Now you can refinance the ARM in first lien position up to 95% of the FHA Maximum County Limit and subordinate the fixed rate loan in second lien position with a combined loan to value over the FHA Maximum County Limit.

Example:

First Lien at 67.75% LTV with subordinated Second Lien with a CLTV of 115.00%

October 31, 2005

MORTGAGEE LETTER 2005-43

TO: ALL APPROVED MORTGAGEES

SUBJECT: Revised Refinance Transactions

The Federal Housing Administration (FHA) has revised a number of underwriting instructions regarding refinance transactions. These changes are designed to provide expanded alternatives for homeowners wishing to refinance their mortgages, and offer greater flexibility to mortgagees in processing and underwriting certain refinance transactions. These guidelines, which are effective for mortgages endorsed on or after the date of this Mortgagee Letter, are summarized below and will appear as revised pages to handbook HUD-4155.1 REV-5 when revised in 2006.

Summary of Changes

Cash-Out Refinances: Under the terms and conditions described below, FHA will insure a cash-out refinance of up to 95% of the appraiser’s estimate of value. The eligibility conditions that must be met include:

· The subject property must have been owned by the borrower as his or her principal residence for at least 12 months preceding the date of the loan application.

· If said property is encumbered by a mortgage, the borrower must have made all of his/her mortgage payments within the month due for the previous 12 months, i.e., no payment may have been more than 30 days late and is current for the month due.

· The property that is security for the refinanced mortgage must be a 1- or 2-unit dwelling.

· Subordinate financing may remain in place, but subordinate to the FHA insured first mortgage, regardless of the total indebtedness or combined loan-to-value ratio, provided the homeowner qualifies for making scheduled payments on all liens.

· Any co-borrower or co-signer being added to the note must be an occupant of the property. Non-occupant owners may not be added in order to meet FHA’s credit underwriting guidelines for the mortgage.

“No Cash Out” (Rate and Term) Refinances and Streamline Refinances: These instructions remain in effect except for the following modifications and additions:

· The mortgage being refinanced must be current for the month due.

· In determining the existing debt as part of the mortgage amount calculation, the mortgagee may include accrued late charges and escrow shortages.

· At closing, the borrower may not receive cash back in excess of $500.

· Prepaid expenses may include the per diem interest to the end of the month on the new loan, hazard insurance premium deposits, monthly mortgage insurance premiums, and any real estate tax deposits needed to establish the escrow account regardless whether the mortgagee refinancing the existing loan is also the servicing lender for that mortgage.

Shortening the Term: Previous instructions provided for an allowance of $50 before triggering a credit review when a borrower shortens the term of the mortgage. However, in light of the increase in mortgage amounts over the past several years, this has become an unrealistic threshold. Therefore, a mortgage on a principal residence may be refinanced to a shorter-term mortgage, provided the monthly principal and interest increases no more than 20 percent. This additional latitude will allow more borrowers to shorten the term of the mortgage without the need for full underwriting.

Refinancing a FHA-Hybrid Adjustable Rate Mortgage to a Fixed Rate: A Hybrid ARM, (3-, 5, 7-, or 10-year mortgage) may be streamline refinanced to a fixed rate mortgage, with or without an appraisal, provided that the payment will not increase by more than 20 percent and all mortgage payments must have been made within the month due for the past 12 months or the period the mortgage has been in force, if shorter.

If you have any questions regarding this Mortgagee Letter, please contact your local Homeownership Center (HOC) in Atlanta (888-696-4687), Denver (800-543-9378), Philadelphia (800-440-8647), or Santa Ana (888-827-5605).

Sincerely,

Brian D. Montgomery

Assistant Secretary for Housing-

Federal Housing Commissioner