For many years, FHA has been a lending cornerstone for buying, building, or refinancing in America. FHA benefits seem endless, but one guideline is changing! Beginning September 1, 2019 FHA cash out refinance loans will be limited to 80% of the appraised value. Prior to 9/1/2019, FHA cash out refinancing allowed up to 85%. Rates are still low so be prepared to get the most out of your refi under the new regulation!
FHA Cash Out Refinance Guidelines Change Explained
Over the last few years, FHA cash out refinance loans have gained in popularity. According to HUD, apparently too much. Recently, appraised values have increased dramatically from the lows during 2008 – 2012. Thus, homeowners have more equity available to extract using a cash out mortgage loan. In a recent HousingWire article, FHA commissioner Brian Montgomery states, “An increase in cash-outs poses a potential future risk for us, but also challenges the core tenants of FHA’s taxpayer-backed mission.”
To say the least, HUD feels that the level of cash out refinancing is getting risky. Thus, the drop from 85% to 80%. Many have forgotten that in 2009, FHA had reduced the cash out limits from 95% to 85%. Even though FHA is reducing the cash out limit to 80%, it is not taking away the FHA pmi requirement!
New FHA Limitations Still Require PMI!
I bet most are reading this and thinking, “Wait! 80% does not require PMI?!” Sorry, but all FHA loans require a 1.75% FHA funding fee plus monthly mortgage insurance, even at 80% of the appraised value. In essence, FHA is not only getting more conservative by reducing the percentage loan. Since, there will still more than likely be a lot of FHA refinances, more borrowers will pay mortgage insurance. Technically, charging PMI on 80% loans makes FHA even more conservative.
FHA Cash Out Refinance Mortgage Insurance Requirements
- FHA funding fee required on all FHA loans – 1.75% of the loan amount financed on top of the base loan
- All FHA loans require monthly mortgage insurance – amounts vary based on loan term and LTV
- If borrowing 90% or less of appraised value, monthly PMI continues for at least 11 years
- If borrowing over 90% of appraised value, monthly PMI continue for the life of the loan
Keep in mind that an FHA cash out refinance is limited to 80% starting with FHA case file numbers assigned September 1, 2019 or after. But, purchases, rate/term refinances, or FHA streamline refinance are still able to exceed 80%.
Cash Out Refinance Loan Options
Even though FHA is backing off when it comes to cash out refinancing, there are additional options. At least for now! In general, here is how they compare.
VA Cash Out Refinance
Fortunately for VA eligible homeowners, VA has the most liberal cash out guidelines. Actually, VA still offers a cash out refinance up to 100% of the appraised value. Recently, VA did take away the ability to add the VA funding fee on top of the appraised value. Now, the new loan amount INCLUDING the VA funding fee must fit within the VA appraised value. Although, some lenders cap at 90%.
Conventional Cash Out Refinance
Conventional loans for a primary residence are already limited to 80%. Compared to FHA loans, conventional loans have advantages. First of all, conventional loans do not require PMI of any kind at 80% of appraised value or less. Additionally, conventional loans allow cash out for second homes and rental properties as well. Here are the maximum cash out levels:
- Primary residence: 80%, 2 unit = 75%
- Second home: 75%
- Rental property 75%, 2 unit = 70%