January 22, 2018
FHA loans and cash back at closing-many borrowers want to know if they can take cash out on an FHA mortgage loan and the answer isn’t as simple as yes or no.
FHA home loan rules allow cash back as a routine part of the transaction for FHA Cash-Out Refinancing and for FHA Home Equity Conversion Mortgages (HECM) also known as FHA Reverse Mortgages. In general terms, the borrower is not permitted cash back on “forward mortgages” used to buy property rather than refinance it.
A borrower is permitted to have an escrow account for certain mortgage loans that allow payouts to contractors or for the purchase of materials, supplies, and other required items for renovation, upgrades, or construction.
But that isn’t the same thing as cash back to the borrower, and FHA loan rules have specific requirements of the lender to insure that there are limits to the loan to avoid what the rule book terms “excess cash back”.
A good example? Borrowers who have extra funds for Energy Efficient Mortgage upgrades included in their loan may need to utilize an escrow account to pay contractors, make purchases, and have their improvements installed. But borrowers who act as their own contractors cannot pay themselves an hourly rate or be compensated for the labor involved. A borrower is allowed to pay a contractor those things, but not herself.
But what happens in cases where the lender has made estimates or calculated the loan amount in a certain way only to find at loan closing time that the dollar amount of the loan exceeds what is required? Does the borrower get that money?
HUD 4000.1 page 413 instructs the lender, “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.”
The $500 rule is consistent throughout HUD 4000.1 where cash back to the borrower is concerned. State law and other requirements may apply above and beyond this restriction.
The borrower doesn’t have to know all the rules for the lender in this area; instead, it’s easier to keep in mind that the FHA loan rulebook generally does not allow cash back to the borrower for forward mortgages above $500 except in the form of a refund of money that was paid up front for things the borrower later chooses to finance.
There are other rules that are designed to reflect the spirit, if not the letter of the law where excess cash back to the borrower is concerned. Borrowers are required to pay the Up Front Mortgage Insurance Premium (UFMIP) in full either in cash as part of the money needed to close, or to have the entire amount of the UFMIP included in the loan amount.
If the borrower refinances within a certain time limit, a UFMIP refund may be possible, but the borrower will not get that money in cash. Instead it is applied to the mortgage principal according to the requirements of HUD 4000.1.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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