings

\$420 Expected Yearly Savings

5.206 Present Value Factor (8% Interest Rate @ 7 Years)

\$2,186 EE Premium (5.206PV x \$420 Annual Savings)

Since the present value of the energy savings over the expected

life of the improvements (the EE premium) is greater than the

installed cost of the improvements, the entire cost of the

improvements may be added to the mortgage amount (as shown above):

\$77,600 Mortgage Amount from above

\+ 2000 Installed Cost of EE Items

\$79,600 Mortgage Amount with Installed EE Items

VII\. CONDOMINIUMS. The Department will now permit Section 203(k)
mortgages to

be used for individual units in condominium projects that have been

approved by FHA or the Department of Veterans Affairs under the

guidelines listed below.

The 203(k) program was not intended to be a project mortgage insurance

program, as large scale development has considerably more risk than

individual single family mortgage insurance. Therefore, condominium

rehabilitation is subject to the following conditions:

1\. Owner/occupant and qualified non-profit borrowers only; no

investors;

2\. Rehabilitation is limited only to the interior of the unit.

Mortgage proceeds are not to be used for the rehabilitation of

exteriors or other areas which are the responsibility of the

condominium association, except for the installation of firewalls

in the attic for the unit;

3\. Only the lesser of five units per condominium association, or 25

percent of the total number of units, can be undergoing

rehabilitation at any time;

4\. The maximum mortgage amount cannot exceed 100 percent of after

improved value.

After rehabilitation is complete, the individual buildings within the

condominium must not contain more than four units. By law, Section

203(k) can only be used to rehabilitate units in one-to-four unit

structures. However, this does not mean that the condominium project, as

a whole, can only have four units or that all individual structures must

be detached.

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Example: A project might consist of 6 buildings each containing 4 units,

for a total of 24 units in the project and, thus, be eligible for

Section 203(k). Likewise, a project could contain a row of more than

four attached townhouses and be eligible for Section 203(k) because HUD

considers each townhouse as one structure, provided each unit is

separated by a 1 1/2 hour firewall (from foundation up to the roof).

Similar to a project with a condominium unit with a mortgage insured

under Section 234(c) of the National Housing Act, the condominium

project must be approved by HUD prior to the closing of any individual

mortgages on the condominium units. The project must be approved in

accordance with Chapter 11 of HUD Handbook 4150.1 REV-1 and must meet

the general requirements set forth in paragraphs 11-1, 11-2, and 11-3

(excluding 11-3F). These paragraphs set out the general project approval

requirements related to pre-sale, owner-occupancy and condominium

document approval.

Because the Section 203(k) program has not previously been used for

condominiums, the regulations for the contract of insurance (applicable

provisions of 24 CF 203.440 -.495) do not contain certain provisions

that ordinarily form part of the contract of insurance applicable when

condominiums are involved (24 CF 234.260 - .280). Each lender that

intends to use the Section 203(k) program for condominiums pursuant to

this Mortgagee Letter must submit to the HUD Office in which the

condominium project is located three signed copies of the \"SUPPLEMENT
TO

INSURANCE CONTRACTS.\" The Supplement (Attachment 3) will permit

insurance claims to be processed under the requirements applicable to

mortgages insured under the Section 234(c) program. The Supplement may

be signed on behalf of the Secretary by the Single Family Housing

Division Director in each HUD Office.

VIII.SECONDARY LENDERS: The volume of 203(k) activity has increased and
we

will exceed our goal of more than 7,500 endorsed loans by the end of the

fiscal year (September 30, 1995). Among the reasons for this increase in

volume is that more lenders are offering Section 203(k) loans. To

continue this trend and help achieve our goals of additional

homeownership opportunities, we will provide additional marketing

materials, including radio spots and other advertisements.

Further, a list of secondary lenders that have indicated an interest in

purchasing Section 203(k) insured mortgages is included in Attachment 4.

If other lenders would like to be added to the list, please contact

Kenneth Crandall of my staff at (202) 708-2121.

IX\. DOCUMENTS

Spanish language 203(k) pamphlets: The Department has translated the

203(k) pamphlet \"Rehab a Home with HUD\'s 203(k)\", into Spanish and

expects these to be available in the near future.

