July 17, 2014
In our last blog post we discussed some of the basic rules for FHA no-cash out refinances with an appraisal required. Those guidelines include rules on how lenders are to deal with subordinate liens such as a home equity line of credit, and what can be done when a borrower needs to buy out an ex-spouse or co-borrower’s equity in the property.
HUD 4155.1 covers these rules in Chapter Three. For subordinate liens, FHA loan rules for this type of refinancing are clear:
“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.”
FHA loan rules in this area add, “The lender must use the maximum accessible credit limit of the existing subordinate lien to calculate the Combined Loan-to-Value (CLTV) ratio.”
For borrowers who need to buy out an ex-spouse or co-borrower, FHA loan rules in HUD 4155.1 say that in some cases court orders or divorce decrees may have a say in how these matters are handled in the course of getting a new loan.
“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.”
As you can see, some additional documentation may be required in these situations in order to move the loan forward–it’s best to anticipate these requirements and prepare accordingly. Never submit originals of any required court documents, always make copies in case you need these documents again later for similar purposes.
Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.
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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