www.hudclips.org 

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D. C. 20410

 
August 7, 1980
OFFICE OF THE ASSISTANT SECRETARY FOR
HOUSING - FEDERAL HOUSING COMMISSIONER       IN REPLY REFER TO:
Mortgagee Letter 80-33
TO     :  All Approved Mortgagees
Subject:  Housing and Community Development Amendments of
          1979 - Section 245
 
A new provision has been added to the Section 245, Graduated
Payment Mortgage (GPM) program, which will permit certain
eligible home purchasers to obtain HUD mortgage insurance under
GPM with lower downpayments than required under the present GPM
program.
 
The new program has a statutory designation of Section 245(b)
and does not replace the present Section 245 program which now
has a statutory designation of Section 245(a).  Mortgagees may
continue to submit applications for mortgage insurance under the
original program.  Field Offices will process applications in
accordance with outstanding instructions contained in HUD
Handbook 4240.2 , the Graduated Payment Mortgage Program, and HUD
Handbook 4155.1 , Mortgage Credit Handbook for Mortgage Insurance
on One- to Four-Family Properties, except as modified below.
 
The benefits of the program are available only to borrowers who
have not held title to a home within the three-year period
preceding the application for mortgage insurance.  The borrower
may not reasonably afford to purchase the dwelling unit by means
of a mortgage insured under the provision of the existing Section
245(a) program or any other mortgage insurance program of the
Department.  The initial mortgage amount is limited to the
loan-to-value ratios under Section 203(b) or if the borrower is
an eligible veteran, the higher amounts permitted under Section
203(b) for qualified veterans.  However, the principal obligation
may not at any one time exceed 97 percent of the projected value
of the property.  The initial appraised value of the property may
be increased by 2-1/2 percent per annum.  In no event may the
principal obligation of the mortgage with deferred interest added
exceed 113 percent of the initial appraised value of the
property, including closing costs.
 
The program is limited to new or substantially rehabilitated
housing approved by the Secretary prior to the beginning of
construction or rehabilitation.  The new program is limited to
50,000 mortgages or 10 percent of the aggregate initial principal
obligation of all mortgages on one- to four-family residences
insured in the previous fiscal year, whichever is greater.  If
necessary, Field Offices which use their allocation may be
allocated additional units.  Such allocation would require a
shift in authority from an office that does not use its
allocation.  Shifts in allocations will be authorized by the
appropriate Regional Administrator.
 
_____________________________________________________________________
                               2
 
The maximum loan will be limited to the lesser of $67,500; or the
amount determined by applying 203(b) loan-to-value ratios against
an assumed value equal to 110 percent of the median prototype
housing cost for the market area, or the 203(b) loan-to-value
ratios applied against the property value, including closing
costs.  The local HUD Field Office will advise all mortgagees
within the Field Office jurisdiction of the appropriate limit.
 
At the time of application, the mortgagee must include a signed
statement from the borrower(s) that he/she or they have not held
title to property for at least three years prior to the date of
the application for mortgage insurance.  Individuals who are in
title as tenants by the entirety, tenants in common and/or joint
tenants shall be considered as having held title to a property
and are not eligible under this program.  In the event the
application involves two or more borrowers, one of whom has held
title to a property and the other(s) has not, the application
will be accepted for processing under the new program.  However,
in no event may any borrower retain an ownership interest in
other real estate.
 
In addition to the prior ownership requirements, it must be
determined that the borrower(s) does not qualify under the
existing 245 program or any other HUD mortgage insurance program.
 
In order to make this determination:
 
1.   Determine the maximum loan amount under Section 203(b) and
     calculate the total housing expense using level annuity
     monthly payments for the interest rate and loan term
     requested in the application.  Calculate the housing expense
     ratio to net effective income.  In the event the housing
     expense exceeds 35 percent of the borrower's net effective
     income, the application may be processed under the new
     program.
 
2.   Calculate the maximum mortgage available under the Existing
     245(a) program, Plan III, and determine whether or not the
     borrower has the cash and/or assets that can readily be
     converted to cash, such as stocks or bonds, in the amount
     needed to close the loan under the regular program.  If the
     borrower does not have sufficient assets to close the loan,
     the application may be processed under the new program.
 
The 245(b) program is limited to two graduated mortgage payment
plans.  The plans include the present Plan III, 7-1/2 percent
5-year graduation with reduced downpayments, and the second plan
provides for increasing mortgage payments of 4.9 percent a year
for 10 years.
 
Once it has been determined that the application for mortgage
insurance may be processed under the new program, the mortgage
credit processing will follow the outstanding instructions in
HUD Handbook 4155.1, except as modified herein.
 