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203(k) Borrower\'s Acknowledgement Form: Many lenders believe that the

borrower\'s acknowledgement form should be provided at the time the loan

application is taken to assure the borrower understands the 203(k)

requirements. The lender is then better protected from borrowers stating

that the 203(k) loan process was not adequately explained. The handbook

instructions will be revised to suggest that the 203(k) Borrowers

Acknowledgement be explained to the borrower, and signed, at the time of

application. However, individual lenders will retain the right to

determine at what point the acknowledgement will be provided. This

revised form (Attachment 6) replaces the 203(k) Applicant

Acknowledgement Form found in Handbook 4240.4 REV-2, Appendix 4.

Change Orders: In addition to using form HUD 92577, change orders may

also be submitted by letter in any manner agreeable to the parties to

the transaction provided items to be changed as well as the cost

estimate of the change are described. Acceptance of the change order

would be completed on the Rehabilitation Inspection Report.

Revision to 203(k) forms: We have revised several forms that may be used

immediately and are mandatory for mortgages closed after January 1,

1996:

1\. Form HUD 92700, 203(k) Maximum Mortgage Worksheet (Attachment 5);

2\. Form HUD 92700-A, 203(k) Borrowers Acknowledgement (Attachment 6);

3\. Form HUD-314, Escrow Commitment Certification (Attachment 7);

4\. Rehabilitation Loan Agreement (Attachment 8); and

5\. Form HUD 9746-A, Draw Request and Rehabilitation Inspection Report

(Attachment 9).

If you have any questions concerning the contents of this mortgagee

letter, please contact your local HUD Office.

Sincerely yours,

![](media/image2.png){width="2.5944444444444446in"
height="0.6236111111111111in"}

Nicolas P. Retsinas

Assistant Secretary for Housing

Federal Housing Commissioner

Attachments

Attachment 1

THE 203(k) CONSULTANT

It has never been a requirement of

today\'s typical mortgage originator

or underwriter to be an expert in

the fields of home inspection or

construction. For the 203(k)

program to be successful on a grand

scale, however, it becomes necessary

that someone be expert in these

areas, at the time of origination

and during construction, in order to

prevent inadequate plans for

improvement from being approved

which could jeopardize the soundness

of the mortgage. In order to answer

these concerns, FHA has included in

its underwriting guidelines the

following requirements:

1\. A Home Inspection that

Categorically Examines the Structure

While Reviewing 35 Areas of Concern;

2\. A Plan Review to Examine the

Customer\'s Bids in Light of a Site

Visit and Review of the Home

Inspection Report;

3\. The Possibility of a Consultant

to Perform all of the above

Functions Including Cost Estimates.

WHAT IS THE CONSULTANT\'S ROLE

The consultant is the KEY to the

203(k) program. If the lender had

to rely on the homebuyer (or their

contractor) to do their own work

writeup and cost estimate, it would

take probably 3 to 6 months to get

their package acceptable for the

lender to proceed to the appraisal

stage. As you can imagine, this is

too long for the mortgage lender to

deal with the property.

To cut this time frame down to 2

weeks, the lender will allow the

borrower to obtain the services of

an independent consultant to prepare

the construction exhibits. The

203(K) Consultant was created to

address the need for DE Lenders to

better control timeframes through

the use of an individual who can

formulate the work write-up by

consolidating the functions of a

home inspection, site visit and the

creation of the bid package. The

ideal Consultant has a construction

background with advanced home

inspection skills and remodeling

experience.

It is the consultant\'s

responsibility to complete the home

inspection and construction exhibits

as soon as possible after the

borrower signs the sales contract,

in order for the lender to request

the appraisal of the property. In

order to attain this goal, the

consultant must be able to prepare

the work writeup and cost estimate

without using a contractor to obtain

bids from. It is important for the

consultant to use cost estimates

that are reasonable for the area in

which the property is located. After

the work writeup and cost estimate

are completed, the borrower will

begin the bidding process with the

contractors or subcontractors.

Hopefully, the borrower can find

bids that are lower than the cost

estimate. If a bid comes in higher,

the borrower will need to discuss

this situation with the consultant

to determine if the estimate(s) may

be too low to complete the job.

The consultant who prepares the work

writeup and cost estimate needs to

inspect the property to assure:

o There are rodents, dryrot,

termites and other infestation

on the property;

o There are no defects that will

affect the health and safety of

the occupants;

o The adequacy of the existing

structural, heating, plumbing,

electrical and roofing systems;

and

o The upgrading of the dwellings

thermal protection (where

necessary).

