www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER January 28, 1986 Mortgagee Letter 86-4 TO: ALL APPROVED MORTGAGEES SUBJECT: Single Family Production Processing of Refinance Transactions With the recent decline in interest rates, there has been a significant increase in the refinancing of existing FHA mortgages. This process has been complicated by the existence of the one-time mortgage insurance premium (MIP) and the fact that housing values have dropped in certain markets around the country. Since there are now a variety of methods for handling refinancing, we are providing you with a brief outline of the refinancing options as well as the methodology for treating one-time MIP in these transactions. If you have any questions on this letter, please contact the Single Family Development Division at (202) 755-6700 or 426- 7212. I. Impact of One-time MIP When mortgagors refinance certain existing FHA loans under 203(b), 203(i) or 203(n) originated after September 1983, it is likely that they will be receiving a significant refund for the unearned portion of the MIP (frequently over $1,000). (One-time MIP is not applicable to Sections 203(k), 221(d) (2), condominiums, or any other programs which are the obligations of the General or Special Risk Insurance Funds). To avoid having two MIPs funded in the new mortgage, the outstanding indebtedness at time of refinancing must be reduced by the estimated amount of refund due based on the calculations set forth in Mortgagee Letter 84-9. This requirement applies to any loan in which the MIP was financed in the previous mortgage. To facilitate the estimated refund calculation process, we will permit mortgagees to use one factor for each policy year regardless of the interest rate. If the MIP was paid entirely in cash, no reduction to the outstanding indebtedness is necessary. _____________________________________________________________________ 2 Below is a list of the applicable factors for 30 year term mortgages. Factors for other terms are available in Mortgagee Letter 84-9. Since one-time MIP was implemented in September 1983, the oldest policy year can be 3 years. The factors are: Termination Estimated Refund During Policy Per Thousand Dollars Year of Original Mortgage 1 $ 34.30 2 $ 29.70 3 $ 23.90 The following example illustrates Tile methodology which mortgagees must use to calculate the amount of the estimated refund and the outstanding balance to be included in the new mortgage. Original Amount (including one-time MIP) $62,600 Mortgage balance in second policy year * of 30 year term (including the financed MIP) $62,112 * assume loan closed n June 1984, therefore mortgage in second policy year at present time. MIP to be refunded use (62.6 x 29.70 - original mortgage amount with second year $ 1,859 factor above.) Mortgage balance as basis for refinance transaction, subtract refund from current $60,253 outstanding balance ($62,112 - $1,859) When the existing loan is paid off after closing, the present holder of that mortgage must complete Form HUD-2344 to cancel tie insurance contract. Please mail this form to the Department of Housing and Urban Development (AFMO), Washington, DC 20410-3415. HUD then forwards a claim form to the mortgagor initiating the refund process. Since the borrower will not receive a refund prior to the closing of the new loan, many mortgagors may experience difficulty in securing the necessary cash investment. Existing mortgage credit processing instructions permit mortgagors to borrow needed funds provided the loan is fully secured by collateral other than the property securing the mortgage to be insured. HUD will assume that a loan secured by a refund resulting from the unearned MIP to fall into that class. It should be emphasized that the above process must be followed for any mortgage in which any part of the MIP was financed in the existing mortgage. _____________________________________________________________________ 3 You are reminded that one-time MIP is not applicable to condominiums, sections 203(k), 221(d) (2), and other programs as noted above. For mortgages insured under such sections, and for mortgages insured under sections 203(b), 203(i) and 203(n) prior to September 1983 or after September 1983 if the one-time MIP was paid in cash, the entire outstanding balance is the basis for the calculation of the new mortgage amount as discussed in the options below. (Mortgages insured under section 203(b) include those insured under that section but pursuant to section 245 or 251.) We are still exploring other ways to streamline this procedure further. II. Refinance Case Processing Once the outstanding balance less the estimated refund of the one-time MIP is determined, you are ready to calculate the mortgage for refinance purposes. Depending on the borrower's purposes (refinance solely to reduce rate or to take cash out), a variety of processing options are available. They are: A. Owner Occupant Refinance to Take Cash Out If an owner occupant wishes to take cash out of the property, FHA treats this case as any new loan, and therefore a new appraisal and complete mortgage credit analysis are required. You are reminded that investors cannot take any cash out in refinance transactions. For