FHA Limits Cash-Out Refinances

Refinancing your mortgage to take cash out using your home’s equity may not be as easy to do under new limitations on cash-out refinances released by the Department of Housing and Urban Development this week.

HUD announced Thursday that it’s lowering the loan-to-value requirements to cash-out refinances from 85% to 80%.

HUD’s new rule will limit the number of homeowners who qualify for a cash-out refinance. The move is to lessen the risk for the Federal Housing Administration, which has seen an increasing number of borrowers who use these loans.

“We are taking another important step to support sustainable homeownership that builds wealth for families,” says FHA 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.”

The change will take effect Sept. 1. The new rules align with Fannie Mae and Freddie Mac’s policies.

HUD last adjusted loan-to-value requirements a decade ago in 2009 from 95% to 85% after noticing an increase in cash-outs through the 2000s.

Cash-out refis have largely been considered risky by the housing industry. Some studies have linked an increase in foreclosures with a high number of cash-out refinances that were completed prior to the housing crisis.

The number of FHA cash-out refinance mortgages has surged 250% from 2013 to 2018, HUD reports. 2013 was the lowest year for cash-out refis. The FHA noted last fall that cash-out refinances comprised 64% of all FHA-insured refinance transactions, up nearly 39% from the year prior. The increase in home prices has prompted more cash-out refis, according to the annual Report to Congress issued last fall.

In a mortgagee letter announcing the change, HUD justified the changes for the FHA as a “prudent measure in order to strengthen the equity position of cash-out refinances and reduce loss severities in the event of default, stay ahead of any potential future shift in the housing market, and better support the FHA’s mission of providing access to sustainable homeownership that builds equity.”

Source: Department of Housing and Urban Development and “FHA Moves to Limit Cash-Out Refinances,” HousingWire (Aug. 1, 2019)