The home inspection report should

address any deficiencies that exist

and certify the condition of all

major systems: electrical; plumbing;

heating; roofing and structural. A

wood-boring insect report should be

included for all loans. It is

possible other reports may also be

required. For properties with

private sewer and water, a septic

certification and a private well

analysis is required. If the

consultant does not have the

expertise to provide all the

inspection services that will be

needed, they should at least be able

to complete their reports with

certifications from sub-contractors.

\"The Home Inspection is the

Cornerstone of a successful FHA

203(k) Mortgage.\" As a part of the

application process for an FHA

203(k) Rehabilitation Mortgage, a

home inspection report on the

current condition of the property is

required. In most cases, the Home

Inspection Report will be the Direct

Endorsement (DE) Underwriter\'s only

\"view\" of the property in its as-is

condition. HUD is not looking for

the consultant to make the house

perfect, but only determine if the

house needs to be repaired based on

the above mentioned items.

It is critically important that this

inspection be carried out in the

utmost professional and competent

manner. The consultant must refrain

from making their own personnel

opinions about the property, while

still maintaining their role as an

advisor to the borrower and

protecting the interests of the

lender and HUD.

Some consultant\'s are documenting

the home inspection with the use of

video tape recorders. (A good

substitute for the video tape is

taking photographs of the problem

areas of the property.) This type of

thorough and creative approach to

the processing of 203(k) mortgages

is critical to its successful

implementation.

The consultant should not have an

identity-of-interest in the

property. The Home Inspection should

not be performed by anyone with an

identifiable interest in the

transaction (seller, buyer or

contractor). If the consultant has

an identifiable interest in the

transaction, then the work writeup

and cost estimate that they prepare

must be reviewed by a HUD assigned

plan reviewer, who will also do the

inspections on the property. If

there is no identity-of-interest

present, then the consultant can

perform the Home Inspection

function, prepare the architectural

exhibits and do the inspections on

the property where approved by the

local HUD Office.

The following checklist should be

used to assure consistency in

providing the necessary to the

borrower. However, the DE lender

can ask for additional exhibits,

where necessary. The HUD Office and

the lender have the right to review

all exhibits to assure that they are

complete and the work writeup and

cost estimate are adequate to assure

compliance with the provisions of

the 203(k) program. Where problems

exist, the consultant must revise

the exhibits where necessary.

ARCHITECTURAL EXHIBIT CHECKLIST

1\. Termite report (including all

outbuildings)

2\. Well and/or Septic report (if

applicable)

3\. Home Inspection Report

4\. Proposed plot plans for new

additions;

5\. Proposed floor plans (where wall

changes occur);

6\. Other exhibits as necessary

(i.e., cabinetry plans and

elevations, new construction

exhibits to obtain building permit

for an addition, grading and

drainage plan);

7\. Engineering and

Soil/Geotechnical reports as

necessary; and the

8\. Work Writeup and Cost Estimate.

WHAT TO LOOK FOR WHEN INSPECTING AN

EXISTING HOUSE

1\. Rehabilitation of the Existing

Structure. The property must comply

with HUD Handbook 4905.1,

Requirements for Existing Housing.

In addition, the following are

required to improve the thermal

efficiency of the dwelling:

a\. Weatherstrip all doors and

windows to reduce infiltration

of air when existing weather-

stripping is inadequate or

nonexistent.

b\. Caulk or seal all openings,

cracks or joints in the

building envelope to reduce air

infiltration.

c\. Insulate all openings in

exterior walls where the cavity

has been exposed as a result of

the rehabilitation. Insulate

ceiling areas where necessary.

d\. Adequately ventilate attic and

crawl space areas.

For additional requirements for

rehabilitation of existing

structures, refer to 24 CFR

Part 39, Appendix A-1 through

A-6 for standards that apply to

improvements proposed as part

of the rehabilitation.

2\. Replacement Systems. When the

improvements involve Replacement

Systems the following must be

considered:

a\. Heating, ventilating and air

conditioning system supply and

return pipes and ducts must be

insulated whenever they run

through unconditioned spaces.

b\. Heating systems, burners and

air conditioning systems must

be carefully sized to be no

greater than 15 percent

oversized, except to satisfy

the manufacturers\' next closest

nominal size.

If a new heating/cooling system

is proposed, the borrower

should work with their

contractor to ensure proper

sizing of the heating system.

3\. Smoke Detectors. Each sleeping

area must be provided with a minimum

of one (1) approved, listed and

labeled smoke detector installed

adjacent to the sleeping area. The

detector must sense visible or

invisible particles of combustion.

When activated, the detector must

provide an alarm suitable to warn

occupants within the sleeping area.

