FHA Cashout Refinance Banks Restricted by Tighter Lending

admin — Thu, 26 Feb 2009 21:24:45 +0000

FHA mortgage loans are becoming tougher to qualify for. As of January 1, 2009 HUD announced that any FHA cash out refinance would require two appraisals when the loan to value exceeds 85%. Since the customer usually has to pay for the appraisal, this adds around $350 to the cost of refinancing with the FHA. In addition, many underwriters are taking a very close look at appraised values, due to the continuing drop in home prices. In turn, the close scrutiny of appraised values by the underwriters are making many appraisers more conservative in the values that they assign to a home. The FHA also raised the down payment requirement on purchases to 3.5% and increased mortgage insurance premiums. The net result is that an FHA mortgage not only has higher costs but also a higher probability of being turned down due to insufficient equity and more stringent underwriting guidelines.

Some Banks Reduce Cash Out Limits for FHA Mortgage Refinancing
Two smaller banks today have reduced the cash out limits on FHA home loans to 85% loan to value, despite the FHA guideline allowing 95% cash out. Rumor has it that larger banks will also follow through on lowering the loan to value limits on FHA cash out refinancing. Tougher guidelines quickly spread industry wide, so expect many more lenders to make it more difficult to cash out on an FHA refinance.

Since FHA loans have a very high default rate (roughly 12%), it is only logical that banks are imposing tougher guidelines for borrowers. The banks simply cannot afford to take on additional default risk given their weak financial position. Many potential borrowers will continue to find it difficult to obtain mortgage approval until the economy recovers and the housing markets stabilize. Based on the way things are going, it could be a long wait.

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FHA Cashout Refinance Banks Restricted by Tighter Lending