On September 12, 2008, the US Department of Housing and Urban Development (HUD) released Mortgagee Letter 2008-23 outlining new downpayment and maximum mortgage requirements as found in the Housing and Economic Recovery Act of 2008 (HERA).
This letter implements three new requirements:
1) Mortgagor will pay in cash or cash equivalent not less than 3.5 percent of the appraised value of the property;
2) The variable loan-to-value (LTV) limits that were based on the combination of property value and average state closing costs (known as "downpayment simplification") is eliminated; and
3) The Federal Housing Administration (FHA) insured first mortgage is limited to 100 percent of the appraised value and requires the inclusion of the upfront premium within this limit. The revised requirements take effect for all new FHA case number assignments on or after January 1, 2009.
The mortgage letter states that closing costs may not be used to help meet the minimum 3.5 percent downpayment requirement. The LTV is 96.5 percent (the reciprocal of the 3.5 percent downpayment requirement). However, when combined with an FHA first mortgage, government subordinate liens are not limited to 100 percent. Sellers are still permitted to provide financing concessions of up to 6 percent of the sales price. Refinances, including FHASecure, are not subject to the 3.5 percent downpayment requirement as there is no "downpayment" on a refinance.
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