Smoke detectors may be battery

powered when installed in existing

or rehabilitated dwellings.

However, where new construction is

being added to an existing building,

the smoke detector must receive its

primary power from the building

wiring, in conformance to local

codes and ordinances.

4\. Wood Boring Insect Damage. A

Certificate of Inspection is

required from a professional

inspection company. Evidence of

past or current infestation and a

report on structural damage is to be

included along with information on

how to correct the problem.

5\. Health and Safety Concerns. A

report is required on any item in

the property that may affect the

health and safety of the occupants.

This would include peeling paint,

the presence of lead paint, missing

or broken stairs, rails, etc. Where

required, plans for abatement or

removal of hazardous substances need

to be included in the work proposal.

In an area subject to hazardous

earthquakes, the property should be

reviewed to assure the seismic

stability of the structure.

6\. Major Systems. A report is

required on the adequacy of existing

structural, heating, plumbing,

electrical, and roofing systems.

The report should include

requirements for upgrading of

thermal protection of the dwelling.

(See above concerning replacement

systems and insulation). Separate

reports may be submitted in lieu of

a comprehensive home inspection if

it is more appropriate.

When these systems cannot be

completely reviewed, the consultant

can recommend a higher contingency

reserve of at least 15% and not to

exceed 20% of the rehab costs in

case problems are found during the

construction phase. It may be

necessary to require certifications

from a contractor in the field of

expertise or a professional

engineer.

7\. Private Water. Individual well

water systems will require

certifications and the work writeup

should address any corrective

measures recommended. Also see

Mortgagee Letter 95-34.

8\. Connection to Public Water

and/or Sewer. Whenever feasible,

all efforts are to be made to

connect the property to an available

public sewer system. The cost of

the connection could make the hookup

infeasible. It could be infeasible

to connect because the existing

water and/or sewer system are in

good working order. The cost of

connection could negate the sale of

the property, because the after-

rehab value of the property would

not allow the cost be included in

the mortgage.

9\. Septic Certifications. Private

septic systems are to be inspected

and a copy of the inspection report

included with the work writeup,

including any recommended repairs,

improvements or treatment.

Remember, in order to do

an adequate Home

Inspection Report on the

property, continue to

refer to HUD Handbook

4905.1 for a complete

list of HUD\'s

Requirements for Existing

Housing.

WHAT FORMAT CAN BE USED TO PREPARE

THE WORK WRITEUP

HUD does not require a specific

format for preparing the work

writeup and cost estimate. However,

HUD does require the work writeup be

prepared in a categorical manner.

Specifically, there are 35

Categories. The categories are the

same as those on the Rehabilitation

Checklist in Appendix 1 of the

203(k) Handbook 4240.4 and on the

Draw Request (form HUD 9746-A). The

list should be used to ensure that

all requirements are being

considered and properly reviewed.

As stated above, the consultant can

use any format, however, there are

some formats that have already been

prepared (and are acceptable to HUD)

that the consultant should be aware

of:

1.Information Services for Buildings

2841 Hartland Road

Falls Church, VA 22043

\(703\) 560-0472

2\. Computer Systems International

1025 Executive Blvd., Suite 111

Chesapeake, VA 23302

\(804\) 436-1535

3\. Government Mortgage Services

276 Spring Green Road

Warwick, RI 02888

(401-463-9883

4\. VMP Mortgage Forms

P.O. Box 26009

Fraser, MI 48026

\(800\) 521-7291

5\. Advanced MicroTech, Inc.

2200 W. Higgins Road, Suite 202

Hoffman Estates, IL 90195

\(708\) 884-7007

The work writeup and cost estimate

should be detailed as to work being

performed per the project proposal,

including the necessary reports

described in the Architectural

Exhibit Checklist discussed above.

Lump sum cost figures should be

avoided except where unit cost

breakdown is not reasonable and

sufficient details are provided to

determine acceptable cost

estimating. It is the intention of

the 203(k) program to address all

health and safety concerns and bring

properties to at least minimum FHA

standards after the repairs are

complete. After the health and

safety concerns are satisfied, the

consultant should work with the

borrower to determine if additional

improvements to the property are

desired.

The borrower should be aware that

the repairs and improvements cannot

exceed the program limits and that

they may have to put money out of

their pocket or reduce the amount of

improvements to make the deal work.

Health and safety items cannot be

removed from the required repairs.

