We have two loans in our portfolio that were underwriten using FHA guidelines and FHA documents - intended to be sold however did not qualify.
Will there be any problems in the future because the are on FHA docs? Should we see if we can get the borrowers to sign new docs?
AS for the MIP that is being paid each month on top of what was collected up front - are we able to purchase PMI with it and use the monthly MIP payments towards the cost of PMI?

Are you asking if it can be "switched" to a different loan type?

I'm not sure what I'm asking - doesn't seem right to keep collecting MIP if there is no MIP but since the LTV is higher than we would have originated a regular loan would like to use the MIP funds to buy protection (PMI) for the bank. Didn't know if in the case of a default - we would have any foreclosure problens with the loan being written on FHA docs?

Since it was underwritten and closed as an FHA, you can't "switch" it now. If you can't service the loan as an FHA and obtain the MIC from HUD you may need to refinance them to a product you can sell. Otherwise, you have an uninsured loan on the books. I don't see how you could get PMI coverage on a loan that was underwritten to FHA guidelines.

We have the same situations as the OP and we're wondering if we could somehow modify the loan to have the borrower continue to make payments in the same amount as they originally were required to make, but instead of using the extra amount each month for the FHA insurance (which they didn't qualify for), we would apply the amount as a principal reduction. This would seem to benefit the borrower, but I'm not sure if we can do it that way. Also, if we could do it, could we pass the funds through the escrow account with disbursements each month to the customer's loan? I'm thinking no, but it would be great if we could.

Bump - Does anyone have any thoughts on or experience with this situation?

You need to talk to legal counsel. You have signed a legal agreement with these customers and you can't hold up your part of the bargain.

Thanks very much, Randy. I just don't have any experience with FHA loans so I didn't know what to tell them. I appreciate your help.

You indicated it was underwritten by FHA Guidelines and closed using FHA documents. Did the investor refuse to purchase? Did you try to get FHA to insure loan? If FHA refused to insure, then I would say you are stuck. If FHA will insure, there may be a lender out there that will purchase the loan. I would, if you haven't already, send it to FHA for insurance. If they insure it, at least it is an insured loan.