June 3, 2020

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FHA No-Cash Out Refinancing Loans (With Appraisal): Basic Rules

087There are plenty of reasons to refinance a home with an FHA no-cash-out refinancing loan–taking advantage of lower interest rates is one of those good reasons, as is getting into a lower mortgage payment. The FHA offers a variety of refinancing options for single family home loans–what are the basic ground rules for an FHA no-cash-out refinancing loan?

For starters, the amount that can be refinanced is, according to HUD 4155.1 Chapter Three Section B, “is the lesser of the 97.75% Loan-To-Value (LTV) factor applied to the appraised value of the property, or existing debt. The total FHA first mortgage is limited to 100% of the appraised value, including any financed upfront mortgage insurance premium (UFMIP).”

Chapter Three adds that in general, the maximum mortgage cannot exceed the “statutory limit, except by the amount of any new UFMIP.” There are some exceptions for what the FHA rulebook terms, “certain specialty products”.

When refinancing with this type of FHA insured loan, some borrowers may want to know if subordinate liens can remain outstanding.

According to Chapter Three, “A subordinate lien, including a Home Equity Line of Credit (HELOC), regardless of when taken, may remain outstanding (but subordinate to the FHA-insured mortgage), provided the FHA insured mortgage meets the eligibility criteria for mortgages with secondary financing outlined in HUD 4155.1 5.C, and combined amount of the FHA-insured mortgage and the entire subordinate lien does not exceed the applicable FHA LTV ratios. The lender must use the maximum accessible credit limit of the existing subordinate lien to calculate the Combined Loan-to-Value (CLTV) ratio.”

Can a borrower use this type of FHA home loan to buy out a co-borrower? This is an important question for some borrowers, which Chapter Three answers.

“When the purpose of the new loan is to refinance an existing mortgage in order to buy out an ex-spouse’s or other coborrower’s equity, the specified equity to be paid is

–considered property-related indebtedness, and
–eligible to be included in the new mortgage calculation.

The divorce decree, settlement agreement, or other bona fide equity agreement must be provided to document the equity awarded to the ex-spouse or coborrower.”

Another question some borrowers want answered for this type of refinancing–is it available for properties that have been recently acquired?

Chapter Three says, “If the property was acquired less than one year before the loan application, and is not already FHA-insured, the original sales price of the property must be considered in determining the maximum mortgage, in addition to the calculations described previously in this topic.”

Additionally “Using conclusive documentation, expenditures for repairs and rehabilitation incurred after the purchase of the property may be added to the original sales price in calculating the mortgage amount. The maximum mortgage amount will be based on the lesser of the:

–total cost to acquire the property, which includes the original purchase price plus any

  • documented costs incurred for rehabilitation, repairs, renovation, or weatherization
  • closing costs, and
  • reasonable discount points, or

–current appraised value, or
–total of all mortgage liens held against the subject property.”

Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.

Joe Wallace - Staff Writer

By Joe Wallace

January 29, 2014

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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FHANewsBlog.com was launched in 2010 by seasoned mortgage professionals wanting to educate homebuyers about the guidelines for FHA insured mortgage loans. Popular FHA topics include credit requirements, FHA loan limits, mortgage insurance premiums, closing costs and many more. The authors have written thousands of blogs specific to FHA mortgages and the site has substantially increased readership over the years and has become known for its “FHA News and Views”.

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