The list takes one from the outside

of the property to the exterior

doors, and then through the inside

of the house. The list ends with a

\"Miscellaneous\" category for items

not addressed elsewhere. It is not

expected that work will be performed

in each category. If no work is to

be performed for any given areas,

then the section should be marked

\"Not Applicable\" (\"N/A\") on the 35

point recap sheet. Special

attention should be given to areas

of \"required work\" to ensure that

either a quote for the work, or an

explanation of why it is not needed,

are contained in the proposal. Be

sure to indicate location of work to

be performed and provide a breakdown

of materials and their costs in

addition to the labor costs for each

project.

1\. Masonry. Describe masonry work to

be performed, such as: point brick

work; stucco; construction of brick

walls; construction/repair of brick,

masonry or stone chimney; etc. Most

estimates will involve square

footage projections.

2\. Siding. Describe siding work to

be performed, such as: replacement

of defective siding, fascia &

soffits; installation of new vinyl

siding with aluminum window trim,

etc. Most estimates will involve

square footage, lineal footage and

length projections.

3\. Gutters & Downspouts. Describe

gutter and downspout work to be

performed, such as: replacement of

bad or missing gutters & downspouts;

cleaning & opening downspouts;

installation of splashblocks, etc.

Most estimates will involve lineal

footage projections.

4\. Roof. Describe roof work to be

performed, such as: installation of

a new built-up roof, with new metal

gravel stops; installation of 240#

Sealtab asphalt shingles on all

roofs with a 3:12 pitch or greater;

etc. Roofs that already have 2

layers of shingles should not be

reroofed again. Remove the existing

shingles, then reroof with new

shingles. Most estimates will

involved square footage projections.

5\. Shutters. Describe shutter work

to be performed, such as:

installation of shutters at windows

at\...; etc. Most estimates will

involve pair pricing.

6\. Exteriors. Describe exterior

work to be performed, such as:

removal of defective, buckled wood

members; providing a structurally

sound porch floor, properly

finished; replacement of existing

porch with masonry steps and stoops;

providing ornamental iron or wood

railing or parts; etc. Most

estimates will involve lineal or

square footage projections.

7\. Walks. Describe walk work to be

performed, such as: installation of

new concrete walks at \...;

Installation of concrete steps at

\...; etc. Most estimates will

involve square and lineal footage

projections.

8\. Driveways. Describe driveway

work to be performed, such as:

remove old driveway and apron;

install blacktop asphalt drive

(minimum 2\") over existing drive and

apron; install new concrete driveway

(minimum 4\") and apron with wire

mesh; etc. Most estimates will

involve square and lineal footage

projections.

9\. Painting (Exterior). Describe

exterior painting work to be

performed, such as: scape, sand

smooth and paint a minimum 2 coats

of good quality paint at all

exterior woodwork and metal; etc.

Most estimates will involve square

and lineal footage projections.

Required work: all

loose/flaking paint must be

scraped, primed and double

coated.)

10\. Caulking. Describe caulking to

be performed, such as: caulk all

windows and door frames, etc. Most

estimates will involve lineal

footage or lump sum projections.

Required work: caulk all

openings, cracks or joints in

the building envelope to reduce

air infiltration).

11\. Fencing. Describe fencing work

to be performed, such as:

installation of new fencing; re-

setting existing fencing, etc. Most

estimates will involve lineal

footage projections.

12\. Grading. Describe grading work

to be performed, such as: removal of

debris from yards; application of

finish earth; grade and seed; etc.

Most estimates will involve square

yard and lump sum projections.

13\. Windows. Describe window work

to be performed, such as:

installation of new metal

replacement windows; replacement of

rotted or defective sash;

replacement of rotted sills at

exterior; replacement of basement

windows; replacement of

cracked/broken glass; replacement of

missing glazing putty; repair or

replacement of screens; etc. If a

particular manufactured window

(i.e., Anderson, Pella or Marvin,

etc.) is used, then the work writeup

should so specify to justify the

cost of the windows. Most estimates

will involve per window projections.

14\. Weatherstripping. Describe

weatherstripping to be performed,

such as: installation of new

weatherstripping at all exterior

doors; weatherstrip all windows;

install metal interlocking

thresholds at exterior doors; etc.

Most estimates will involve per unit

and linear footage projections.

Required items: weatherstrip

all doors and windows to reduce

infiltration of air when

existing weatherstripping is

inadequate or nonexistent.

