FHA Single Family Housing Policy Handbook 4000.1, Part III — f. Release or Substitution of Security (05/09/2022)

FHA Single Family Housing Policy Handbook 4000.1, Part III — f. Release or Substitution of Security (05/09/2022)

f. Release or Substitution of Security (05/09/2022) i. Prior Approval Required (A) Standard The Lender must obtain prior approval from HUD to release or substitute any lien securing a Title I insured Loan. Requests for prior approval must be submitted in writing to the FOC. (B) Required Documentation The Lender’s request for approval of release or substitution must include: • information regarding what modification to the lien is proposed; • why the Borrower is seeking to modify the lien; • how the modification of the lien could benefit the Borrower or help them to avoid hardship; • the Lender’s recommendation; and • documentation that supports why HUD should approve the request. III. SERVICING AND LOSS MITIGATION C. Title I Insured Programs 1. Title I Property Improvement Loan Program Handbook 4000.1 1548 Last Revised: 11/26/2025 (1) Release of Lien for Short Sale In the case of a Short Sale where the Property is to be sold but the sale proceeds are insufficient to pay all liens in full, the documentation must include: • copies of the contract of sale; • an appraisal showing the value of the Property; • the Title Report for the Property; and • the proposed Settlement Statement or similar legal document showing how the proceeds will be distributed. The lien securing the Title I Loan should be treated equitably and the sale must provide for a payment that will result in a significant principal reduction to the Title I Loan. The Title I Loan may be in Default, but the delinquency must not exceed four payments and the payment from the Short Sale must be sufficient to bring the Loan current as well as make a principal reduction. Unless HUD also approves a release of liability or a Borrower is discharged in bankruptcy, the Note must remain valid and enforceable against all Borrowers. To avoid any confusion or misunderstanding, the Lender must obtain an affidavit from the Borrower(s) that reaffirms their obligation to repay the remaining portion of the Title I Loan. The Lender must be careful to prevent an unintentional release of liability while processing the release of lien. “Paid in Full,” “Satisfied in Full,” or similar text must not be indicated on the release document, on the promissory note, or in other correspondence from the Lender regarding the release of lien. (2) Partial Release of Security In the case of a partial release of security, the documentation must include: • a legal description of the Property to be released; • an appraisal showing the value of the Property to be released and of the Property that will continue to secure the lien; and • information on the consideration received and how the funds will be distributed. The Lender must apply 100 percent of the consideration to reduce the Title I Loan and/or liens that are senior to the lien securing the Title I Loan. ii. Substitution of Security (A) Standard To be eligible for substitution of the security, the security must not be impaired or reduced in value. The security value provided by the proposed substitution Property must equal or exceed the value of the existing security. III. SERVICING AND LOSS MITIGATION C. Title I Insured Programs 1. Title I Property Improvement Loan Program Handbook 4000.1 1549 Last Revised: 11/26/2025 (B) Required Documentation The submission to the FOC must include: • current appraisals for both Properties; • information on the outstanding balances of all liens against both Properties; and • information regarding ownership. iii. Subordination of Security (A) Prior Approval Requirement Except as provided below, the Lender must request approval from HUD to subordinate the Title I security. The Lender must submit approval requests to the FOC. Exceptions The Lender may approve and execute a subordination of security without prior approval from HUD in compliance with the following: the Lender may subordinate the Title I security to Easements that the Borrower may grant to a utility company or in connection with aviation or noise abatement programs; or to correct obvious errors in the recording of the Title I lien or other liens. Prior approval from HUD is also not required when the following conditions are met: • In all cases there must not be indications of misuse of the loan proceeds or other noncompliance with HUD’s requirements, or other irregularities. • The scheduled improvements must be completed and a Completion Certificate executed. • If an inspection was required, the inspection report should confirm that all improvements were completed. • The Title I Loan must be current. The Lender may approve a Delinquent Title I Loan if the delinquency is six months or less, and the Loan will be brought current from the proceeds of a refinance of the Borrower’s first Mortgage. (B) Refinancing of a Senior Lien (1) Standard (a) Second Lien Position The Lender may subordinate the Title I security in the case of a refinance of the senior mortgage(s), when the subordination of an existing Title I lien maintains no less than second lien position. III. SERVICING AND LOSS MITIGATION C. Title I Insured Programs 1. Title I Property Improvement Loan Program Handbook 4000.1 1550 Last Revised: 11/26/2025 (b) Borrower Benefit Unless the Loan meets the exception requirements in Cash-Out When Refinancing a Senior Loan, the Borrower must receive a benefit from a refinance of the first mortgage. The Lender may consider the refinance as benefiting the Borrower when any of the following are reduced: • the remaining amortization period of the existing mortgage; • the interest rate of the new senior mortgage; or • the Principal and Interest (P&I) payment, resulting from any reason, including an extension of the loan term or payment to the principal balance. (c) New First Trust Mortgage Amount Unless the Loan meets the exception requirements in Cash-Out When Refinancing a Senior Loan, the amount of the new first mortgage must not exceed the outstanding balance of the existing first mortgage balance, plus reasonable closing costs. (d) Cash-Out When Refinancing a Senior Loan If the new refinanced mortgage results in cash-out that will be: • applied to the principal balance of a delinquent Title I Loan that is not more than six months delinquent; or • used to pay off another lien, which would raise the Title I Loan to a second position; then, the standards for Borrower Benefit and New First Trust Mortgage Amount are not required. The Lender must not subordinate the Title I security for a refinance that includes cash-out for payment of other obligations, including, but not limited to: • unsecured debt; • loans secured by collateral other than the subject Property; • loans in junior lien position to the Title I Loan; or • for any other purpose without prior approval from HUD. (2) Required Documentation The Lender must verify and document the following: • financing type of existing loan and proposed loan; • next payment due date of the existing loan and determination that the loan is not in default; • the principal amounts of the original senior loan, its current unpaid balance, and proposed new refinanced loan; III. SERVICING AND LOSS MITIGATION C. Title I Insured Programs 2. Title I Manufactured Home Loan Program Handbook 4000.1 1551 Last Revised: 11/26/2025 • existing and proposed interest rate; • existing and proposed monthly P&I payment amount; • existing monthly escrow payments; • existing monthly payments with principal, interest, and escrows; • the term of the existing senior lien and proposed refinanced loan; • estimated closing costs for the new refinanced mortgage; and • Title I Loan information, including: o date of origination; o original loan amount and current principal balance; and o next payment due date and any delinquency status. 2. Title I Manufactured Home Loan Program Title I FHA-approved Lenders may: • service the Loans they hold; • service Title I Loans on behalf of or at the direction of another FHA-approved Lender; or • utilize services of a servicing agent. It is not necessary for an agent of the Lender to be approved by FHA to service Title I Loans. However, all Title I Loans must be serviced in accordance with HUD requirements. A Title I Lender holding Title I Loans will remain responsible to HUD for proper collection efforts, even though an agent of the Lender may perform actual loan servicing and collection.

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