source:
  type: guide
  id: hud-4000-1-iii-f-release-or-substitution-of-security
  authority: FHA Single Family Housing Policy Handbook 4000.1, Part III — f. Release
    or Substitution of Security (05/09/2022)
  description: FHA Single Family Housing Policy Handbook 4000.1, Part III — f. Release
    or Substitution of Security (05/09/2022).
  coverage_tier: operative
obligations:
- id: hud-4000-1-iii-f-release-or-substitution-of-security-full
  canonical_id: hud-4000-1-iii-f-release-or-substitution-of-security-full
  section: FHA Single Family Housing Policy Handbook 4000.1, Part III — f. Release
    or Substitution of Security (05/09/2022)
  type: do
  tags:
  - regulator-direct
  - fha
  - hud-handbook
  - corpus-expansion
  - tier-operative
  primary_source:
    tier: 1
    authority: FHA Single Family Housing Policy Handbook 4000.1, Part III — f. Release
      or Substitution of Security (05/09/2022)
    source_class: hud-handbook
    source_url: https://www.hud.gov/hud-partners/single-family-handbook-4000-1
    snapshot_id: 8c03836f77f317e1
    fetched_at: '2026-05-23T00:28:40Z'
    content_hash: sha256:411430f29b13f9b54a2ebb0e6f6e7087ecd2b90d0da22eb0c8c792eaa2d7d0df
    paragraph_quote: '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.'
  judgment: false
