June 8, 2017
We’ve been examining the ins and outs of FHA refinance loans in our last few posts, but one issue we haven’t discussed yet is whether an FHA refinance can be used to buy out an existing title holder, applied for as part of an FHA short refinance, or to pay off land contracts.
HUD 4000.1 has a list of the rules in these areas. Where short payoffs are concerned, the rules are fairly simple:
“The Mortgagee may approve a Rate and Term refinance where the maximum mortgage amount is insufficient to extinguish the existing mortgage debt, provided the existing Note holder writes off the amount of the indebtedness that cannot be refinanced into the new FHA-insured Mortgage.”
Do you need to refinance your existing mortgage in order to buy out a title holder? FHA loan rules address this situation, stating:
“When the purpose of the new Mortgage is to refinance an existing Mortgage to buy out an existing title-holder’s equity, the specified equity to be paid is considered property-related indebtedness and eligible to be included in the new mortgage calculation. The Mortgagee must obtain the divorce decree, settlement agreement, or other legally enforceable equity agreement to document the equity awarded to the title-holder.”
And where paying off recorded land contracts is concerned, HUD 4000.1 states:
“When the purpose of the new Mortgage is to pay off an outstanding recorded land contract, the unpaid principal balance will be deemed to be the outstanding balance on the recorded land contract.”
All of these FHA refinance loan purposes are listed under the “no cash out” heading. In fact, FHA loan rules include language that forbids the lender from providing “excessive cash back” on these transactions.
“When the estimated costs utilized in calculating the maximum mortgage amount result in greater than $500 cash back to the Borrower at mortgage Disbursement, Mortgagees may reduce the Borrower’s outstanding principal balance to satisfy the $500 cash back requirement. The Mortgagee must submit the Mortgage for endorsement at the reduced principle amount.”
Speak to a participating FHA lender to determine what type of FHA refinance loan might be right for your needs.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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