FHASecure Guidelines
May 7, 2008
MORTGAGEE LETTER 2008-13
TO: ALL APPROVED MORTGAGEES
SUBJECT: Expansion of FHASecure
In Mortgagee Letter 2007-11, the Federal Housing
Administration announced FHASecure, a temporary initiative to
permit lenders to refinance delinquent adjustable rate
mortgages (ARMs) and/or to offer new subordinate financing
where the combined loan-to-value ratio exceeds the applicable
FHA loan-to-value ratio and geographical maximum mortgage
amount. The Department has decided to expand FHASecure
as follows:
MORTGAGEE LETTER 2008-13
TO: ALL APPROVED MORTGAGEES
SUBJECT: Expansion of FHASecure
In Mortgagee Letter 2007-11, the Federal Housing
Administration announced FHASecure, a temporary initiative to
permit lenders to refinance delinquent adjustable rate
mortgages (ARMs) and/or to offer new subordinate financing
where the combined loan-to-value ratio exceeds the applicable
FHA loan-to-value ratio and geographical maximum mortgage
amount. The Department has decided to expand FHASecure
as follows:
• To include borrowers delinquent on their non-FHA ARMs due to a rate reset
or the occurrence of an extenuating circumstance but experienced no more than
two 30-day or one 60-day late payment in the 12 months prior to the rate reset or
extenuating circumstance that caused the delinquency; or
• To include borrowers delinquent on their non-FHA ARMs due to a rate reset
or the occurrence of an extenuating circumstance but experienced no more than
one 90-day late payment or no more than three 30-day late payments prior to the
rate reset or extenuating circumstance that caused the delinquency provided the
loan-to-value on the FHA insured first mortgages does not exceed 90 percent.
• Borrowers delinquent on their interest-only and/or payment option ARMs are
not eligible for this expansion: borrowers with these types of mortgages must
demonstrate that a rate reset caused the delinquency and that they were making
the monthly mortgage payments within the month due during the 6 months prior to
the rate reset.
• For borrowers refinancing delinquent non-FHA ARMs the Up-front mortgage
insurance premium (UFMIP) is set at 2.25 percent of the base loan amount (loan
amount excluding UFMIP) regardless of the loan-to-value (LTV) ratio. For LTV
ratios greater than 95 percent (excluding UFMIP) the Annual premium (collected
monthly) is set at .55 percent.
This mortgagee letter replaces the specific guidance regarding FHASecure issued
in Mortgagee Letter 2007-11 and is effective for case numbers assigned on or
after July 14, 2008. FHA is implementing the policies in this letter simultaneously
with the implementation of risk-based pricing through notice in the Federal
Register May 13, 2008. Mortgagees are reminded that the eligibility criteria for
delinquent borrowers and new subordinate financing under the FHASecure
initiative are temporary and require that the loan application be signed no later
than December 31, 2008. Mortgagees are also reminded that FHA has not
changed its underwriting guidelines, but rather its eligibility criteria. Existing
policies are still applicable, such as those involving bankruptcy. This mortgagee
letter also clarifies guidance issued in Mortgagee Letter 2005-43 regarding cash-
out refinance transactions.
I. FHASecure Eligibility Criteria
All conventional-to-FHA rate and term refinances are considered FHASecure,
regardless of whether the borrower is delinquent or current. Cash-out refinance
transactions are not acceptable under this initiative. The following items are the
eligibility criteria for originating mortgages under FHASecure.
Borrowers Current on Their Mortgages
• The mortgage being refinanced must be a non-FHA fixed rate or adjustable
rate mortgage.
• Mortgagees are reminded that they need to verify the borrower’s mortgage
payment history through the mortgage servicer or through cancelled checks to
determine if it is acceptable under FHA’s standard underwriting guidelines.
• If there is insufficient equity in the home, FHA will insure first mortgages
where there is a:
1) Write Down. The existing note holder(s) writes off the amount of
indebtedness that cannot be refinanced into the FHA insured mortgage (a short
pay-off); or
2) New Subordinate Financing. The FHA-approved lender making the new
mortgage, the existing note holder or other interested party may take back a
second lien by the amount which the payoff is short, including closing costs,
arrearages, other reasonable and customary costs that are standard servicing
practices and are included in all payoff statements or previous secondary
financing if the indebtedness exceeds FHA prescribed LTV and maximum
mortgage amount limits; and/or
3) Re-subordination/Modification. The note holder(s) of existing subordinate
financing must re-subordinate or modify the existing subordinate lien(s) and re-
execute at closing if the lien is to remain in effect after closing; and/or
4) Other options. State/local programs or “Rescue Funds” administered by
nonprofit organizations.
