5-7: DETERMINING THE NET PRINCIPAL LIMIT (11/18/1994)

© HUD Single Family Housing Policy Handbook 4235.1

To determine the maximum amount of payments that a borrower can receive after closing, the net principal limit is calculated.

A. The net principal limit is calculated by subtracting from the principal limit any initial payments to or on behalf of the borrower, such as the initial MIP, closing costs, or cash payment to the borrower, and any funds set aside from the principal limit for monthly servicing fees (see Paragraph 5-7B.) or set asides for repairs after closing (see Paragraph 3-5) and first-year property charges (see HUD Handbook 4330.1). The net principal limit may be drawn by a borrower as monthly payments, or as a line of credit, or both.
B. A set-aside for monthly servicing fees is calculated by determining a fixed monthly fee, and then determining the present value of that fee using the term used for a tenure payment plan (i.e., to the borrower's 100th birthday) and the compounding rate defined below in 5-8B.2. Example: The present value of a fixed monthly servicing fee of $25, given a term of 300 months and a compounding rate of .0825 divided by 12 is $3,192.58. This amount should be subtracted from the principal limit to arrive at the net principal limit that is used for determining monthly payments or a line of credit.