If you are considering doing an FHA refinance and getting cash out, as of January 1, there are some new rules regarding FHA refinances where the borrower gets “cash out” and the loan-to-value ratio is greater than 85%.
These guideline changes apply to the FHA 95% cash out program and are effective for all FHA case numbers that are issued after January 1, 2009. If you are getting less than 85% of the value of your home, these guideline changes do not apply.
- The property must have been owned by the borrower as his or her principal residence for at least 12 months preceding the date of the loan application.
- If the property is encumbered by a mortgage, the borrower cannot have been more than 30 days late within the last 12 months and the borrower must be current on their mortgage payments.
- The property must be either a 1or 2 unit property, 3 and 4 units are not eligible.
- Second mortgages may remain in place, but must be in 2nd place behind the FHA insured first mortgage.
- If another person is added to the loan in the refinance, the person must be an occupant of the property. You cant add someone who doesn’t live in the property to the loan in order to meet FHA’s credit underwriting guidelines for the mortgage.
Whenever you go up to 95% loan-to-value, you will now be required to get two appraisals done.
From Mortgagee Letter 2008-40:
In addition, FHA will now require a second appraisal for all cash-out refinances where the LTV, exclusive of the UFMIP, will exceed 85 percent of the appraiser’s estimate of value. This second appraisal requirement applies regardless of the loan amount or the location of the property, i.e., whether the property is in a “declining area” or is not. This second appraisal requirement for cash-out refinances is effective for all case number assignments on or after January 1, 2009 and is to adhere to the instructions set forth in ML 2008-09. Please also note that cash-out refinances with LTVs exceeding 85 percent will be over-selected for post-endorsement technical reviews (PETR) to assure the quality of the underwriting.
Mortgagee Letter 2008-09 sets out the requirements for the 2nd appraisal. It must be done by an FHA approved appraiser engaged by the lender and the costs may be passed on to the borrower. If the second appraisal has an estimated value more than 5% below the first appraisal, the maximum mortgage must be determined based on the lower appraised value.
What this means in simple english is that if you want to get cash out of your home, it is going to be more difficult than it has been in the past. Lenders are going to require two appraisals and lenders are going to be picking apart the appraisals more than ever. For people who are thinking of using the 95% cash out program, that means somewhere in the neighborhood of $700 in appraisal fees.