While it’s a little late in the cycle of the most recent refinance wave, policies are being clarified on government-insured refinance transactions.
When a Federal Housing Administration-insured mortgage is refinanced, mortgagees can apply unused escrow account funds as directed by the borrower.
Unused borrower funds are what’s left over after paying property taxes, homeowners insurance, annual assessments and monthly mortgage insurance premiums.
The clarification from the Department of Housing and Urban Development was made in Mortgagee Letter 2013-29 and impacts new FHA loans with case numbers assigned on or after Nov. 1.
Borrowers can direct mortgagees how they’d like to use the funds — including receiving cash back for themselves.
Unused borrower funds are not related to repair escrows and aren’t considered cash back to borrower.
When borrowers want unused funds to be applied to the costs of a new FHA loan, then a written authorization is needed from the borrower clearly stating the purpose.
The authorization should be included in the case binder. A credit needs to be show on the settlement statement to offset settlement charges on the new loan.
HUD also reminded mortgagees that maximum mortgage amounts must be calculated starting with the existing outstanding principal balance — not the payoff amount.
HUD additionally highlighted that its previous guidance indicated that mortgagees can include up to two months of annual mortgage insurance premium payments in the loan amount on streamlined refinances.
