New FHA Mortgagee Letter for Refinancing
HUD released the FHA Mortgagee Letter 2011-11. The Housing of urban Development clarified the guidance for FHA refinancing transactions and is effective immediately. Borrowers will be required to be current on the home loan they are being refinancing for the month due prior to the month in which they close the refinance loan and for the month in which they close. For example, if the mortgagor is closing on April 8, the mortgagor must have paid the March payment within the month of March. The mortgagor must make the April payment by closing. The mortgagor has the option to make the April payment at the beginning of the month, or may include the April payment in the payoff amount at closing
All FHA Refinancing with Subordinate Loans
This is a clarification of existing guidance and is effective immediately. If there is an existing second mortgage on the property, such as a Home Equity Line of Credit, the entire lien must be subordinated at refinance. For the calculation of the Combined Loan to Value (CLTV) ratio, the mortgagee must use the maximum accessible credit limit of the existing subordinate lien.
Occupancy of Former Investment Property Eligible Financing
- 12 months or more prior to the loan application date of the refinancing mortgage
- Maximum financing at the same level as an owner-occupant
- Less than 12 months prior to the loan application date of the refinancing mortgage
- Rate-and-term refinancing only (no streamline allowed), with an LTV not to exceed 85 percent
FHA Streamline Refinance – Net Tangible Benefit
This Mortgagee Letter rescinds and replaces paragraph I.C of Mortgagee Letter 2009-32 and its subsequent incorporation in HUD Handbook 4155.1.6.C.5.a, which defined “net tangible benefit” in a streamline refinance transaction as, among other things, a reduction to the principal, interest, taxes, and hazard insurance (PITI). This new guidelines for FHA streamlines base the calculation of the net tangible benefit on the principal and interest (P&I) and Mortgage Insurance Premium (MIP). The purpose of this change in guidance is to allow mortgagors who can reduce their P&I and MIP by 5 percent to do a streamline refinance, even if they have an increase in taxes and insurance, because mortgagors must pay taxes and insurance regardless of whether they refinance. This will allow more mortgagors to qualify for a streamline refinance, increasing their ability to repay their mortgages. The mortgagee must determine that there is a net tangible benefit to the mortgagor as a result of the streamline refinance transaction, with or without an appraisal. “Net tangible benefit” is defined as:
- A 5% reduction to the P&I of the mortgage payment plus the annual MIP, or
- Refinancing from an Adjustable Rate Mortgage (ARM) to a fixed rate mortgage.
Note: Reducing the term of the mortgage, in and of itself, is not a net tangible benefit. Also, when refinancing to a hybrid ARM, mortgagees must treat the new hybrid ARM as a fixed rate mortgage. The following table defines the permissible minimum thresholds in different refinance situations and outlines what is new and existing guidance.