FHA reduces cash-out refinancing limits

The Trump administration is limiting the amount of cash borrowers can withdraw from their homes under the Federal Housing Administration (FHA) financing program.

As of September, the FHA now limits cash-out refinancing to 80 percent of the home value. Previously, borrowers could take out up to 85 percent of their property’s equity. The new FHA rule brings the limits in line with standards already in place at Fannie Mae and Freddie Mac.

Veterans Administration (VA) loans also face new cash-out limits. After Nov. 1, 2019, cash-out refinances with loan-to-value ratios exceeding 90 percent will no longer be eligible for Ginnie Mae’s flagship securities. While the VA still allows for 100 percent cash-out loans placed in Ginnie Mae’s custom pools, the new restrictions will hamper availability.

Refinances and cash-out loans have increased as home prices have risen and mortgage rates have declined. Cash-out refinancing made up 63 percent of all FHA refinancing through September 2018, up 39 percent from the previous year, the Wall Street Journal reported.

According to a letter issued by the U.S. Department of Housing and Urban Development, the agency is looking at past trends as a warning indicator of possible problems ahead. Cash-out refinances increased rapidly as housing prices rose through the mid-2000s. Studies suggest that a significant increase in foreclosures may have been the result of a high number of cash-out refinances completed prior to the collapse of the housing market.

The total number of FHA endorsements with cash-out refinance mortgages has increased from 43,052 in FY 2013, which had the lowest share of cash-out refinances, to 150,883 in FY 2018.