HUD Reduces FHA Cash Out Refinance Limits to 80% LTV
August 5, 2019
In an effort to reduce risk and exposure to future borrower default, HUD has reduced the FHA cash out refinance limits from 85% to 80% LTV.
Today, homeowners are able to cash out up to 85% of their home value using an FHA insured mortgage. Effective September 1, 2019, the FHA cash out refinance limit will be reduced to 80% LTV.
Cash out refinances are often used to consolidate debt or to use the additional funds to make home improvements. Legislators and leaders at HUD are concerned that another housing bubble could put some homeowners under water if the home values drop below the loan balances.
Another reason for the change is to help homeowners to maintain their track towards the reduction of their total debt. It is essentially geared to prevent homeowners from tapping into their equity to purchase things that do not add value, equity or wealth. Too often, people will use the funds for things like expensive vacations and then will finance the costs over the life of their 30 year mortgage.
The housing bubble in 2008 led to many foreclosures. Some of which were legitimate in that homeowners simply could not make their mortgage payments due to a financial hardship. In many other instances, homeowners who had the funds to make the payments walked away from their homes because the loan balances were much higher than their new lowered values due to the recession. This added to a continued market drop and also an increased number of individuals with poor credit today.
Cash out refinances are still an effective way to use the equity in your home to make strategic home improvements to improve the look of your home while also adding more value. If you simply want to refinance to reduce your interest rate without cashing out the additional funds, then the best option would be an FHA streamline refinance. This option reduces refinance costs by eliminating the need for a new appraisal.