loans in this category, there is no need to calculate the one-time MIP refund as described in section i above. An occupant mortgagor who intends to use cash proceeds for purposes unrelated to the property may obtain a mortgage up to 85 percent of the value plus closing costs subject to the applicable statutory mortgage limit. Where a property was acquired within the last twelve months, the maximum mortgage amount must be computed on the lesser of acquisition cost or the FHA estimate of value plus closing costs. The new MIP is added to the mortgage amount calculated above if the MIP is being financed. These cases can be processed by eligible Direct Endorsement lenders. _____________________________________________________________________ 4 B. Refinances with no cash out To expedite the processing of the refinancing of existing FHA mortgages where the borrower does not want to take any cash out and only seeks to reduce the monthly payment, FHA implemented a streamlined procedure in November, 1982. In this process, the appraiser is not required to list any repair conditions and FHA will accept the appraisal as on estimate of value under the conditions described below. This procedure applies to any no cash out refinance transaction in which the new mortgage amount is based on the lesser of the two following formulas. They are: i. Application of maximum loan-to-value ratios (97/95) to appraised value and closing costs. 2. One hundred percent of existing indebtedness (minus the refund amount as explained in section I above), closing costs and the cost of refinancing (including discount points). In those transactions in which formula 2 is the one on which the mortgage amount is predicated, HUD field offices will review the refinancing costs to make certain that they are reasonable and customary for the area. After determining the mortgage amount based on the appropriate formula, the one-time MIP is then added to the mortgage, if applicable. These cases can be processed under the Direct Endorsement program. C. Refinances Without an Appraisal For mortgages insured under section 203, existing regulations (section 203.43(b) (7) permit mortgages to be refinanced without an appraisal so long as neither the original mortgage amount nor the unexpired term of the existing loan are exceeded. Through this procedure, FHA can process cases in areas where the current property value does not support a mortgage equal to the current outstanding balance. Cases can only be processed if the borrower's monthly payment on the new mortgage will be reduced. This process is available to any mortgage meeting the following criteria: 1. The new mortgage cannot exceed the existing indebtedness less the MIP refund, if applicable) plus the new MIP if it is financed. If the new MIP is paid in cash or the mortgage _____________________________________________________________________ 5 is made pursuant to one of the section 203 programs still using monthly MIP, the new mortgage cannot exceed the original mortgage amount. 2. All costs (closing costs and costs to refinance) above these limits must be paid in cash. However, as was noted earlier, the borrower may obtain funds using the MIP refund as security. 3. The maximum mortgage term of the new mortgage is 25 years. The MIP factors for 25 year terms are: .036 if the MIP is financed and .03475 if the MIP is paid in cash. Any mortgages with unexpired terms under 25 years will not be eligible for refinancing under this procedure. 4. Section 203.43(b) (7) only applies to Section 203. As a result, mortgages to be insured under any other section of the Act, such as 234, (condominiums) can not be processed under this option. 5. The Government National Mortgage Association has indicated that they will accept these mortgages in Mortgage Backed Security pools. Loans of different terms may be put in the same pools. 6. Since no appraisal is required, these cases may be processed by a all who are approved as Direct Endorsement mortgagees including those with proposed construction approval only. 7. For loans insured under section 203 pursuant to section 245 (GPMs), please be advised that by regulation and statute, the new mortgage may not exceed the original mortgage amount plus the one-time MIP, if applicable. 8. The mortgagee provides evidence or certifies that the loan is current. 9. In preparing the HUD Form 92900 application, the mortgagee should complete all of the form down to Section II. Only Block 24 of Section I 1, must be completed. Sections III and V must also be completed. Entries on the HUD worksheet by the processor are to be limited to: case number, borrower's name, appropriate portions of Section III and final approval. Mortgagee must still complete and sign the first page of the 2800 package. _____________________________________________________________________ 6 With the availability of the process described in paragraph C, no other refinances are permitted without new appraisals. In conclusion, we trust this letter clarifies HUD's position on the processing of refinance transactions. Sincerely, Janet Hale General Deputy Assistant Secretary for Housing-Federal Housing Commissioner _____________________________________________________________________