HUD has announced some changes that will affect many homeowners who have current 2nd mortgages. Previously FHA loans allowed for unlimited Combined Loan-to-Value (CLTV).  This allowed homeowners to refinance their first mortgage and resubordinate their current second mortgage, as long as their first mortgage was at 97.75% Loan to Value (LTV) or below.    Now FHA loans will require that the CLTV also be at or below 97.75%.

Example : You owe 100K on your first mortgage and 25K on your second mortgage.  The house appraises at 120K.  Under the previous rules, you would refinance the first and subordinate the current second.  Under the new rules, this would not be allowed, as the combined amount owed (125K) exceeds the 120K appraised value.

Combined Loan-to-Value (CLTV) Requirements for FHA Refinance Transactions

Effective with case numbers assigned on or after September 7, 2010, FHA refinance transactions will have lower CLTV requirements as follows:

•·         The maximum LTV/CLTV on FHA rate and term (or No Cash Out) refinances with new or existing subordinate liens is 97.75%.

•·         The maximum LTV/CLTV on FHA cash out transactions with existing subordinate liens is 85% CLTV (new subordinate liens currently have a maximum 85% CLTV).

•·         Financed Upfront MIP is not included in the calculation of the CLTV for any refinance types.

•·         Regardless of whether the subordinate financing is existing or new, the combined amounts of the FHA first lien and any subordinate liens may not exceed the applicable county loan limit.

•·         Second liens that have been modified may use the modified total lien amount to calculate the CLTV ratio, provided an executed and recorded modification agreement is supplied.