Lowers LTV Requirements from 85% to 80%

In the last several years, an increasing number of borrowers with loans backed by the Federal Housing Administration have been refinancing their mortgages to extract cash – a trend some have called concerning and risky.

Now, the Department of Housing and Urban Development is taking steps to curb the prevalence of cash-out refinances, announcing recently that it’s lowering loan-to-value requirements on cash-outs from 85% to 80%.

In effect, the new rule will limit the number of people who qualify for a refinance to extract some of their home equity in cash. The FHA said the change will mitigate its risk and preserve the housing wealth of FHA borrowers.

The agency also said the change, which will be effective for loans with case numbers assigned on or after September 1, 2019, aligns the FHA’s max LTV rules with those upheld by Fannie Mae and Freddie Mac.

This is the first time in a decade that the agency has moved to alter LTV requirements for FHA cash-outs. Apparently, the FHA has been watching, and it felt now was the time to act.

The agency stated in its mortgagee letter that it felt an LTV reduction was “a prudent measure” that would “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 FHA’s mission of providing access to sustainable homeownership that builds equity.”