Beginning September 1, 2019, The U.S. Department of Housing and Urban Development (HUD) cut the loan to value (LTV) limit on Federal Housing Administration (FHA) cash-out refinances to 80% LTV, down from the old standard of 85%. The change is in line with the limits already put in place at Fannie Mae and Freddie Mac.
According to a HUD press release, this new rule will reduce the risks associated with cash-out refinance lending. The changes “preserve homeowners’ ability to convert home equity to cash via government-sponsored mortgage but also improves the risk profile of HUD’s housing finance programs.”
The HUD is saying since the FHA program is essentially an insurance program, they want to curb the number of cash-out refinances to reduce the risk of foreclosures. “We are taking another important step to support sustainable homeownership that builds wealth for families,” said Federal Housing Commissioner Brian Montgomery. “This is a prudent measure to make certain that we protect and preserve the home equity borrowers are building for their futures and guard against taxpayer losses from the FHA program.”
This change will have an impact on the amount of cash available for home owners seeking a cash-out refinance with low equity. For instance, if you have a house that has a property value of $400,000, and your current loan is $320,000, and you sought a cash-out refinance loan at the old 85% LTV or $340,000, the difference is $20,000. After approximately $3,000 in closing costs, the cash to you would have received is $17,000.
Under the same scenario, but changing the LTV to the current 80%, the new amount of the loan would be $320,000, so in other words, no cash would be available.
There are loans available, however, for those who need a higher LTV. A few banks are offering cash-out refinancing loans above the new 80% limit; some as high as 95%. Mortgage insurance is required for these higher limit loans, but the banks offering the cash-out refinances at these LTVs are the only option at this point.
If you would like to learn more about how you can get a cash-out refinance loan at an LTV above 80%, contact the mortgage experts at NASB at 855-465-0753.