Bulletin: TX000038

This bulletin has been partially replaced by TX2017009.

Dear Associates:

Refinance on urban business, urban residence and rural homestead

The constitutional amendment allows a refinance of a purchase money mortgage, ad valorem taxes, owelty lien, federal tax lien, or mechanic's lien contract, if the only additional funds (besides the payoffs) advanced are for "reasonable costs necessary to refinance such debt" or for taxes, owelty or new improvements (pursuant to a new mechanic's lien contract). [Subsection (e), Section 50, Article XVI, Texas Constitution] A refinance that includes a payoff of a prior Home Equity Mortgage is a Home Equity Mortgage and is subject to our requirements for a Home Equity Mortgage. You may rely on recitals or apparent purpose of a prior deed of trust that is being refinanced.

This means that if a borrower receives any loan proceeds as cash at closing, the loan is not a "refinance" of a valid prior lien. [See our solution in this bulletin under Company Policy on Refinances.] If the borrower takes cash out of the closing, the new mortgage must then be treated as a Home Equity Mortgage, and will be subject to the same requirements and coverage. If the borrower takes cash out of the closing and the new mortgage is not then treated as a Home Equity Mortgage, then the new mortgage could be void.

If the new mortgage refinances a Home Equity Mortgage, then the new mortgage must be treated as a Home Equity Mortgage, even if the borrower does not get any new money.

Company Policy on Refinances on Homestead (Beginning January 1, 1998)

When insuring refinances of mortgages on homestead (whether urban residential, urban business, or rural) commencing January 1, 1998, you should do the following:

• You may insure the new refinance mortgage for the pay-off of a purchase money mortgage, ad valorem taxes, owelty, federal tax lien, prior refinance deed of trust, or mechanic's lien contract, plus interest, all points, all origination fees, VA funding fee, prepaid interest to the end of the month, mortgage insurance premium, and other closing costs (including prepaids or reserves such as escrow for insurance and taxes, up to the greater of 5% of the loan or $5,000). (See our Bulletin TX000017 (March 26, 1993).)
  
  
• If you close a refinance and the payoffs are less than the funding furnished by the new lender (e.g., perhaps the mortgage has been paid down by an additional monthly payment), you may do either of the following:

  (1) You may apply the excess proceeds to pay down the new mortgage or to fund the escrow reserves for taxes and insurance. [If you do this, please inform the lender, for example, by sending a completed HUD-1 to the lender.] The lender may wish to revise its Truth-in-Lending disclosure (many do not) if the money is applied to pay down the loan or may wish to revise the documents to lower the loan amount.
  
  (2) You may suggest to the lender that the loan amount be changed. We suggest that you allow the lender to choose its option of these two alternatives.

  You should not allow the borrower to receive any proceeds on a homestead refinance (that is not a new Home Equity Mortgage) if there are excess proceeds on a refinance because of payoffs or because the lender provided excess funding.
  
  
• If you close a refinance and the borrower receives a "credit" (as excess money to take out of closing) for prepaid credit report, appraisal or loan application fee (reflected as a POC item), you may do any of the following:

  (1) You may apply the excess proceeds to pay down the new mortgage or to fund the escrow reserve for taxes and insurance. [If you do this, please inform the lender, for example, by sending a completed HUD-1 to the lender.] The lender may wish to revise its Truth-in-Lending disclosure (many do not) if the money is applied to pay down the loan or may wish to revise the documents to lower the loan amount.
  
  (2) You may suggest to the lender that the loan amount be changed. We believe that this approach is not necessary with a "credit."
  
  (3) You may do the following:

  (a) show the payment to the borrower on line 303 of the HUD-1 (or line 1604 of HUD-1A) as a "refund of [mention type of prepaid]" and
  
  (b) your check to the borrower may state that it is a "refund of [mention type of prepaid]" and
  
  (c) the borrower can acknowledge in writing that "The check dated ____ in the amount of $_____ is being made as a refund for the following prepaid item [here mention type of prepaid item] and does not constitute proceeds of the loan from ______."

The amount disbursed to the borrower may not exceed the amount prepaid by the borrower for credit report, appraisal and/or loan application. Any excess over that amount must be applied to reduce the loan amount unless the papers are redrawn to reduce the loan.

Where possible, secure execution of the Refinance Affidavit.

Where possible, request that any excess proceeds on a payoff be refunded to you to pay down the new refinance Deed of Trust.

A purchase money mortgage may include the finance of mortgage insurance or the VA Funding Fee. You may call our underwriting personnel if the purchase money loan includes other closing costs.