No Cash Out Refinances

If the maximum insurable mortgage amount calculated by the FHA guidelines is insufficient to pay off the full existing mortgage debt, the transaction may still proceed as a “Short Payoff.” This is permitted only if the existing note holder agrees to write off the portion of the indebtedness that cannot be refinanced into the new FHA loan. The borrower cannot be held liable for the written-off amount. This allows borrowers who might be slightly underwater or constrained by LTV limits to refinance into a more sustainable FHA loan, provided the current lender consents to release the lien for the lower amount.

Yes, borrowers are permitted to finance specific closing costs into the new loan amount for a Rate and Term Refinance. The maximum mortgage amount is calculated based on the sum of the existing debt and allowed costs, which include borrower-paid expenses associated with the new mortgage, such as title fees, origination fees, and prepaid items. Additionally, if the appraisal identifies required repairs, those borrower-paid repair costs can also be included. However, the total loan amount is still subject to the maximum Loan-to-Value (LTV) limit of 97.75 percent of the Adjusted Value for principal residences.

To be eligible for a Streamline Refinance, the existing FHA mortgage must meet specific “seasoning” criteria to ensure a sufficient payment history has been established. First, the borrower must have made at least six payments on the mortgage being refinanced. Second, at least six full months must have passed since the first payment due date of the refinanced mortgage. Third, at least 210 days must have passed from the closing date of the original mortgage. If the mortgage was assumed, the borrower must have made six payments since the assumption. These rules prevent rapid churning of loans.

Yes, a Rate and Term Refinance can be utilized to buy out the equity of an existing title-holder, such as in the case of a divorce settlement. In this scenario, the equity specified to be paid to the departing co-owner is considered property-related indebtedness. This debt can be included in the calculation of the new mortgage amount. To proceed, the borrower must provide legal documentation, such as a divorce decree or settlement agreement, detailing the equity award. The new loan allows the remaining owner to retain the property while properly compensating the ex-spouse or co-owner.

A Credit Qualifying Streamline Refinance is typically required when the new mortgage will not include all the borrowers from the existing mortgage. For instance, in cases of divorce or separation where one borrower remains on the property, the lender must perform a credit and capacity analysis to ensure the remaining borrower can afford the mortgage payments solo. Additionally, this option is used if a borrower does not meet the strict payment history requirements for the Non-Credit Qualifying option but can still demonstrate creditworthiness. The Non-Credit Qualifying option is preferred when all original borrowers remain and have a perfect payment history.

In any FHA No Cash-Out Refinance transaction—whether it is a Rate and Term, Simple, or Streamline Refinance—the borrower is strictly limited to receiving a maximum of $500 in cash back at closing. This amount is intended only for minor adjustments and computational rounding at the settlement table. The loan proceeds must be used primarily to pay off existing debt and cover closing costs. If the final calculations result in the borrower receiving more than $500, the lender is required to reduce the principal balance of the new mortgage to bring the cash back within the allowable $500 limit.

To qualify for a Streamline Refinance, the transaction must provide a “Net Tangible Benefit” to the borrower. This generally means the refinance must result in a reduced “Combined Rate” (the interest rate plus the Mortgage Insurance Premium rate) or a safer loan structure. For example, moving from a fixed-rate to another fixed-rate loan requires the new Combined Rate to be at least 0.5 percentage points lower than the prior rate. Alternatively, a benefit exists if the borrower transitions from an Adjustable Rate Mortgage (ARM) to a fixed-rate mortgage, or reduces the loan term without significantly increasing the monthly payment.

Generally, an FHA Streamline Refinance does not require a new appraisal. The program is designed to simplify the refinancing process for existing FHA borrowers by relying on the original value of the property rather than a current market valuation. Even if a lender obtains an appraisal, the FHA typically uses the original appraised value to calculate Loan-to-Value (LTV) ratios for mortgage insurance premiums. This policy speeds up the process and reduces closing costs for the borrower. However, because there is no new appraisal, the borrower cannot use a Streamline Refinance to remove mortgage insurance if equity has increased due to market appreciation.

For a Simple Refinance, the maximum Loan-to-Value (LTV) ratio depends on the occupancy status of the property. If the property is the borrower’s Principal Residence, the maximum LTV is generally 97.75 percent of the Adjusted Value. However, if the property is a HUD-approved Secondary Residence, the maximum LTV is capped at 85 percent of the Adjusted Value. To calculate the maximum mortgage amount, lenders consider the lesser of the Nationwide Mortgage Limit, the applicable LTV ratio, or the sum of existing debt and allowable costs. This ensures the new loan remains within FHA risk parameters while allowing borrowers to refinance.

The primary distinction lies in the type of mortgage currently held by the borrower. A Rate and Term Refinance is used to refinance any mortgage type, such as a conventional loan, into a new FHA-insured mortgage. It allows for the payoff of existing liens and transaction costs. In contrast, a Simple Refinance is exclusively for refinancing an existing FHA-insured mortgage into a new FHA-insured mortgage. While both are “no cash-out” options, the Simple Refinance is more restrictive regarding the existing debt, whereas Rate and Term offers a pathway for borrowers moving from other loan programs into the FHA portfolio.