FHA Updates Good Neighbor Next Door Loan Policy
This HUD program is available to those who want to purchase homes under GNND using an FHA insured mortgage. The updated policy information is found in FHA Mortgagee Letter 2013-20, which says:
“The purpose of this Mortgagee Letter is to clarify that the mortgage insurance premium shall be based on the first mortgage only; and clarify the process for submitting requests for an interruption in the owner-occupancy term.”
When using GNND, the FHA borrower applies for a mortgage loan for the discounted amount. Additionally, he or she must sign a second mortgage for the amount of the discount. This second mortgage IS NOT PAYABLE so long as the borrower meets the occupancy requirements of the program, listed at a minimum 36 months. This is known as a “silent” second mortgage.
According to the HUD official site, “HUD requires you to sign a Second Mortgage and Note on the discounted amount. No interest or payments are required on this ‘silent second’ mortgage if you live in the home for the entire 36 month occupancy period. You may be required to pay a pro-rata portion of the discount to HUD should you fail to fulfill the three year occupancy requirement.”
But the borrower should know that he or she is not penalized with the silent second mortgage--the FHA loan rules make it clear that MIP and Up Front MIP are not affected by this second mortgage. “The note and second mortgage, mandatory under the GNND program, are not to be included in the upfront and annual Mortgage Insurance Premium (MIP) associated with the purchase of a GNND property. The upfront and annual MIP should be based on the average outstanding principal obligation of the first mortgage.”
Under GNND, the borrower will be responsible for MIP only on the amount of the “first mortgage” . For more information on whether you qualify for GNND or to clarify the new rules, speak to a loan officer or contact the FHA directly at 1-800 CALL FHA.
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