Just a quick heads up about a change to the guidelines for the FHA 95% loan to value cash out refinance program effective for all case numbers issued after January 1, 2009. This change does not apply to the standard 85% loan to value program.
The guidelines already included additional requirements that many loan officers have overlooked when taking applications for 95% loan to value cash out refinances:
- The subject property must have been owned by the borrower as his or her principal residence for at least 12 months preceding the date of the loan application.
- If said property is encumbered by a mortgage, the borrower must have made all of his/her mortgage payments within the month due for the previous 12 months, i.e., no payment may have been more than 30 days late and is current for the month due.
- The property that is security for the refinanced mortgage must be a 1- or 2-unit dwelling.
- Subordinate financing may remain in place, but subordinate to the FHA insured first mortgage, regardless of the total indebtedness or combined loan-to-value ratio, provided the homeowner qualifies for making scheduled payments on all liens.
- Any co-borrower or co-signer being added to the note must be an occupant of the property. Non-occupant owners may not be added in order to meet FHA’s credit underwriting guidelines for the mortgage.
In Mortgagee Letter 2008-09, FHA already made it a requirement that two appraisals were required when the loan amount exceeds $417000. Those loans are also limited to 85% LTV (loan to value).
Now HUD has extended this requirement to any loans with an LTV above 85% beginning with any case number issued on or after January 1, 2009.
From Mortgagee Letter 2008-40:
In addition, FHA will now require a second appraisal for all cash-out refinances where the LTV, exclusive of the UFMIP, will exceed 85 percent of the appraiser’s estimate of value. This second appraisal requirement applies regardless of the loan amount or the location of the property, i.e., whether the property is in a “declining area” or is not. This second appraisal requirement for cash-out refinances is effective for all case number assignments on or after January 1, 2009 and is to adhere to the instructions set forth in ML 2008-09. Please also note that cash-out refinances with LTVs exceeding 85 percent will be over-selected for post-endorsement technical reviews (PETR) to assure the quality of the underwriting.
Mortgagee Letter 2008-09 sets out the requirements for the 2nd appraisal. It must be done by an FHA approved appraiser engaged by the lender and the costs may be passed on to the borrower. If the second appraisal has an estimated value more than 5% below the first appraisal, the maximum mortgage must be determined based on the lower appraised value.
If you are a mortgage broker, please take note of that last sentence. This means that wholesale lenders are going to be picking these loans apart even more closely than they have been. And they haven’t exactly been easy with the underwriting lately to begin with. Also, remember that the borrower should be prepared to have as much as $900 of their cash out eaten up by appraisal fees!
I will Post the new requirements tomorrow regarding The revised Home Valuation Code of Conduct (the"Code") The Effective Date for any Lenders selling loans to FHLMC to comply with the new "Code" is May 1, 2009.
AUTHOR: Bryan Schroeder is a Certified Mortgage Consultant in Salem, OR. Bryan has worked in the mortgage industry for over 15 years and areas of expertise include FHA and Conventional loans, Lot loans, and New construction.