• Mortgagees must determine that the borrower has sufficient income and
resources to make the monthly payments under the new FHA-insured refinancing
mortgage as well as pay other recurring obligations.
Borrowers Delinquent on Their Mortgages
• The mortgage being refinanced must be a non-FHA adjustable rate
mortgage.
• When refinancing a delinquent mortgage where the delinquency was caused
by a rate reset or the occurrence of an extenuating circumstance the borrower’s
payment history must show that:
1. The borrower was making the monthly mortgage payments within the month
due during the 6 months prior to the rate reset or extenuating circumstance; OR
2. In the 12 months prior to the rate reset or extenuating circumstance the
borrower’s payment history shows no more than one 60-day late payment or two
30-day late payments. Borrowers with less than a full 12 months payment history
(i.e., 7-11 months payment history) must show that they have made their monthly
mortgage payments within the month due during the 6 months prior to the rate
reset or occurrence of the extenuating circumstance; OR
3. If the borrower is unable to meet the payment history requirements
specified above, the lender may still proceed with the refinance transaction
provided that the loan-to-value ratio on the new FHA-insured mortgage does not
exceed 90 percent and the borrower has no more than one 90-day late or no more
than three 30-day late payments over the 12 month period prior to the rate reset
or extenuating circumstance.
• Mortgagees must determine that the rate reset or extenuating circumstance
that caused the delinquency does not affect the borrower’s overall capacity to
repay the new FHA-insured mortgage.
• Borrowers delinquent on their interest only and/or payment option ARMs
must demonstrate that the delinquency was caused by a rate reset and that they
were making their monthly mortgage payments within the month due during the 6
months prior to the rate reset.
• If there is insufficient equity in the home, FHA will insure first mortgages
where there is a:
1) Write Down. The existing note holder(s) writes off the amount of
indebtedness that cannot be refinanced into the FHA insured mortgage (a short
pay-off); or
2) New Subordinate Financing. The FHA-approved lender making the new
mortgage, the existing note holder or other interested party may take back a
second lien by the amount which the payoff is short, including closing costs,
arrearages, other reasonable and customary costs that are standard servicing
practices and are included in all payoff statements or previous secondary
financing if the indebtedness exceeds FHA prescribed LTV and maximum
mortgage amount limits; and/or
3) Re-subordination/Modification. The note holder(s) of existing subordinate
financing must re-subordinate or modify the existing subordinate lien(s) and re-
execute at closing if the lien is to remain in effect after closing; and/or
4) Other options. State/local programs or “Rescue Funds” administered by
nonprofit organizations.
• Mortgagees must determine that the borrower has sufficient income and
resources to make the monthly payments under the new FHA-insured refinancing
mortgage as well as pay other recurring obligations.
• In most of the FHA insurance programs, there is an Up-Front Mortgage
Insurance Premium (UFMIP) and an Annual premium. For borrowers refinancing
delinquent non-FHA loans the UFMIP is set at 2.25 percent of the base loan
amount (loan amount excluding Up-front MIP) regardless of the loan-to-value
(LTV) ratio. For LTV ratios greater than 95 percent (excluding UFMIP) the Annual
premium (collected monthly) is set at .55 percent. These premiums reflect the
relative risk associated with new borrowers under the FHASecure expansion, within
the limits applicable law places upon FHA’s premium-setting authority.
Maximum FHA loan-to-value ratios
The maximum loan-to-value limits are shown below and are applied to the
appraiser’s estimate of value, exclusive of any upfront mortgage insurance
premium.
Maximum Loan-to-Value Ratios
States with Average Closings Costs At or Below 2.1 Percent of Sales Price
• 98.75 percent: For properties with appraised values equal to or less than
$50,000.
• 97.65 percent: For properties with appraised values in excess of $50,000
up to $125,000
• 97.15 percent: For properties with appraised values in excess of $125,000.
States with Average Closings Costs Above 2.1 Percent of Sales Price
• 98.75 percent: For properties with appraised values equal to or less than
$50,000
• 97.75 percent: For properties with appraised values in excess of $50,000
Calculating the Maximum FHA Mortgage Amount
The amount of the FHASecure mortgage may not exceed either the geographical
maximum mortgage limits or the loan-to-value ratios shown above. FHA will permit
the inclusion in the new loan amount the existing first lien, any purchase money
second mortgage, closing costs, prepaid expenses, discount points, prepayment
penalties, late payment charges, attorney fees, inspection fees, and those other
charges traditionally associated with servicing mortgages. FHA will also permit
arrearages (principal, interest, taxes and insurance) to be added into the new loan
amount provided the arrearages arose after the reset or occurrence of an
extenuating circumstance.
