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HUD Adjusts Cash-Out Refi Rules

Last week the Department of Housing and Urban Development (HUD) announced changes in the maximum loan-to-value (LTV) requirements for homeowners pursuing a cash-out refinance on their mortgage. As of September 1, 2019, the maximum LTV ratio will be 80% – down 5% from where it’s sat for a decade.

Will new HUD changes affect your refi?

What does this mean for you if you’ve been thinking of tapping the equity in your home? Because we’ve been recently sharing information on refinancing and Federal Housing Administration (FHA) programs specifically, we want to inform and explain what the new initiatives entail.

A loan-to-value ratio is used by lenders to show the difference between the loan amount and the appraised value of a home. For example, if the home is appraised at $300,000 and you want to refinance (borrow) $240,000 that’s an LTV ratio of 80%. The current maximum LTV of 85% would mean a difference of $15,000 on that same loan, potentially limiting qualified borrowers who want to cash in on their home equity.

According to the memo issued by HUD, the FHA is making the adjustment to mitigate the risks to borrowers and preserve homeowner equity. The change is also in alignment with those upheld by Fannie Mae and Freddie Mac. In addition, the Government National Mortgage Association (Ginnie Mae) is taking its own action to reduce risks pertaining to mortgages insured by the Department of Veterans Affairs (VA).

“We are taking another important step to support sustainable homeownership that builds wealth for families,” said Federal Housing Commissioner Brian Montgomery in the HUD press release. “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 FHA seeks to mitigate the risks to borrowers and preserve homeowner equity.

This is the first change in LTV numbers since 2009 when it was reduced from 95% to 85%. The increase in cash-out transactions in the 2000s led to a jump in foreclosures, fueling the financial and housing crisis at that time. As a result, the number of cash-outs fell steadily until 2013 when it began to rise again. As of last year, the agency reports that cash-out refinances are 64% of all FHA transactions. The surge and popularity of this refi option can also be attributed to the increase in home prices and the decrease in other forms refinancing activity.

There’s no denying that a cash-out refinance has the potential to be a timely and prudent way to access the equity in your home, whether through the FHA or other means. Debt consolidation, home improvement, and interest rate reduction are all viable objectives for savvy homeowners.

So how does the government announcement impact you and your plan to tap into your equity? Our years of experience and knowledge here at EnTrust Funding (ETF) can help you determine the best course of action in all areas of mortgages – including FHA refinancing. Give us a call today to discuss your needs and timeline.

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