If the mortgage is determined to be unacceptable for insurance endorsement, FHA will electronically issue a Notice of Return (NOR) on the FHA Connection Case Query screen and include the reasons for non-endorsement and any corrective actions that must be taken by the lender. The lender should resubmit the case with the information/documentation necessary to correct the deficiencies.
The lender can check the Case Query screen to determine if the resubmitted case was insured. If the case is permanently rejected for insurance endorsement, the NOR will include instructions to the lender to notify the borrower that he/she does not have an FHA-insured mortgage and the circumstances which make the mortgage ineligible for FHA insurance. The lender must also obtain a refund of both the Upfront Mortgage Insurance Premium (UFMIP) and any periodic MIP paid by the borrower or on behalf of the borrower and apply the refund to the principal balance of the loan.
For more information please see Handbook 4000.1 Section II.A.7.d.iii-iv. at https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh