FHA Cash-Out Refinance Changes
The Federal Housing Administration (FHA) made some changes to this popular refinance loan effective on 1 January 2009. It is still a very appealing loan, but the FHA raised some of the limits and clarified the guidelines for applicants. These changes came about as the result of the 2008 Housing and Economic Recovery Act. The biggest issue applies to those wishing to take the highest limit of cash from their homes.
Before 1 January 2009, the homeowner could have a whopping 97% of the home value refinanced. This has changed to 95% loan-to-value financing. In the past, many loan officers fudged some of the requirements for this program. The FHA has now reinforced the guidelines of this refinance program and stated them as five easy to understand requirements:
The property to be refinanced must be owned by the borrower and used as the principal residence of this borrower for a minimum of twelve full months before any refinance loan application is accepted.
If there is an existing mortgage in place on the property to be refinanced, the borrower must have a history of monthly mortgage payments made on time for the twelve months before submitting an application for the FHA cash-out refinance. The borrower must also be current for the month of the application.
This cash-out refinance applies only to one- or two-family unit properties.
Second mortgages or home equity loans can remain in place as long as the FHA-insured first mortgage has a #1 priority. Other liens are subrogated to this insured loan. The combined loans can not exceed the loan-to-value ratio (95%) allowed. The borrower must have the means and ability to repay all monies borrowed against the property.
If there is a co-signer or co-borrower for the cash-out refinance, it must be someone who is an occupant of the property. The FHA credit underwriting guidelines are quite specific about this point. A primary borrower must not present a co-borrower just to meet the terms of this clause requiring an applicant to have means and ability to pay.
It has always been mandatory to have two appraisals performed on a property when 1) the loan amount was above $417,000 and 2) it had an 85% loan-to-value ratio.
The Department of Housing and Urban Development (HUD) has made it mandatory for two appraisals to be done on all FHA Cash-Out Refinance loans with 85% (or more) LTV ratio requested after 31 December 2008. There are specific guidelines for that second appraisal to ensure quality control standards are applied.