Can a lender collect from a borrower amounts the lender advanced to HUD for a principal reduction?

An excessive mortgage amount occurs when the lender closes a mortgage in an amount higher than what is permitted by FHA requirements. The mortgage is not eligible for insurance until the amount is reduced to within permissible limits.

The lender may choose to either pay down the principal balance, or re-close the mortgage to an insurable amount.  The lender must provide a copy of the payment ledger showing the principal balance has been paid down to an insurable amount.  If the lender advances the principal loan reduction on behalf of the borrower, the lender cannot require a repayment amount, either in lump sum or monthly payment, if the amount will jeopardize the borrower's ability to repay the mortgage and potentially cause a default. 

For additional information see Handbook 4000.1 II.A.7.d.iv.(C) available at

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.

Topic Number: KA-04571