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FHA, VA to Limit Cash-Out Refinances

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If you’ve thought about tapping into the equity in your home to get extra cash, you may want to act sooner than later. Under new guidelines — some taking effect as soon as Sept. 1, 2019 — you’ll lose up to 10% worth of borrowing power for a cash-out refinance offered through Federal Housing Administration- and Veterans Affairs-approved lenders.

Here are the big changes coming for FHA and VA cash-out refinances.

New FHA cash-out maximums

Under the new guidelines taking effect Sept. 1, 2019, FHA borrowers will be limited to borrowing a maximum of 80% of their home’s value for a cash-out refinance. A cash-out refinance involves borrowing more than you currently owe on your mortgage and pocketing the difference.

This matches the maximum loan-to-value (LTV) ratio offered by conventional loans through Fannie Mae and Freddie Mac. To calculate your LTV ratio, divide the loan amount by the property’s value.

Although the FHA cash-out refinance LTV ratio is only being lowered by 5% from the current guidelines — more on this later — that extra 5% reduces your borrowing power by $5,000 for every $100,000 you take out for a mortgage.

You may be familiar with the 80% LTV ratio for another reason since it’s the cutoff point for a conventional loan to avoid private mortgage insurance (PMI). Mortgage insurance, which is required with a down payment of less than 20% on a conventional loan, insures the lender if you default.

It’s important to remember with an FHA loan that you’ll still have to pay an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP) even though you’re borrowing only 80%. You may want to consider an 80% conventional cash-out refinance to avoid the extra FHA mortgage insurance costs.

New VA cash-out maximums

VA-approved lenders soon won’t be able to guarantee new cash-out refinance loans to borrowers for more than 90% of the home’s value. The VA cash-out refinance LTV reduction for loans guaranteed on or after Nov. 1, 2019, is twice that of the change made by the FHA — more on this later, too. It will hit your cashback bottom line by $10,000 for every $100,000 you borrow.

There is one exception to the new rule: If you are using the cash-out to pay off a construction loan used to build a new home, you’ll still be able to pay off the current loan up to 100% of the home’s value.

How much cash you can currently borrow with FHA, VA

Homeowners often use money from a cash-out refinance to consolidate high-interest debt, fund home improvement projects or stash extra cash in a savings account for a future purchase.

Until the new changes take effect, here’s a quick refresher on the current limits:

Current FHA maximum cash-out limits

The FHA currently allows approved lenders to provide funding for FHA cash-out refinances up to an 85% LTV ratio. The process is similar to when you first took out the loan to buy your home. The lender verifies income, pulls a credit report and requires an appraisal on your home to determine how much equity you can tap.

Many borrowers choose FHA loans because they are easier to qualify for. Minimum FHA mortgage requirements allow for credit scores as low as 500, and exceptions can be made for approval even if your total debt makes up more than 43% of current before-tax income (also known as your debt-to-income or DTI ratio).

Current VA maximum cash-out limits

Under current guidelines, eligible veterans and active-duty military personnel can access 100% of the value of a home with a VA cash-out refinance.

There are limits on what the money can be used for, and lenders must be able to prove the refinance will improve a VA borrower’s financial situation. Examples include using the cash to pay off other high-interest credit cards or making upgrades and improvements to a home, such as fixing an old roof or replacing an air conditioner at the end of its useful life.

One thing that isn’t changing is the minimum requirements for VA loans. VA homeowners can still qualify with no set minimum credit score and higher DTIs than those allowed by the FHA.

What you can do to lock in current FHA, VA cash-out maximums

As long as you apply for an FHA loan and your lenders assign a case number to your cash-out refinance by Sept. 1, 2019 — or by Nov. 1 for a VA loan — you’ll be able to borrow extra equity up to the higher current maximums.

A case number is a special number assigned to FHA- and VA-approved lenders that identifies your loan to government agencies, and your lender will take care of ordering it once it receives your loan application.

Have paperwork, such as current pay stubs and bank statements, ready to complete your refinance. Also, ask your loan officer if there is a deadline for your closing date. Each lender may have a different closing timeline to take advantage of the higher current cash-out maximums, so be sure you know the date upfront.

Final thoughts about new FHA, VA cash-out refinance guidelines

Your mortgage loan balance reduces the amount of housing wealth you have. Each mortgage payment helps you become more “house rich” by paying down that balance until you have a debt-free home.

While cash-out refinances may help accomplish goals, they also restart the loan clock. However, if you are in a situation where you have high revolving debt balances with monthly payments that squeeze your budget, it’s worth it to finish an FHA or VA cash-out refinance before the new changes go into effect.

The information in this article is accurate as of the date of publishing. 


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