Federal Housing Administration mortgagees have been advised of new refinance requirements. Some of the changes are already in force, while others take effect in two months.
On Feb. 14, the Department of Housing and Urban Development published Mortgagee Letter 2011-11 clarifying and updating existing guidance concerning refinance transactions for FHA insurance. Many of the items discussed in the letter are effective immediately, as they are clarifications of already existing policy. New guidance becomes effective 60 days from the date of the mortgagee letter.
The mortgagee letter clarifies that for all refinances, the mortgagor must be current on the mortgage being refinanced for the month prior to the month of refinancing, as well as for the month in which the refinancing is closed. The example given is that if the refinancing will close in April, the mortgagor must have paid the March payment within the month of March and must make the April payment by closing, either by paying at the beginning of the month or including the April payment in the payoff amount at closing.
This is immediately effective.
The second clarification that is also now in effect involves the subordination of existing subordinate liens at refinance. If a property secures an existing subordinate lien loan, such as a home-equity line of credit, the entire lien must be subordinated at refinance. To calculate the combined loan to value ratio, the mortgagee must use the maximum accessible credit limit on the subordinate lien.
Also effective immediately, with respect to streamline refinances, the following criteria must be met as of the date of FHA case number assignment: (1) the mortgagor must have made at least six payments on the FHA-insured mortgage that is being refinanced; (2) at least six full months must have passed since the first payment due date of the refinanced mortgage; and (3) at least 210 days must have passed from the closing date of the mortgage being refinanced. The Mortgagee Letter provides an example for clarification.
For cashout refinances, the mortgagee must document that the mortgagor has an acceptable payment history. By way of clarification, and effective immediately, the payment history is acceptable if the mortgagor: (1) is current; (2) has made all payments on the mortgage being refinanced within the month due for the previous 12 months; and (3) for mortgages with more than six months and less than 12 months of payment history, the mortgagor must have made all payments when due. Mortgages with less than six months of payment history are not eligible for a cash-out refinance.
The mortgagee letter provides guidance on the maximum mortgage amount available for mortgagors who re-occupy a former investment property securing the loan being refinanced. If the mortgagor will occupy the former investment property for 12 months or more prior to the application for refinancing, the maximum financing will be at the same level as an owner-occupant. If the mortgagor occupies the former property less than 12 months prior to applying to refinance, the mortgagor will be eligible for a rate and term refinance only with an LTV of no more than 85 percent.
This guidance goes into effect 60 days from the mortgagee letter.
The second new piece of guidance is that HUD Handbook 4155.1.2.B.4, which addresses purchase transactions involving three and four unit properties, will also apply in its entirety to all refinance transactions of three and four unit properties.
HUD is redefining what it will consider to be a “net tangible benefit” in a streamline refinance transaction. “Net tangible benefit” will now be defined as either: (1) a five percent reduction to the principal and interest of the mortgage payment plus the annual mortgage insurance premium; or (2) refinancing from an adjustable rate mortgage to a fixed rate mortgage. The mortgagee letter provides a table of the permissible minimum thresholds that must be met in various circumstances in order for there to be a net tangible benefit.
Effective no later than 60 days from the date of HUD’s letter, mortgagees will be permitted to use an abbreviated Uniform Residential Loan Application in connection with non-credit-qualifying streamline transactions. On an abbreviated URLA, the mortgagee is not required to complete the employment information, monthly income and combined housing expense information, assets and liabilities information or any of the declarations, other than occupancy information and property ownership information, for the previous three years.
Pursuant to the new guidance, mortgagees may not use TOTAL Scorecard on streamline refinance transactions.
For non-credit-qualifying streamline refinances, mortgagees may not increase the insurable mortgage balance beyond the sum of the outstanding principal and the new upfront mortgage insurance premium. If the mortgagee intends to increase the insurable balance beyond this sum, the mortgagee must do so using a credit-qualifying refinance with an appraisal.
Finally, as clarification to existing policy, but effective no later than 60 days from the date of the mortgagee letter, HUD Handbook 4155.1.2.B.6.a, which deals with financing limits for loans that pay off land contracts with no cash out at closing, applies in its entirety to all cash out loan transactions that pay off land contracts. Additionally, the handbook section applies in its entirety to refinancing transactions on properties subject to ground rents. These types of transactions must be treated as if they were cash out refinances on property held in fee simple.
