FHA Ends Its 95 Percent Cash-Out Refinances March 31, 2009. 85 Percent Is New Maximum.

Dan Green
The Mortgage Reports contributor

FHA Cash Out Refinance restrictions starting April 1 2009NOTE : FHA mortgage guidelines change frequently. Relevant updates are posted to Information below may be outdated.

This isn’t a new story, but more of a reminder.

The FHA is discontinuing its 95% cash-out refinance program effective April 1, 2009. For all case assigmements made on or after April 1, 2009, cash-out refinances are limited to 85%.  “Case assignment” is FHA-speak for “registered loans”.

It’s a move that shouldn’t surprise you.  As Fannie Mae and Freddie Mac have tightened their respective underwriting guidelines and added onerous loan-level pricing adjustments, the FHA has become the lender of last resort for a lot of Americans.

  • Is your credit score under 680? Think FHA.
  • Is your downpayment less than 10%? Think FHA.
  • Are you trying to take cash out from your home?  Think FHA.

See, over the last 18 months, Fannie and Freddie have repeatedly narrowed their respective strike zones.  That’s bad news for people in want of a mortgage because Fannie and Freddie are often the source of the lowest-cost mortgages. After opening the lending door for everyone and his mother, both groups pulled back guidelines to a point where if you’re not considered an excellent risk, they don’t want you.

Now, FHA is getting tighter, too.  In limiting FHA cash-out refinances to 85% loan-to-value, it’s also setting a few other rules:

  1. With less than 12 months since purchase, the home’s appraised value cannot exceed its purchase price — even if you’ve made home improvements.
  2. If you’re delinquent on your home loan, you cannot do a cash-out refinance
  3. Co-signers can’t be added to the mortgage note for purposes of qualifying

The FHA’s moves are a defensive one.  As Fannie and Freddie turn away would-be borrowers, the FHA is insuring all of the “less-than-perfect” home loans.  Like in Coming To America, when Hakeem tells Lisa that his job is to clean up the trash, that’s what the FHA has been doing.

When you think of garbage, think of Akeem FHA!

The FHA’s loan pool is disgusting right now.  Riddled with early-payment defaults, the FHA’s portfolio quality is deteriorating and the powers-that-be have the difficult job of making loans available without making them too available.  My guess is that more tightening will be on the way throughout 2009 and 2010 and the government realizes that it’s on the hook for a lot of bad loans.

Either way, you have to give the FHA credit.  At least they set deadlines and warn people about them.

If you have need to take a cash-out mortgage and the conforming lenders are telling you “no”, look FHA and get your loan registered with a loan officer no later than Tuesday, March 31, 2009.  And be sure to check your local FHA loan limits, too — they’re different from your local conforming loan limits.