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FHA Limits Cash Out Refinancing

by Peter G. Miller
March 23rd, 2009

HUD has announced that beginning April 1st that it will limit the ability of borrowers to refinance and take cash out of their properties.

“Effective for case number assignments on or after April 1, 2009,” says HUD, “the loan-to-value (LTV) of any cash-out refinance to be insured by FHA may not exceed 85 percent of the appraiser’s estimate of value.

“Given the continued deterioration in the housing market, and FHA’s need to limit its exposure to undue risk, this reduction to the maximum LTV for cash-out refinances is being instituted on a temporary basis while FHA further analyzes the housing and mortgage industry as well as its own portfolio to determine whether permanent measures should be taken.”

$30,000 Less

To understand what’s happening here, imagine that you have a property appraised at $300,000. Imagine also that you currently have a loan with a $200,000 balance and you elect to refinance.

Under the current FHA mortgage standard you could get a new loan equal to 95 percent of the appraised LTV or $285,000. The new loan amount, less the old loan balance, produces $85,000 in cash less closing costs.

Under the new standard, if you refinance you can only get 85 percent of the property’s appraised LTV. In this case we take the appraised value, $300,000, multiply by 85 percent, and we get $255,000. Subtract the $200,000 balance of the old loan and we have $55,000 remaining less closing costs.

In this example the reduced ability to get a cash-out refinance means our borrower will walk away with $30,000 less from the closing table.

Rules

Here are some of the rules associated with the new FHA loan policy:

___ You must own the property for at least 12 months to qualify for the 85 percent LTV cash out.

___ If the property has been owned less than 12 months then, says HUD, “the mortgage amount is limited to the lesser of either 85 percent of the appraiser’s estimate of value or 85 percent of the sales price of the property when acquired. However, a sales price need not be considered if the property was acquired as the result of inheritance and is or will become the heir’s principal residence.”

___ Borrowers who are delinquent or in arrears are not eligible for a cash-out refinance.

___ A second appraisal is required on cash-out refinances that exceed $417,000 and the property is in a “declining” area.

___ Any co-borrower or co-signer being added to the note must be an occupant of the property. Non-occupant co-borrowers or co-signers may not be added in order to meet FHA’s credit underwriting guidelines for the cash-out refinance.

___ Properties owned free and clear may be financed as cash-out transactions.

Between October 1st, the start of the government’s fiscal year, and February 28th, HUD refinanced 285,569 loans.

For specifics regarding the new policy, please speak with lenders who handle FHA mortgages.  Check here for more information on FHA underwriting guidelines.

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