Subordinate Financing and Combined Loan-to-Values
If the new maximum FHA loan is not enough to pay off the existing first lien, closing
costs and arrearages, the new or existing lender may execute a subordinate lien at
closing to pay the difference. This new subordinate lien does not have to be
supported by the value of the property. The combined amount of the FHASecure
first mortgage and any subordinate non FHA-insured lien may exceed the
applicable FHA loan-to-value ratio and geographical maximum mortgage amount.
If payments on the new subordinate lien are required, they must be included in
qualifying the borrower unless payments have been deferred for no less than 36
months. If payments on the new subordinate lien are deferred for 36 months,
underwriters should consider the repayment terms to ensure that when the
payments begin they do not exceed the borrower’s reasonable ability to pay.
While it is permissible to establish equity sharing agreements or other similar
arrangements for providing a subordinate lien, the terms agreed to must not
trigger a default on the FHA-insured first mortgage. Therefore, FHA has
established the following conditions:
• The terms of the subordinate lien(s) must not provide for a balloon payment
before ten years, unless the property is sold or refinanced;
• The terms must permit prepayment by the borrower, without penalty, after
giving 30 days advance notice;
• The required monthly payment under both the new FHA-insured mortgage
and the subordinate lien(s) – regardless of when payments begin – plus other
housing expenses and all recurring charges, cannot exceed the borrower’s
reasonable ability to pay; and
• Any periodic payments due on the subordinate lien(s) are due monthly and
are essentially the same in dollar amount.
FHA is also simplifying its policies involving combined loan-to-value (CLTV) ratios
to make them as consistent as possible regardless of the type of refinance
transaction. The following chart provides additional guidance to mortgagees
regarding CLTV ratios for refinance transactions, including cash-out and FHA-to-
FHA refinance transactions.
Loan-to-value and Combined Loan-to-Value Maximum Mortgage Calculation
Criteria FHASecure FHA 95% Cash-out Refinance FHA-to-FHA
Refinance
LTV Standard LTV on FHA first mortgage; or
90% LTV on FHA first mortgage if the borrower has one 90-day late or three 30-
day late payments over the specified period. Up to 95% LTV on FHA first
mortgage provided loan amount will not exceed $417,000. Otherwise, capped at
85% LTV. Standard LTV on FHA first mortgage.
CLTV Unlimited CLTV on new and/or re-subordination or modification of
existing subordinate financing. New subordinate financing is not permissible.
Unlimited CLTV for re-subordination or modification of existing subordinate
financing for both 95% and 85% LTVs. Standard CLTV on new subordinate
financing, i.e., combined amount of first and second mortgages does not exceed
applicable LTV ratio and the maximum mortgage limit for the area.
Unlimited CLTV for re-subordination or modification of existing subordinate
financing.
Max Mtg Amount In addition to standard rate and term, the maximum mortgage
calculation may include arrearages incurred because of interest rate reset or
occurrence of extenuating circumstance. Standard cash-out maximum
mortgage calculation up to 95%. Standard rate and term maximum mortgage
calculation.
Value Current appraised value is used in determining maximum loan
amount. Current appraised value is used in determining maximum loan
amount. Current appraised value is used in determining maximum loan
amount.
Underwriting the Mortgage/Qualifying the Borrower
FHA encourages all approved lenders to use FHA’s TOTAL Mortgage Scorecard
to obtain risk classifications on each mortgage originated under the FHASecure
initiative. If TOTAL renders an “accept/approve,” the mortgagee’s underwriter
need not perform a personal review of the borrower’s credit history and capacity to
repay. However, in the more likely event that the risk class is a “refer,” the
underwriter must:
1. Determine that the borrower has the capacity to make future mortgage
payments as well as pay all other obligations. The payment-to-income and debt-to-
income ratios are 31 percent and 43 percent, respectively, and may be exceeded
provided there is a strong compensating factor(s) (see handbook HUD 4155.1
REV-5, ¶ 2-13).
For borrowers limited to 90% LTV due to their mortgage payment history, the
payment-to-income and debt-to-income ratios may not be exceeded even when
compensating factors are present.
