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David A. Krebs is a licensed mortgage broker with over 15 years of experience offering loan options beyond traditional banks

Anticipating a downturn in the market, many lenders are tightening up and making it more difficult for borrowers to obtain cash-out refinance mortgages. However, as discussed further below, some lenders are willing to take on the risk.

For single-family homeowners looking to refinance their Federal Housing Administration (FHA) loans, they will face stricter guidelines starting September 1, 2019.

Specifically, the Department of Housing and Urban Development (HUD) recently announced that, effective September 1, 2019, the maximum loan-to-value (LTV) for FHA cash-out refinance mortgages will be lowered from 85% to 80%.

The last time HUD made such an adjustment was a decade ago in 2009 (from 95% to 85% LTV) after a rapid increase in cash-outs throughout the 2000s led to a spike in foreclosures.

This change for FHA cash-out refinances aligns with Fannie Mae and Freddie Mac’s guidelines, which also generally impose an 80% maximum LTV for cash-out refinances on single-family residences.

While FHA, Fannie Mae and Freddie Mac guidelines cap the LTVs on cash-out refinances at 80%, lenders nearly always have their own guidelines known as “lender overlays” or “bank overlays.” In other words, the federal government sets the official standards, but most banks are more conservative and therefore apply additional guidelines on top of the official standards, hence the term “overlays.”

In fact, many banks in South Florida have been tightening their underwriting guidelines in light of the anticipated market correction.  Some banks in the area have overlays capping the maximum LTV on cash-out refinances at 60% to 65%. Other banks have ceased offering cash-out refinances on single-family residences altogether.

The key, therefore, is finding a lender who imposes fewer restrictions or overlays, which will boost your chances of getting approved for a cash-out refinance.

We have access to multiple alternative lenders who have a greater appetite for risk and are willing to offer cash-out refinancing with LTVs as high as 75%.

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