Current Maximum Loan-To-Value (LTV) and Combined Maximum Loan-To-Value (CLTV) percentages Reduced to 80 percent on Cash-out Refinance Mortgages
By now you’ve likely heard the announcement from the US Department of Housing and Urban Development (HUD) that there have been some important changes made to the FHA loan program.
An FHA Loan is a mortgage that’s insured by the Federal Housing Administration (FHA) and allows borrowers to finance homes with down payments as low as 3.5%. These loans are a good option for first-time homebuyers who may not have 10 or 20% to to put down. Borrowers who have suffered from bankruptcy or foreclosures may qualify for an FHA-backed mortgage.
Recently, the FHA adjusted the Maximum Loan-To-Value (LTV) and Combined Maximum Loan-To-Value (CLTV) percentages to 80% on Cash-out Refinance Mortgages.
What does this mean?
According to HUD, prior to FHA’s reduction of LTV requirements, the share of cash-out refinances had rapidly increased as housing prices increased through the mid-2000s. Subsequent studies showed that a significant increase in foreclosures may have been the result of a high number of cash-out refinances completed prior to the collapse of the housing market.
FHA’s data is again showing that an increasing amount of cash-out refinance transactions are occurring. In its annual Report to Congress issued last fall, the FHA said cash-out refinances represented 64% of all FHA-insured refinance transactions – up nearly 39% from the year before. It attributed the trend to gains in home prices and the decline of other forms of refinance activity.
The increasing number of borrowers with loans backed by the Federal Housing Administration who are refinancing their mortgages to extract cash – is viewed as a risky trend.
Consequently, FHA has concluded, for the first time in a decade, that this “would be 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 FHA’s mission of providing access to sustainable homeownership that builds equity.”
For your clients, keep in mind that is effective for case numbers assigned on or after September 1, 2019.