_____________________________________________________________________
                               3
 
Field Offices may use the following loan-to-value ratio tables
and cash investment percentages to process applications under
245(b).
 
                   7-1/2 Percent for 5 Years
___________________________________________________________________
               11-1/2%*       12%          13%          14%
 
Maximum        Lesser of    Lesser of    Lesser of    Lesser of
insurable loan 203(b)       203(b)       203(b)       203(b)
non-veteran    limits or    limits or    limits or    limits or
as well as     96.98% of    96.86% of    96.63% of    96.29% of
veteran        value        value        value        value
 
Minimum        Greater of   Greater of   Greater of   Greater of
investment     203(b)       203(b)       203(b)       203(b)
requirements   requirement  requirement  requirement  requirement
non-veteran    or 3.02%     or 3.14%     or 3.37%     or 3.71%
loans only     of           of           of           of
               acquisition  acquisition  acquisition  acquisition
               cost         cost         cost         cost
___________________________________________________________________
*  At rates less than 11-1/2 percent, the maximum insurable
   mortgage will be limited by the 203(b) loan-to-value and cash
   investment ratios.  At rates falling between those listed
   above, use the loan-to-values for the next higher rate.  For
   example, if the rate is 11-7/8 percent, use the loan-to-value
   ratio at 12 percent.
 
                   4.9 Percent for 10 Years
____________________________________________________________________
                   12%*                    13%          14%
 
Maximum           Lesser of              Lesser of    Lesser of
insurable loan    203(b)                 203(b)       203(b)
non-veteran as    limits or              limits or    limits or
well as veteran   96.76% of              96.08% of    94.43% of
                  value**                value        value
 
Minimum           Greater of             Greater of   Greater of
investment        203(b)                 203(b)       203(b)
requirements      requirement            requirement  requirement
non-veteran       or 3.24% of            or 3.92% of  or 5.57% of
loans only        acquisition            acquisition  acquisition
                  cost                   cost         cost
____________________________________________________________________
*  At rates less than 12 percent, the maximum insurable mortgage
   will be limited by the 203(b) loan-to-value and cash
   investment ratios.  If the interest rate falls between the
   amounts shown, the loan-to-value ratio will be the same as the
   next highest rate.  For example, if the rate is shown as
   12-1/2 percent, use the loan-to-value ratios at 13 percent.
 
** Value means the HUD estimate of value including closing cost.
 
_____________________________________________________________________
                               4
 
   Minimum investment for a veteran loan will be the total prepaid
   items but not less than $200 plus 5 percent of acquisition cost
   in excess of $25,000.
 
In no event may the insurable mortgage exceed the lesser of
$67,500, or the loan amount determined by applying 203(b) limits
against a value equal to 110% of the median range prototype
housing cost for the market area.  Prototype housing costs are
developed by each Field Office and are published in the Federal
Register.  For purposes of this program, each Field Office may
use the latest information on prototype cost developed by the
Field Office.
 
Factors to compute the payment to principal, interest and
mortgage insurance premium (12.75 percent to 15 percent in
quarter percent increments), and the factors for computing the
outstanding balance of the mortgage loan are included in Handbook
4240.2 REV CHG 3, Graduated Payment Mortgage Program, Section
245, dated 8/80.  The Handbook change is being distributed
simultaneously with this Letter.
 
There must be an indication that borrowers under the program have a
reasonable opportunity for increases in income which will be
commensurate, but not necessarily equal to the increases in mortgage
payment.  An employer may not be willing to unequivocally guarantee
the potential for increased income of a particular applicant.
However, the mortgagee must include with the request for
verification of employment, a statement from the employer
describing possible promotion opportunities offered, incentive
programs available, opportunities for additional pay increases
either through upward mobility programs, mid level management
training programs or through union contract terms.  Any employee
benefits offered by an employer should be delineated in order
that the Mortgage Credit Examiner can be reasonably assured that
the applicant will be able to meet the increase in monthly
payments.  Self-employed individuals must supply HUD, through the
mortgagee, with financial statements covering operations for the
last two full years prior to application for mortgage insurance.
Newly self-employed borrowers must include their latest financial
statement plus a detailed analysis of future trends.
 
This program carries identifying case number suffix codes
different than the existing 245 program.  Mortgagees must
indicate a case number suffix code of 261 for all 245(b) GPM
loans originated under 203(b) or 203(b) veteran.  Case number
suffix code 262 will be used to identify 245(b) loans originated
under 234(c) condominium units.
 
                                Sincerely,
 
                                Lawrence B. Simons
                                Assistant Secretary for
                                Housing-Federal Housing Commissioner