4-2: BASIC UNDERWRITING ISSUES (11/18/1994)

© HUD Single Family Housing Policy Handbook 4235.1

The underwriting of a HECM differs from standard underwriting procedures in the following ways:

A. The borrower will not be required to pay closing costs in cash at closing, although he or she has the option to do so.
1) With the exception of the origination fee (see Section B below), the borrower is allowed to finance 100% of the closing costs.
2) All expenses that require payment at closing may be added to the outstanding balance. As a result, any future payments of the mortgage proceeds will be calculated from the net principal limit, as described in Chapter 5.
3) The lender may require that the borrower pay in cash for services performed by third parties related to the processing of the borrower's application (e.g., credit report, appraisal, title commitment, etc.). The borrower may request to be reimbursed for these expenses at closing, and have these costs added to the outstanding balance on the mortgage.

B. The lender will be permitted to charge an origination fee agreed upon between the borrower and the lender. This fee will cover expenses incurred in the processing and underwriting of the borrower's loan. However, the borrower will only be permitted to finance (i.e., add to the outstanding balance at or after closing) an origination fee of no greater than eighteen hundred dollars ($1,800.00). That amount, along with the fee charged for administering the Repair Rider (See Chapter 3, Paragraph 3-5B), can be added to the outstanding balance. Any portion of the origination fee that exceeds the financed amount must be paid in cash by the borrower at closing. A Verification of Deposit must be submitted as part of the required mortgage credit documentation for any portion of the loan origination fee that will be paid in cash.

C. The lender will not be permitted to charge discount points.

D. The options for adjustable-rate mortgages (ARMs) differ from standard FHA-insured ARMs.
1) If the lender chooses to offer an ARM, it must offer an ARM that limits changes in the interest rate to a maximum of two percent (2%) per year and five percent (5%) over the life of the loan. The interest rate may be adjusted only once per year.
2) The lender may also offer an interest rate that is adjusted monthly. Under this option, the lender must establish a lifetime cap on rate adjustments, but is unrestricted in which cap is chosen.

E. The property need not be debt-free for the borrower to be eligible.
1) The indebtedness on an existing lien must be satisfied at closing or subordinated to the HECM mortgages.
2) If the borrower chooses to satisfy an existing lien, its total indebtedness must not be greater than the borrower's net principal limit at closing, unless the borrower has other financial resources from which to draw in order to satisfy the lien.

F. Instead of calculating a monthly principal and interest payment, a principal limit must be calculated to determine the payments that a borrower may receive. This method is explained in Chapter 5.

G. The borrower will not be required to establish an escrow account for the purpose of collecting annual payments for property taxes and hazard insurance. However, the borrower has the option of requiring that the lender pay taxes and hazard insurance premiums by withholding the necessary amounts from the borrower's payments or by withdrawing the required amounts from the borrower's line of credit. The funds to make these payments are added to the outstanding balance when the payments are actually made (see Paragraph 8-9).