Answer

If the FHA loan applicant will use the FHA loan to complete payment on a land contract, contract for deed, or other similar type financing arrangement in which the FHA loan applicant does not have title to the property, the new FHA mortgage may be processed as either a purchase or a refinance transaction with maximum FHA-insured financing if the borrower receives no cash at closing. If all loan proceeds are used to pay the outstanding balance on the land contract and eligible repairs, renovations, etc., the appropriate LTV ratio is applied to the lesser of:

1. The appraised value; or
2. The total cost to acquire the property (the original purchase price, plus any documented costs the purchaser incurs for rehabilitation, repairs, renovation, or weatherization), plus allowable closing costs and, if treated as a refinance, reasonable discount points.

Equity in the property (original sales price minus the amount owed) may be used for the borrower's entire cash investment. However, if the borrower receives more than $500 cash at closing, the loan is limited to 85 percent of the sum of the appraised value and allowable closing costs. Replenishment of the borrower's own cash expended for repairs, improvements, renovation, etc., is not considered as '''cash back,''' provided the borrower can substantiate with cancelled checks and paid receipts all out-of-pocket funds spent for those purposes.

Handbook 4155.1: 2.B.6.a-c