2. Analyze the borrower’s overall credit history, especially payments on the
existing mortgage. If the mortgage being refinanced is delinquent, the underwriter
must determine that:
a. The borrower’s mortgage payment history during the 6 months prior to the
interest rate reset or occurrence of an extenuating circumstance showed no
instances of making mortgage payments outside the month due; OR
b. In the 12 months prior to the reset or extenuating circumstance, the
borrower’s payment history shows no more than one 60-day late payment or two
30-day late payments. Borrowers with less than a full 12 months payment history
(i.e., 7-11 months payment history) must show that they have made their monthly
mortgage payments within the month due during the 6 months prior to rate reset or
extenuating circumstance; OR
c. If the borrower is unable to meet the payment history requirements
specified above, the loan-to-value ratio on the new FHA-insured mortgage must
not exceed 90 percent and the borrower has no more than one 90-day late or no
more than three 30-day late payments over the 12 month period prior to the rate
reset or extenuating circumstance.
d. Borrowers with interest-only or payment option ARMs must show that they
have made their monthly mortgage payments within the month due during the 6
months prior to the rate reset.
If the borrower was offered partial forbearance, the underwriter must determine
that he/she has made payments under the forbearance agreement in a timely
manner.
For those borrowers current on their non-FHA mortgage, underwriters should not
automatically penalize borrowers who made their mortgage payment their first
priority at the expense of meeting other recurring obligations in a timely manner.
If the credit report indicates satisfactory credit prior to the reset or extenuating
circumstance, and any derogatory credit subsequent to that date can be related to
the effects of the rate reset or extenuating circumstance, FHA will consider for its
underwriting standards that the borrower is a satisfactory credit risk.
3. Provide comments in the “remarks” section of the mortgage credit analysis
worksheet (or loan underwriting and transmittal summary) that he or she has
determined that the cause of the borrower’s inability to make payments was
directly related to the rate reset or extenuating circumstance and not due to a
disregard for recurring obligations.
Misuse of FHASecure
Lenders are also reminded that the FHASecure initiative is not to be used to solicit
borrowers to cease making timely mortgage payments. FHA reserves the right to
reject for insurance, those mortgage applications where it appears that a loan
officer or other mortgagee employee suggested that the borrowers could stop
making their payments, refinance into a FHA insured mortgage, and keep, as
cash, the amount of payments not made on time.
II. Clarification on Cash-out Refinance Transactions
In Mortgagee Letter 2005-43, FHA revised its policies regarding refinance
transactions and introduced a cash-out refinance of up to 95 percent of the
appraiser’s estimate of value. Given the popularity of this refinance option, FHA is
taking this opportunity to reiterate and clarify the eligibility conditions that must be
met in order to take advantage of the increased LTV that is permitted. And, as
noted in ML 2008-09, if a borrower is pursuing a cash-out refinance and the loan
balance exclusive of FHA’s upfront mortgage insurance premium will exceed
$417,000, the loan-to-value may not exceed 85 percent of the appraiser’s
estimate of value.
• Borrowers who are delinquent or in arrears under the terms and condition of
their mortgage are not eligible for a cash-out refinance.
• The subject property must have been owned by the borrower as his or her
principal residence for at least 12 months preceding the date of the loan
application. If the borrower has not owned the property for a minimum of 12
months, the FHA-insured new mortgage is capped at 85 percent LTV. In such
cases, the mortgage amount must be calculated using the lesser of the appraised
value or the original sales price of the property multiplied by 85 percent.
• If said property is encumbered by a mortgage, the borrower must have made
all of his/her mortgage payments within the month due for the previous12
payments, i.e., no payment may have been more than 30 days late and is current
for the month due. For those borrowers who have owned their property for 12
months but do not have a full 12 months payment history, lenders may create an
aggregate 12-month payment history from a previous mortgage the borrower held
on the subject property. If a lender is unable to establish a 12 months payment
history, the FHA-insured new mortgage is capped at 85 percent LTV.
• The property that is security for the refinanced mortgage must be a 1- or 2-
unit dwelling.
• Existing subordinate financing may remain in place, but subordinate to the
FHA-insured first mortgage, regardless of the total indebtedness or combined loan-
to-value ratio, provided the borrower qualifies for making scheduled payments on
all liens. FHA understands that many subordinate lien holders have been
requesting modifications to the terms of the lien (typically a reduction in the
amount of the lien) in exchange for remaining in a subordinate position. Modifying
the subordinate lien in this manner often results in re-executing it at closing, which
is an acceptable practice to FHA and therefore, we would not consider it a new
subordinate lien. This policy regarding CLTV ratios is also applicable to cash-out
refinance transactions limited to 85 percent of the appraiser’s estimate of value (or
sales price if the property was purchased less than one year preceding loan
application, whichever is less), thus superseding current policies in Handbook
4155.1 REV-5, paragraph 1-11 B, addressing CLTV ratios in 85 percent cash-out
refinance transactions.
