FHA home loans have specific rules about when a borrower can get cash back on an FHA transaction and how. In general, FHA mortgage loans for new purchases don’t permit cash back except in the form of legitimate refunds, but HUD 4000.1 outlines certain circumstances where a small amount of cash back is permitted.
However, that cash back cannot be “excessive”. A lender is required to estimate the costs of the loan before the actual expenses are tallied. These estimates could result in the borrower budgeting more than is required. When money is due back to the borrower, HUD 4000.1 states:
“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 Borrowers outstanding principal balance to satisfy the $500 cash back requirement. The Mortgagee must submit the Mortgage for endorsement at the reduced principle amount.”
You read that correctly, FHA loans for new purchases on single family residences don’t permit more than $500 to the borrower at closing time.
When would a borrower be due a refund as opposed to “cash back”? If you pay up front for costs that wind up be included in the loan amount, you would be owed that money back. Naturally, the down payment is a required up-front expense no matter what, but other expenses permitted to be rolled into the loan may be “opted in” later in the loan process depending on circumstances.
New purchase loans have their own rules for money back to the borrower, but what about refinance loans? No cash back is permitted (except for refunds as previously discussed) for FHA Streamline Refinancing, but for cash-out loans, the amount of money back to the borrower depends on a variety of issues including the appraised value of the property, how much money is left over on the loan once the original note was paid off, and whether the borrower is financing or paying up front for discount points.
Cash out refinancing and FHA Reverse Mortgages naturally permit money back to the borrower, but even these transactions have rules governing how they must be carried out. Borrowers will have to factor in the expenses of the loan paid up front when trying to estimate how much money will be coming to them.
Certain refinance transactions may include a refund of the first mortgage’s Up Front Mortgage Insurance Premium (UFMIP), but the amount of that refund is something you will need to discuss with the lender. Keep in mind that UFMIP refunds are required to be applied to the principal balance of the loan rather than being returned to the borrower in cash.