15\. Doors (Exterior). Describe door

work to be performed, such as:

install new 1 314\" exterior solid

core wood door(s); install 1 3/4\"

metal insulated door; install 3 new

door butts; install new exterior

door trim; install new lockset with

deadbolt; etc. Most estimates will

involve per unit and linear footage

projections.

Required items: Be sure to

address weatherstripping and

caulking of all replacement

doors and trim.

16\. Doors (Interior). Describe

interior door work to be performed,

such as: replacement of defective

doors; installation of new doors

with locksets; installation of

locksets where missing or

malfunctioning; readjusting all

doors for proper closing;

installation of bedroom closet

doors; installation of bi-fold doors

at \...; installation of door trim at

\...; etc. Most estimates will

involve per unit projections.

17\. Partitions (Do not include

drywall costs). Describe

partitioning work to be performed,

such as: framing of new walls and

partitions; framing for new closet;

etc. Most estimates will involve

lineal or square footage

projections.

18\. Plaster/Drywall. Describe

plaster and drywall work to be

performed, such as: patch all

defective plaster/drywall; finish

smooth with existing wall/ceiling

finish; install drywall at \...; etc.

Most estimates will involve lump sum

and square footage projections.

19\. Decorating. Describe painting

work to be performed, such as: paint

interior walls; remove all existing

wallpaper at \...; wallpaper walls at

\...; remove lead paint contamination

and refinish surfaces at \...; etc.

Most estimates will involve square

and lineal footage projections.

Required items: Because of the

concern for lead paint

ingestion, all peeling paint

conditions must include

scraping, priming and double

coating of surface areas. It

may even be necessary to cover

the lead paint up. Some states

may require more specific

treatment.

20\. Wood-Trim. Describe wood-trim

work to be performed, such as:

replace all cracked, broken,

mismatched trim, jambs, etc.; remove

all unused hinges, curtain rod

hangers, nails, screws, etc.;

replace all wood trim at interior

door units, base, shoe & other trim;

replace defective wall panelling at

\...; etc. Most estimates will

involve square and lineal footage,

per unit, and lump sum projections.

21\. Stairs. Describe stair work to

be performed, such as: replace bad

basement treads and risers; replace

main stairs, treads and risers;

replace broken and/or missing

baluster; provide handrails; install

new stairs at\...; etc. Most

estimates will involve lump sum and

lineal footage projections.

Required Items: Stairways must

have hand rails; broken and/or

missing baluster must be

replaced.

22\. Closets. Describe closet work to

be performed, such as: install new

shelves, clothes rods; etc. Most

estimates will involve lineal

footage projections.

23\. Wood Floors. Describe wood

floor work to be performed, such as:

replace all defective flooring,

holes in floors, etc., with wood

flooring to match existing floors;

sand, fill and refinish wood floors;

install new hardwood floors at \...;

etc. Most estimates will involve

square footage projections.

24\. Finish Floors. Describe finish

floor work to be performed, such as:

install vinyl asbestos tile or sheet

goods with 1/4\" underlayment at ..;

install carpet and pad at \...; etc.

Specify nonstandard type flooring to

justify the cost estimate. Most

estimates will involve square yard

projections.

25\. Ceramic Tile. Describe ceramic

tile work to be performed, such as:

install ceramic tile wainscot in

bathtub area for shower height;

install ceramic tile floor at ..;

install Marlite wainscot in bathtub

area for shower height; replace

defective tile in bath; replace

defective tile in kitchen; etc. Most

estimates will involve square

footage or lump sum projections.

26\. Bath Accessories. Describe bath

accessory work to be performed, such

as: replace medicine cabinet in

bath; install paper holder; install

towel bar(s); install soap dish;

install grab bar in tub/shower; etc.

Most estimates will involve per unit

projections.

27\. Plumbing. Describe plumbing work

to be performed, such as: install

new hot & cold water piping; install

30 gal. (min.) glass lined gas hot

water heater (52 gal. if electric);

install new kitchen stainless steel

sink; install 3-piece bathroom with

shower over tub; install laundry

tray with faucet; replace washers at

faucets; replace defective sewer

lines; connect to public sewer line;

replace defective faucet at \...;

etc. Most estimates will involve

per unit, lump sum and lineal

footage projections.

Required items: When feasible,

connect to public sewer systems

where available.

28\. Electrical. Describe

electrical work to be performed,

such as install 100 amp service;

replace frayed exterior wire from

service to main and into exterior

panel box; install new ceiling light

wall switches; install new lighting

fixtures at \...; install new

exterior lighting; replace wall

receptacles; install 3-way switch;

install smoke detectors; install

exterior wall exhaust fan(s); etc.