• Any co-borrower or co-signer being added to the note must be an occupant
of the property securing the new FHA-insured mortgage. Non-occupant co-
borrowers or co-signers may not be added in order to meet FHA’s credit
underwriting guidelines for the mortgage.
Attached to this Mortgagee Letter is an FHA Refinance Programs Comparison
Matrix to use as a quick reference guide. If you should have any questions
concerning this Mortgagee Letter, call
1-800-CALLFHA.
Sincerely,
Brian D. Montgomery
Assistant Secretary for Housing-
Federal Housing Commissioner
or the occurrence of an extenuating circumstance but experienced no more than
two 30-day or one 60-day late payment in the 12 months prior to the rate reset or
extenuating circumstance that caused the delinquency; or
• To include borrowers delinquent on their non-FHA ARMs due to a rate reset
or the occurrence of an extenuating circumstance but experienced no more than
one 90-day late payment or no more than three 30-day late payments prior to the
rate reset or extenuating circumstance that caused the delinquency provided the
loan-to-value on the FHA insured first mortgages does not exceed 90 percent.
• Borrowers delinquent on their interest-only and/or payment option ARMs are
not eligible for this expansion: borrowers with these types of mortgages must
demonstrate that a rate reset caused the delinquency and that they were making
the monthly mortgage payments within the month due during the 6 months prior to
the rate reset.
• For borrowers refinancing delinquent non-FHA ARMs the Up-front mortgage
insurance premium (UFMIP) is set at 2.25 percent of the base loan amount (loan
amount excluding UFMIP) regardless of the loan-to-value (LTV) ratio. For LTV
ratios greater than 95 percent (excluding UFMIP) the Annual premium (collected
monthly) is set at .55 percent.
This mortgagee letter replaces the specific guidance regarding FHASecure issued
in Mortgagee Letter 2007-11 and is effective for case numbers assigned on or
after July 14, 2008. FHA is implementing the policies in this letter simultaneously
with the implementation of risk-based pricing through notice in the Federal
Register May 13, 2008. Mortgagees are reminded that the eligibility criteria for
delinquent borrowers and new subordinate financing under the FHASecure
initiative are temporary and require that the loan application be signed no later
than December 31, 2008. Mortgagees are also reminded that FHA has not
changed its underwriting guidelines, but rather its eligibility criteria. Existing
policies are still applicable, such as those involving bankruptcy. This mortgagee
letter also clarifies guidance issued in Mortgagee Letter 2005-43 regarding cash-
out refinance transactions.
I. FHASecure Eligibility Criteria
All conventional-to-FHA rate and term refinances are considered FHASecure,
regardless of whether the borrower is delinquent or current. Cash-out refinance
transactions are not acceptable under this initiative. The following items are the
eligibility criteria for originating mortgages under FHASecure.
Borrowers Current on Their Mortgages
• The mortgage being refinanced must be a non-FHA fixed rate or adjustable
rate mortgage.
• Mortgagees are reminded that they need to verify the borrower’s mortgage
payment history through the mortgage servicer or through cancelled checks to
determine if it is acceptable under FHA’s standard underwriting guidelines.
• If there is insufficient equity in the home, FHA will insure first mortgages
where there is a:
1) Write Down. The existing note holder(s) writes off the amount of
indebtedness that cannot be refinanced into the FHA insured mortgage (a short
pay-off); or
2) New Subordinate Financing. The FHA-approved lender making the new
mortgage, the existing note holder or other interested party may take back a
second lien by the amount which the payoff is short, including closing costs,
arrearages, other reasonable and customary costs that are standard servicing
practices and are included in all payoff statements or previous secondary
financing if the indebtedness exceeds FHA prescribed LTV and maximum
mortgage amount limits; and/or
3) Re-subordination/Modification. The note holder(s) of existing subordinate
financing must re-subordinate or modify the existing subordinate lien(s) and re-
execute at closing if the lien is to remain in effect after closing; and/or
4) Other options. State/local programs or “Rescue Funds” administered by
nonprofit organizations.
• Mortgagees must determine that the borrower has sufficient income and
resources to make the monthly payments under the new FHA-insured refinancing
mortgage as well as pay other recurring obligations.
Borrowers Delinquent on Their Mortgages
• The mortgage being refinanced must be a non-FHA adjustable rate
mortgage.
