12.8.3 Additive change Orders

A. The Lender must not give any explicit or implied assurance to the Borrower or the contractor that an increase in the insured mortgage amount will be granted when construction changes are approved.

B. Except for “necessary” change orders, the Lender must require the Borrower to escrow funds with the Lender for any additive change order where HUD first estimates that the aggregated change orders equal or exceed a $5,000 increase in the construction contract price, and for all subsequent additive change orders.

1. The Lender may submit to HUD a letter of confirmation from the contractor stating that the Borrower has fully paid for the approved change order instead of escrowing the funds.

2. Non-profit Borrowers may use the Developer’s fee to fund additive change orders.

3. After 75% completion is achieved and if construction is on schedule and without findings of noncompliance, the CA may allow any HUD approved additive change order to be funded from the 2% contingency.

   • Excess mortgage proceeds, if available, may be used to fund the escrow for necessary and betterment change orders. However, any excess mortgage proceeds used to fund the escrow for contractor estimated costs in excess of HUD estimated costs, or HUD estimated costs in excess of contractor estimated costs, may not be disbursed until final closing. [See Cross References at Chapter 8, Section 8.14.C.11 and Appendix 12, Section A.12.1.4]

• The Lender may accept a third-party letter of credit instead of a cash deposit, subject to the Lender agreeing to provide the cash equivalent, where the letter of credit is not immediately honored.

• The Lender may recognize the cost of third party paid change orders at cost certification, where there are available mortgage savings.

4. For substantial rehabilitation projects the Lender must approve disbursements from the established contingency reserve in an amount not to exceed the HUD cost estimate for necessary or betterment change orders.

   • The Lender must require an escrow for any amount that the contractor’s cost estimate exceeds the HUD estimate.

• The Lender may authorize the use of excess mortgage proceeds, if available, to satisfy the escrow requirement, subject to the disbursement limitations in Section 12.8.4.A.1 above.

• After substantial rehabilitation work is complete and approved by the HUD Inspector and subject to Lender and HUD approval, the Borrower may elect to apply funds remaining in the contingency reserve line item to do:

  • 1. Necessary, further improvements, betterments or upgrades to the property,
  • 2. An initial deposit to the reserve for replacement account, or
  • 3. A reduction to the principal mortgage balance.

5. The Lender must approve the following forms for mortgagor’s application for funds for completed additive change orders:

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Chapter 12 Construction Period 12.8 Change Orders – HUD Duties

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• a. Form HUD-92464M, Request for Approval of Advance of Escrow Funds, where an escrow is used, which must be submitted to HUD for approval.

• Form HUD-92403, Application for Insurance of Advance of Mortgage Proceeds, where a rehabilitation project’s contingency funds or a non-profit’s Developer’s fee or excess mortgage proceeds are to be used.