Most estimates will involve per unit

and lump sum projections.

Required work: 30 amp service

must be upgraded to 100 amp

minimum. Each sleeping area

must be provided with a minimum

of one (1) approved, listed and

labeled smoke detector

installed adjacent to the

sleeping area. Smoke detectors

may be battery powered when

installed in existing or

rehabilitated dwellings.

However, where new construction

is being added to an existing

building, the smoke detector

must receive its primary power

from the building wiring, in

conformance to local codes and

ordinances.

29\. Heating. Describe heating and

air conditioning work to be

performed, such as: install new

forced warm air heater; install new

hot water boiler; install automatic

flow control valve; install temp

control valve at boiler; install

heat supply outlet in each room;

install heat FWA grilles at \...;

etc. Most estimates will involve

per unit and lump sum projections.

Required work: Heating,

ventilating and air

conditioning system supply and

return pipes and ducts must be

insulated whenever they run

through unconditioned spaces.

Heating systems, burners and

air conditioning systems must

be carefully sized to be no

greater than 15% oversized,

except to satisfy the

manufacturers\' next closest

nominal size. If a new

heating/cooling system is

proposed, the borrower should

assure that the contractor

properly sizes the system.

30\. Insulation. Describe insulation

work to be performed, such as:

install insulation in crawl space,

R- ; install insulation batts in

attic, R- ; install R-13

insulation batts in exterior walls;

etc. Most estimates will involve

square footage projections.

Required improvements: 1)

Insulate all openings in

exterior walls where the cavity

has been exposed as a result of

the rehabilitation; 2) Insulate

ceiling areas where necessary;

3\) Replacement heating,

ventilating, and air

conditioning systems supply and

return pipes and ducts must be

insulated whenever they run

through unconditioned spaces.

31\. Cabinetry. Describe cabinetry

work to be performed, such as:

install new base cabinets at \...;

install new kitchen countertop;

install new vanity at \...; replace

vanity countertop at \...; etc. It

may be necessary to provide cabinet

elevations to show proper placement

of cabinets (homebuyer can obtain

from building supply company). Most

estimates will involve lump sum and

linear footage projections.

32\. Appliances. Describe new

appliances to be installed, such as:

install new range at \...; install

new refrigerator at \...; install new

dishwasher and disposal at \...; etc.

Most estimates will involve per unit

projections.

Required items: Appliances must

be new and not used to be

included in the mortgage.

Homebuyer can provide used

appliances, however, the

cost cannot be included

in the mortgage.

33\. Basements. Describe basement

work to be performed, such as:

install minimum 3\" thick concrete

floor; cement parge basement walls;

provide dry basement; install new

sump pump; replace termite (or other

woodboring insect) damaged joists;

etc. Most estimates will involve

lump sum, per unit, and square

footage projections.

34\. Cleanup. Describe cleanup work

to be performed, such as: remove

debris from property exterior;

remove debris from property

interior; broom clean all floors,

clean all windows; clean all

plumbing fixtures and appliances;

rental for dumpster; etc. Most

estimates will involve lump sum

projections.

35\. Miscellaneous. Describe any

other work to be performed, such as:

demolition, raze existing unsafe

garage; repair of detached

outbuildings; move existing house

onto mortgaged lot; landscaping;

repair of swimming pools; etc.

ATTACHMENT 2

ATTACHMENT 2 CONTAINS MORTGAGE CREDIT ANALYSIS WORKSHEET

ATTACHMENT 3

SUPPLEMENT TO INSURANCE CONTRACTS

(Mortgagee - name) and the Assistant Secretary of Housing-Federal

Housing Commissioner acting on behalf of the Secretary of the Department
of

Housing and Urban Development (Secretary) agree as follows:

1\. Mortgagee Letter 95- allows Paragraph 1-4 of Handbook 4240.2 REV-2,
under

specified conditions, to permit rehabilitation loans for property in

condominium projects (\"condominium Leans\") to be insured under Section
203(k)

of the National Housing Act. In reliance on this policy, the Mortgagee

intends to request insurance under Section 203(k) for condominium loans.

2\. In compliance with a condition of the policy, the contract of
insurance

for each condominium loan will include the provisions of 24 CFR
234.260-280

in addition to the applicable provisions of 24 CFR 203.440-495.

3\. The Mortgagee will include a copy of this Supplement to Insurance

Contracts in the loan file for each condominium loan that is endorsed
for

insurance.