• When refinancing a delinquent mortgage where the delinquency was caused
by a rate reset or the occurrence of an extenuating circumstance the borrower’s
payment history must show that:
1. The borrower was making the monthly mortgage payments within the month
due during the 6 months prior to the rate reset or extenuating circumstance; OR
2. In the 12 months prior to the rate reset or extenuating circumstance the
borrower’s payment history shows no more than one 60-day late payment or two
30-day late payments. Borrowers with less than a full 12 months payment history
(i.e., 7-11 months payment history) must show that they have made their monthly
mortgage payments within the month due during the 6 months prior to the rate
reset or occurrence of the extenuating circumstance; OR
3. If the borrower is unable to meet the payment history requirements
specified above, the lender may still proceed with the refinance transaction
provided that the loan-to-value ratio on the new FHA-insured mortgage does not
exceed 90 percent and the borrower has no more than one 90-day late or no more
than three 30-day late payments over the 12 month period prior to the rate reset
or extenuating circumstance.
• Mortgagees must determine that the rate reset or extenuating circumstance
that caused the delinquency does not affect the borrower’s overall capacity to
repay the new FHA-insured mortgage.
• Borrowers delinquent on their interest only and/or payment option ARMs
must demonstrate that the delinquency was caused by a rate reset and that they
were making their monthly mortgage payments within the month due during the 6
months prior to the rate reset.
• If there is insufficient equity in the home, FHA will insure first mortgages
where there is a:
1) Write Down. The existing note holder(s) writes off the amount of
indebtedness that cannot be refinanced into the FHA insured mortgage (a short
pay-off); or
2) New Subordinate Financing. The FHA-approved lender making the new
mortgage, the existing note holder or other interested party may take back a
second lien by the amount which the payoff is short, including closing costs,
arrearages, other reasonable and customary costs that are standard servicing
practices and are included in all payoff statements or previous secondary
financing if the indebtedness exceeds FHA prescribed LTV and maximum
mortgage amount limits; and/or
3) Re-subordination/Modification. The note holder(s) of existing subordinate
financing must re-subordinate or modify the existing subordinate lien(s) and re-
execute at closing if the lien is to remain in effect after closing; and/or
4) Other options. State/local programs or “Rescue Funds” administered by
nonprofit organizations.
• Mortgagees must determine that the borrower has sufficient income and
resources to make the monthly payments under the new FHA-insured refinancing
mortgage as well as pay other recurring obligations.
• In most of the FHA insurance programs, there is an Up-Front Mortgage
Insurance Premium (UFMIP) and an Annual premium. For borrowers refinancing
delinquent non-FHA loans the UFMIP is set at 2.25 percent of the base loan
amount (loan amount excluding Up-front MIP) regardless of the loan-to-value
(LTV) ratio. For LTV ratios greater than 95 percent (excluding UFMIP) the Annual
premium (collected monthly) is set at .55 percent. These premiums reflect the
relative risk associated with new borrowers under the FHASecure expansion, within
the limits applicable law places upon FHA’s premium-setting authority.
Maximum FHA loan-to-value ratios
The maximum loan-to-value limits are shown below and are applied to the
appraiser’s estimate of value, exclusive of any upfront mortgage insurance
premium.
Maximum Loan-to-Value Ratios
States with Average Closings Costs At or Below 2.1 Percent of Sales Price
• 98.75 percent: For properties with appraised values equal to or less than
$50,000.
• 97.65 percent: For properties with appraised values in excess of $50,000
up to $125,000
• 97.15 percent: For properties with appraised values in excess of $125,000.
States with Average Closings Costs Above 2.1 Percent of Sales Price
• 98.75 percent: For properties with appraised values equal to or less than
$50,000
• 97.75 percent: For properties with appraised values in excess of $50,000
Calculating the Maximum FHA Mortgage Amount
The amount of the FHASecure mortgage may not exceed either the geographical
maximum mortgage limits or the loan-to-value ratios shown above. FHA will permit
the inclusion in the new loan amount the existing first lien, any purchase money
second mortgage, closing costs, prepaid expenses, discount points, prepayment
penalties, late payment charges, attorney fees, inspection fees, and those other
charges traditionally associated with servicing mortgages. FHA will also permit
arrearages (principal, interest, taxes and insurance) to be added into the new loan
amount provided the arrearages arose after the reset or occurrence of an
extenuating circumstance.
Subordinate Financing and Combined Loan-to-Values
If the new maximum FHA loan is not enough to pay off the existing first lien, closing
costs and arrearages, the new or existing lender may execute a subordinate lien at
closing to pay the difference. This new subordinate lien does not have to be
supported by the value of the property. The combined amount of the FHASecure
first mortgage and any subordinate non FHA-insured lien may exceed the
applicable FHA loan-to-value ratio and geographical maximum mortgage amount.
