FHA Payoff Guidelines

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Understand FHA payoff guidelines before selling or refinancing.
Understand FHA payoff guidelines before selling or refinancing. (Image: Thinkstock/Comstock/Getty Images)

Most homeowners aspire to pay off their mortgage one day and own their home free and clear. Most mortgages, however, are paid off long before their repayment term is over, either through sale or refinance of the property. The Federal Housing Administration insures mortgages, protecting lenders in the event of homeowner default by reimbursing their losses. It is in FHA's best interest that borrowers pay off their loans.

Sales

Sellers with an FHA-insured mortgage must pay off their loan balance with the sale proceeds. Generally, the FHA loan is in first lien position, meaning payment of any other debts on the property is secondary, or in subordinate lien position. FHA-approved lenders service the loan and supply the necessary loan payoff information during a sale transaction. The seller or a neutral third party known as escrow requests a demand letter from the lender stating the payoff amount needed to release the mortgage lien. A separate request must be sent to each lender or lienholder. Assuming the proceeds from the sale are sufficient to pay off the mortgage's remaining principal balance, any interest, county taxes and hazard or mortgage insurance due to date, the lender releases the lien and property title can transfer to the new owner.

Refinances

A refinance transaction involves paying off an existing real estate debt with proceeds from a new mortgage. FHA offers three main refinance types: the streamline refinance, which requires minimal paperwork and credit qualifying; the no-cash-out refinance, which allows a borrower to change his loan's interest rate and repayment term; and the cash-out refinance, which gives the borrower proceeds in an amount above $500 from the home's equity. The lender must ascertain and include a payoff statement in the case binder for all liens to be paid through the refinance. A HUD case binder, either electronic or hard copy, is a folder that lists the stacking order of the documents needed to submit the FHA file to HUD for insurance endorsement. The lender for the loan being paid off must provide a payoff statement based on the estimated closing date. The payoff amount due is adjusted accordingly, if the loan closes before or after the estimated date on the initial demand letter.

Short Payoffs

FHA allows the short payoff of certain refinance and sale transactions involving an insured loan. Eligible cases include those in which the borrower can document her inability to continue repaying the loan or satisfy the full payoff balance due to financial hardship or because the property's current market value is less than the balance owed. To refinance an FHA loan with a short payoff, the borrower must be current on the loan, according to FHA Outreach. Non-FHA borrowers can refinance into an FHA-insured loan using the temporary program known as the FHA short refinance, which is scheduled through 2012. With both refinance options, the lender must agree to write-off a certain amount of unpaid principal. In a short sale transaction, the lender must also agree to participate by agreeing to settle the account for less than what is owed.

Considerations

FHA loans in which the borrower used the partial claim feature require the claim amount to be paid in full at the time of sale or refinance. A partial claim involves funds advanced on the borrower's behalf to reinstate the delinquent loan. In exchange, the borrower signs an interest-free promissory note, payable to HUD. Partial claims must also be paid as part of a short payoff sale.

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