The U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2020-23, dated July 28, 2020, to update COVID-19 national emergency guidance for FHA loans. The guidance addresses the verification of business operations for self-employed borrowers, the use of rental income for qualification purposes, and rehabilitation escrow accounts in connection with 203(k) loans. The guidance on the first two topics is effective for cases with note dates on or after July 28, 2020 through November 30, 2020. The guidance on 203(k) loans is effectively immediately for open escrow accounts through November 30, 2020. 

Self-Employed Borrowers. When self-employment income is being used to qualify the borrower, within 10 calendars days before the date of the note the lender must verify and confirm that the business is open and operating by obtaining one of the following:

  • Evidence of current work (executed contracts or signed invoices that indicate the business is operating on the day the lender verifies self-employment);
  • Evidence of current business receipts within 10 days of the note date (payment for services performed);
  • Lender certification that the business is open and operating (lender confirmed through a phone call or other means); or
  • A business website demonstrating activity supporting current business operations (timely appointments for estimates or service can be scheduled).

Rental Income. When a borrower is qualifying using rental income, for each property generating rental income the mortgagee must:

  • Reduce the effective income associated with the calculation of rental income by 25 percent; or
  • Verify six months of principal, interest, tax, and insurance reserves (this option is applicable to forward mortgages only); or
  • Verify the borrower has received the previous two months rental payments as evidenced by borrower’s bank statements showing the deposit. (This option is applicable only for borrowers with a history of rental income from the property).

Rehabilitation Escrow Accounts. FHA notes that under existing guidelines when the rehabilitation work is not completed within the specified rehabilitation period, the borrower may request an extension of time and submit adequate documentation to support the extension. The lender may grant an extension only if all mortgage payments are current. Further, if the mortgage is delinquent, the lender may refuse to make further releases of funds from the rehabilitation escrow account, and the project must stop if the mortgage is in payment default. 

FHA advises that it is providing temporary flexibility to allow lenders to continue administering the rehabilitation escrow account, including the approval of extension requests and release of funds, which will allow the project to continue for mortgages when the borrower is in forbearance due to the impacts of COVID-19. The lender is still required to obtain:

  • An explanation for the delay from the borrower, contractor, or consultant when reviewing extension requests; and
  • A new estimated completion date.

HUD welcomes feedback from interested parties for a period of 30 calendar days from the date of the Mortgagee Letter.


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