4\. This Supplement to Insurance Contracts shall be binding on each
mortgagee

that receives as assignment of a condominium loan insured under Section

203(k).

MORTGAGEE

\[Name\]

By:

\[Name and title\] \[Date\]

SECRETARY

BY:

\[Name and title\] \[Date\]

ATTACHMENT 4

203(k) Secondary Lenders

(September 1, 1995)

1\. Broadview Mortgage 7. Federal National Mtg. Asso.

95 E. Wilson Bridge Road (FANNIE MAE)

Worthington, OH 43085 3900 Wisconsin Avenue, NW

Washington, D.C. 20016-2899

Contact: Lenny Zangardi

(614)436-2000 Contact: Herb Moses

\(202\) 752-6011

2\. Federal Savings Bank & Mtg.

2800 Cantrell Road, Suite 500 8. M & T Mortgage Corporation

Little Rock, AR 72202 P.O. Box 390

Clifton Park, NY 12065

Contact: Dennis Mills

\(501\) 280-3500 or (800) 395-6001 Contact: Jane King

\(518\) 877-3500 or (800) 726-5851

3\. Liberty Mortgage Company

473 E. Rich Street 9. Commonwealth United Mtg.

Columbus, OH 43215 4490 Holland Office Park

Suite 100

Contact: Vickie Harmon Virginia Beach, VA 23452

\(614\) 224-4000 Contact: John Third

\(804\) 456-0155 or (800) 203-203k

4\. MICE Incorporated

1640 Powers Serry Road 10. Federal Home Loan Mtg. Corp.

Bldg 6, Suite 300 (FREDDIE MAC)

Marietta, GA 30067 1410 Springhill Road

McLean, VA 22102

Contact: Jack Goodman

(800)877-2130 Contact: Chris Ritchey

\(703\) 918-5062

5\. Miami Valley Bank

24370 Northwestern Highway 11. Waters Mortgage Corporation

Southfield, MI 48075 8751 W. Broward Blvd., Suite 500

Plantation, FL 33324

Contact: John Townsend

(513)843-4000 Contact: John Gordon

\(305\) 370-3339 x213

6\. Malone Mortgage Corporation

8214 Westchester, Suite 606 12. Sun West Mortgage Company

Dallas, TX 75225 18303 Gridley Road

Cerritos, CA 90701

Contact: William McGuire

\(214\) 696-0386 Contact: Sanat Shankardass

\(714\) 898-8538 or (800) 453-7884

13\. CrossLand Mortgage 17. American City Mortgage

3902 State Street 20501 S. Avalon Blvd.

Salt Lake City, UT 84107 Carson CA 90746

Contact: Ron Pedersen Contact: Patrick Theodora

\(801\) 269-7679 or (800) 446-3300 (310) 380-6459

14\. Countrywide 18. Prudential Home Mortgage

Correspondent Lending Division 3200 Robbins Road

MS 5-53 Springfield, IL 62794

155 N. Lake Avenue

Pasadena, CA 91101 Contact: Cheryl McKinney

\(217\) 547-7500 or (800) 832-1298

Contact: Marius Nicolau

\(818\) 304-5805 or (800) 669-6680 19. Universal Lending Corporation

6775 East Evans Avenue

15\. Carl I. Brown and Company Denver, CO 80224

612 W. 47th Street

Kansas City, MO 64112-1911 Contact: Bruce Bowler

\(303\) 759-7323 (Colorado Lenders

Contact: Steve Bondank Only)

\(816\) 931-8988 or (800) 678-1979

16\. SCME Mortgage Bankers

6265 Greenwich Drive, Suite 200

San Diego, CA 92122

Contact: Doris Davies

\(619\) 558-2700 or (800) 448-SCME

ATTACHMENT 5

ATTACHMENT 5 CONTAINS 203(k) MAXIMUM MORTGAGE WORKSHEET.

ATTACHMENT 6

ATTACHMENT 6 CONTAINS FORM HUD-92700-A, 203(k) BORROWER\'S
ACKNOWLEDGEMENT.

ATTACHMENT 7

ATTACHMENT 7 CONTAINS FORM HUD-314, ESCROW COMMITMENT CERTIFICATION.

ATTACHMENT 8

ATTACHMENT 8 CONTAINS REHABILITATION LOAN AGREEMENT.

ATTACHMENT 9

ATTACHMENT 9 CONTAINS FORM HUD-9746-A, DRAW REQUEST - SECTION 203(k).