FHA Limits Cash-Out Refinances


The Federal Housing Administration (FHA), in an effort to limit its exposure to undue risk, has reduced the maximum loan-to-value ratio (LTV) for cash-out refinances. Starting April 1, the LTV of any cash-out refinance insured by the FHA may not exceed 85% of the appraiser's estimate of value.

The new limit is being instituted on a temporary basis, although the FHA says it will further analyze the housing and mortgage industries as well as its own portfolio to determine whether the changes should be made permanent.

Underwriting and eligibility requirements for cash-out refinances include new subordinate financing: If new subordinate financing is being offered by the mortgagee or other permitted entity, the combined LTV (CLTV) is limited to 85% (the FHA-insured first mortgage and any new junior liens when added together).

Existing subordinate financing may remain in place but is subordinate to the FHA-insured first mortgage, regardless of the total indebtedness or CLTV ratio, provided the borrower qualifies for making scheduled payments on all liens, the FHA says.

The subject property must have been owned by the borrower as his or her principal residence for at least 12 months preceding the date of the loan application in order to obtain the maximum of 85% of the appraiser's estimate of value in the new mortgage.

If the subject property has been owned less than 12 months preceding the date of the loan application as the borrower's principal residence, the mortgage amount is limited to the lesser of either 85% of the appraiser's estimate of value or 85% of the sales price of the property when acquired.


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