If payments on the new subordinate lien are required, they must be included in
qualifying the borrower unless payments have been deferred for no less than 36
months. If payments on the new subordinate lien are deferred for 36 months,
underwriters should consider the repayment terms to ensure that when the
payments begin they do not exceed the borrower’s reasonable ability to pay.
While it is permissible to establish equity sharing agreements or other similar
arrangements for providing a subordinate lien, the terms agreed to must not
trigger a default on the FHA-insured first mortgage. Therefore, FHA has
established the following conditions:
• The terms of the subordinate lien(s) must not provide for a balloon payment
before ten years, unless the property is sold or refinanced;
• The terms must permit prepayment by the borrower, without penalty, after
giving 30 days advance notice;
• The required monthly payment under both the new FHA-insured mortgage
and the subordinate lien(s) – regardless of when payments begin – plus other
housing expenses and all recurring charges, cannot exceed the borrower’s
reasonable ability to pay; and
• Any periodic payments due on the subordinate lien(s) are due monthly and
are essentially the same in dollar amount.
FHA is also simplifying its policies involving combined loan-to-value (CLTV) ratios
to make them as consistent as possible regardless of the type of refinance
transaction. The following chart provides additional guidance to mortgagees
regarding CLTV ratios for refinance transactions, including cash-out and FHA-to-
FHA refinance transactions.
Loan-to-value and Combined Loan-to-Value Maximum Mortgage Calculation
Criteria FHASecure FHA 95% Cash-out Refinance FHA-to-FHA
Refinance
LTV Standard LTV on FHA first mortgage; or
90% LTV on FHA first mortgage if the borrower has one 90-day late or three 30-
day late payments over the specified period. Up to 95% LTV on FHA first
mortgage provided loan amount will not exceed $417,000. Otherwise, capped at
85% LTV. Standard LTV on FHA first mortgage.
CLTV Unlimited CLTV on new and/or re-subordination or modification of
existing subordinate financing. New subordinate financing is not permissible.
Unlimited CLTV for re-subordination or modification of existing subordinate
financing for both 95% and 85% LTVs. Standard CLTV on new subordinate
financing, i.e., combined amount of first and second mortgages does not exceed
applicable LTV ratio and the maximum mortgage limit for the area.
Unlimited CLTV for re-subordination or modification of existing subordinate
financing.
Max Mtg Amount In addition to standard rate and term, the maximum mortgage
calculation may include arrearages incurred because of interest rate reset or
occurrence of extenuating circumstance. Standard cash-out maximum
mortgage calculation up to 95%. Standard rate and term maximum mortgage
calculation.
Value Current appraised value is used in determining maximum loan
amount. Current appraised value is used in determining maximum loan
amount. Current appraised value is used in determining maximum loan
amount.
Underwriting the Mortgage/Qualifying the Borrower
FHA encourages all approved lenders to use FHA’s TOTAL Mortgage Scorecard
to obtain risk classifications on each mortgage originated under the FHASecure
initiative. If TOTAL renders an “accept/approve,” the mortgagee’s underwriter
need not perform a personal review of the borrower’s credit history and capacity to
repay. However, in the more likely event that the risk class is a “refer,” the
underwriter must:
1. Determine that the borrower has the capacity to make future mortgage
payments as well as pay all other obligations. The payment-to-income and debt-to-
income ratios are 31 percent and 43 percent, respectively, and may be exceeded
provided there is a strong compensating factor(s) (see handbook HUD 4155.1
REV-5, ¶ 2-13).
For borrowers limited to 90% LTV due to their mortgage payment history, the
payment-to-income and debt-to-income ratios may not be exceeded even when
compensating factors are present.
2. Analyze the borrower’s overall credit history, especially payments on the
existing mortgage. If the mortgage being refinanced is delinquent, the underwriter
must determine that:
a. The borrower’s mortgage payment history during the 6 months prior to the
interest rate reset or occurrence of an extenuating circumstance showed no
instances of making mortgage payments outside the month due; OR
b. In the 12 months prior to the reset or extenuating circumstance, the
borrower’s payment history shows no more than one 60-day late payment or two
30-day late payments. Borrowers with less than a full 12 months payment history
(i.e., 7-11 months payment history) must show that they have made their monthly
mortgage payments within the month due during the 6 months prior to rate reset or
extenuating circumstance; OR
c. If the borrower is unable to meet the payment history requirements
specified above, the loan-to-value ratio on the new FHA-insured mortgage must
not exceed 90 percent and the borrower has no more than one 90-day late or no
more than three 30-day late payments over the 12 month period prior to the rate
reset or extenuating circumstance.
d. Borrowers with interest-only or payment option ARMs must show that they
have made their monthly mortgage payments within the month due during the 6
months prior to the rate reset.
