The Department of Housing and Urban Development updated its Frequently Asked Questions (FAQ) document for HECM servicers to include additional guidance on short sale closing costs.
The most recent question addressed in the new FAQ is below.
Q: What closing costs will HUD allow to be deducted from HECM sales proceeds for either mortgagor or mortgagee sales?
A: HUD does not dictate what closing costs may be deducted from HECM sales proceeds, but rather controls only what the mortgagee may be reimbursed through the claim process.
There has been some confusion regarding how Mortgagee Letter 2006-04 applies to sale of properties with HECM loans. ML 2006-04 rescinded paragraph 5-2 of handbook HUD 4000.2, Rev-3, in which specific items were designated as allowable closing costs, and allowed mortgagees to “charge and collect from mortgagors those customary and reasonable costs necessary to close the mortgage.” Although there was mention of HECM in that ML, the guidance was strictly applicable to loan origination. It addressed closing costs that could be collected from the borrower in relation to obtaining an FHA loan to purchase a home and also what costs lenders could charge to HECM borrowers for origination. References to seller’s contributions applied only to forward mortgages for which FHA insured loans were being used to purchase a home.
That ML notwithstanding, HUD will reimburse mortgagees for reasonable and customary seller’s costs, per jurisdiction, that have been deducted from the sales proceeds at settlement for sales of properties with HECM loans.
Allowable settlement costs include, but are not limited to:
- Sales commission consistent with the prevailing rate but, not to exceed 6%;
- Real estate taxes prorated to the date of closing;
- Local/state transfer tax stamps and other closing costs customarily paid by the seller including the seller’s costs for a title search and owner’s title insurance;
- Any charges required by state law or local ordinance to be paid by the seller, such as, but not limited to, attorney fees, probate fees, representative fees (i.e., personal representative for an estate).
Likewise, HUD will reimburse the mortgagee for costs that are customarily paid by the seller on the buyer’s behalf in that jurisdiction. Those costs must be itemized on the HUD-1 at closing and may not exceed actual costs. It is the mortgagee’s responsibility to obtain satisfactory documentation to that effect and submit it to HUD with the claim if they request reimbursement for these items. Lump sum contributions will not be considered.
Unacceptable closing costs, which will not be reimbursed by HUD regardless of local customary allowances, include, but are not limited to:
- Repair reimbursements or allowances;
- Home Warranty fees;
- Tax service fees;
- Discount points or loan fees for non FHA-financing;
- Wire transfer fees;
- Courier or messenger fees;
- Any items identified only by the term “miscellaneous” or “other”.
All allowable settlement costs not claimed elsewhere in specified item numbers on the Form HUD-27011 are entered in Part D, item 408, with a clear explanation that the cost is customary for the jurisdiction. Documentation of customarily paid charges must be submitted to HUD with the claim package.
To read the rest of the FAQ click the link below.