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U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D. C. 20410-8000

June 27, 1989
OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-
FEDERAL HOUSING COMMISSIONER
Mortgagee Letter 89-20
   TO:  ALL APPROVED MORTGAGEES
   SUBJECT:  Single Family Loan Production - Modifications to
               Mortgage Credit underwriting
 
        As you know, we recently revised and reissued HUD Handbook
   4155.1, Mortgage Credit Analysis for Mortgage Insurance on One-to
   Four-Family Properties.  This revised Handbook consolidated all of
   the Mortgage Credit Underwriting policy changes that occurred
   since 1983.  We have received many comments and suggestions about
   the Handbook since its publication and based upon these comments,
   we are making several changes and clarifications.
 
   A.  The following changes are effective immediately:
 
        1.  Paragraph 1-6H, Verification of Mortgage.  As an
            alternative to a Verification of Mortgage, the lender may
            provide 12 months of cancelled checks.  Also, if the
            mortgage is reported on the Residential Mortgage Credit
            Report, no separate Verification of Mortgage or cancelled
            checks need to be obtained.
 
        2.  Paragraph 1-16, Real Estate Certification.  Although
            some lenders believe that this was a new requirement,
            this certification requirement has been a part of the HUD
            Application (Form HUD 92800) for many years.  However, it
            is not necessary for the borrower, seller and the selling
            real estate agent or broker to execute a separate
            certification if the sales contract already includes a
            provision that states that it constitutes the entire
            agreement between the parties and that there are no other
            agreements.  All three parties must be signatories to the
            contract.
 
        3.  Paragraph 1-17, Face-to-Face Interview.  Additional
            exceptions to the requirement for a face-to-face
            interview with all borrowers will be made under the
            following limited circumstances:
 
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            a.  When related co-borrowers (parents/children,
                siblings, etc.) are purchasing the property, the co-
                borrowers who will not occupy the property may be
                interviewed by telephone instead of face-to-face.
                The lender must document the file to show that a
                telephone interview was performed.
 
            b.  When spouses are living apart because of job transfer
                or military duty face-to-face interview with one
                spouse is acceptable.  The lender should interview
                the other spouse by telephone, if possible, and
                document the file to show that a telephone interview
                was performed or if one was not performed, the reason
                why it was not.  A spouse that is unavailable for an
                interview because of military duty, is an acceptable
                reason.  If only one spouse is to take title, that
                borrower must be interviewed.
 
        4.  Paragraphs 1-19, Signatures on the Application Form and
            5-17A, Mortgagee Responsibility.  In those states which
            continue to recognize inchoate property interests such as
            the right of homestead, dower or curtesy, lenders may
            have both husband and wife execute the security
            instrument in order to acquire a valid and enforceable
            lien in the face of the statutory right.  Execution of
            the security instrument for such reasons does not make
            the spouse a borrower under this paragraph for purposes
            of requiring the spouse to co-sign the application or
            note.
 
        5.  Paragraph 2-19B, Closing Cost Estimate.  To give lenders
            more flexibility, if the closing costs used in processing
            are now overstated by more than $250, the maximum
            mortgage amount must be recalculated before settlement.
            The estimate of closing costs should be a reasonable
            reflection of the actual closing costs used in the
            settlement of the mortgage.  All charges must be
            reasonable for the market area as determined by the local
            Field Office.  The closing costs must be added to the
            estimate of value on the HUD-92800 for underwriting
            purposes.
 
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        6.  Paragraph 3-8A, Self-Employed Borrowers.  The definition
            of self-employed borrower will now be an individual that
            has a 25 percent or greater ownership interest in the
            business.  The change to 25 percent from 10 percent
            conforms to general requirements within the industry.
 
            There have been some questions about the requirements of
            Paragraph 3-8C, concerning the borrower's earning trend.
            We continue to believe that a self-employed borrower
            whose company shows a continuing decline in its financial
            position over an extended period of time (two or three
            years) generally, should be rejected.  However, there may
            be special circumstances or conditions under which the
            borrower can be approved (for example, the borrower's
            company has just been awarded a contract that is expected
            to boost the company's and the individual earnings, or
            the gross income of the company is so great and the
            declines so small when compared to the income that such
            declines have and would continue to have minimal effect
            on the general financial soundness of the company).
            Individual, special circumstances should be discussed
            with the local HUD Field Office and then appropriately
            documented in the file.
 
    B.  The following changes are effective for all applications
        involving sales contracts signed 60 days after the date of
        this letter:
 
             1.  Paragraph 3 - 24C.  25 Percent Cash Investment.  The
                 25 percent cash investment cannot include any gift
                 funds.
 
             2.  Three- and Four-Unit Properties.  For all three- and
                 four unit properties the maximum mortgage HUD will
                 insure on the property is limited to a mortgage on
                 which the monthly payment ratio, defined as the
                 principal, interest, taxes and insurance divided by
                 the net income from the units cannot exceed 100
                 percent.  Net income is defined as HUD's estimate of
                 market rent (determined by the appraiser) less a
                 reasonable allowance for vacancies and collections.
                 Each HUD Field Office will set the vacancy and
                 collections allowance based upon local market
                 conditions.  Once this limit is established, even if
                 the borrower's income will support a greater
                 mortgage, no increase is to be made.
 
_____________________________________________________________________
 
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    We expect to reprint the appropriate pages of the Handbook in the
    next few months to reflect the above changes.  If you have any
    questions concerning this letter, please contact your local HUD
    Office or the Headquarters Single Family Mortgage Credit Branch
    at (202) 755-6700.
 
                               Sincerely yours,
 
                               James E. Schoenberger
                               General Deputy Assistant Secretary
                                 for Housing