If the borrower was offered partial forbearance, the underwriter must determine
that he/she has made payments under the forbearance agreement in a timely
manner.
For those borrowers current on their non-FHA mortgage, underwriters should not
automatically penalize borrowers who made their mortgage payment their first
priority at the expense of meeting other recurring obligations in a timely manner.
If the credit report indicates satisfactory credit prior to the reset or extenuating
circumstance, and any derogatory credit subsequent to that date can be related to
the effects of the rate reset or extenuating circumstance, FHA will consider for its
underwriting standards that the borrower is a satisfactory credit risk.
3. Provide comments in the “remarks” section of the mortgage credit analysis
worksheet (or loan underwriting and transmittal summary) that he or she has
determined that the cause of the borrower’s inability to make payments was
directly related to the rate reset or extenuating circumstance and not due to a
disregard for recurring obligations.
Misuse of FHASecure
Lenders are also reminded that the FHASecure initiative is not to be used to solicit
borrowers to cease making timely mortgage payments. FHA reserves the right to
reject for insurance, those mortgage applications where it appears that a loan
officer or other mortgagee employee suggested that the borrowers could stop
making their payments, refinance into a FHA insured mortgage, and keep, as
cash, the amount of payments not made on time.
II. Clarification on Cash-out Refinance Transactions
In Mortgagee Letter 2005-43, FHA revised its policies regarding refinance
transactions and introduced a cash-out refinance of up to 95 percent of the
appraiser’s estimate of value. Given the popularity of this refinance option, FHA is
taking this opportunity to reiterate and clarify the eligibility conditions that must be
met in order to take advantage of the increased LTV that is permitted. And, as
noted in ML 2008-09, if a borrower is pursuing a cash-out refinance and the loan
balance exclusive of FHA’s upfront mortgage insurance premium will exceed
$417,000, the loan-to-value may not exceed 85 percent of the appraiser’s
estimate of value.
• Borrowers who are delinquent or in arrears under the terms and condition of
their mortgage are not eligible for a cash-out refinance.
• The subject property must have been owned by the borrower as his or her
principal residence for at least 12 months preceding the date of the loan
application. If the borrower has not owned the property for a minimum of 12
months, the FHA-insured new mortgage is capped at 85 percent LTV. In such
cases, the mortgage amount must be calculated using the lesser of the appraised
value or the original sales price of the property multiplied by 85 percent.
• If said property is encumbered by a mortgage, the borrower must have made
all of his/her mortgage payments within the month due for the previous12
payments, i.e., no payment may have been more than 30 days late and is current
for the month due. For those borrowers who have owned their property for 12
months but do not have a full 12 months payment history, lenders may create an
aggregate 12-month payment history from a previous mortgage the borrower held
on the subject property. If a lender is unable to establish a 12 months payment
history, the FHA-insured new mortgage is capped at 85 percent LTV.
• The property that is security for the refinanced mortgage must be a 1- or 2-
unit dwelling.
• Existing subordinate financing may remain in place, but subordinate to the
FHA-insured first mortgage, regardless of the total indebtedness or combined loan-
to-value ratio, provided the borrower qualifies for making scheduled payments on
all liens. FHA understands that many subordinate lien holders have been
requesting modifications to the terms of the lien (typically a reduction in the
amount of the lien) in exchange for remaining in a subordinate position. Modifying
the subordinate lien in this manner often results in re-executing it at closing, which
is an acceptable practice to FHA and therefore, we would not consider it a new
subordinate lien. This policy regarding CLTV ratios is also applicable to cash-out
refinance transactions limited to 85 percent of the appraiser’s estimate of value (or
sales price if the property was purchased less than one year preceding loan
application, whichever is less), thus superseding current policies in Handbook
4155.1 REV-5, paragraph 1-11 B, addressing CLTV ratios in 85 percent cash-out
refinance transactions.
• Any co-borrower or co-signer being added to the note must be an occupant
of the property securing the new FHA-insured mortgage. Non-occupant co-
borrowers or co-signers may not be added in order to meet FHA’s credit
underwriting guidelines for the mortgage.
Attached to this Mortgagee Letter is an FHA Refinance Programs Comparison
Matrix to use as a quick reference guide. If you should have any questions
concerning this Mortgagee Letter, call
1-800-CALLFHA.
Sincerely,
Brian D. Montgomery
Assistant Secretary for Housing-
Federal Housing Commissioner
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