The good news is that much of the change involved in the new FHA requirements for a second appraisal for FHA cash-out refinancing, isn’t new at all. Many of the FHA refinancing requirements have existed before and have just been overlooked by lenders.
Given the difficulty economic times however, the FHA is choosing to remind lenders of these requirements and add a few more. Many borrowers feared the FHA would do away with the 95% LTV (loan to value) category but the good news is, it is still available along with the 85% LTV option. Having an understanding of the changes initiated by the FHA and the requirements for FHA cash-out refinancing that have always existed and the FHA is seeking to more strictly enforce will help you in applying for your loan.
This is what hasn’t changed about the FHA cash-out refinancing requirements:
The property must have been the principal residence of the borrower for at least 12 months prior to the date on the loan application.
All payments on the primary mortgage and any other mortgages or loans against the property are current as of the date of the application.
The property is a 1 or 2-unit dwelling.
All additional financing is subordinate to the FHA insured first mortgage and may remain in place, regardless of the total indebtedness or combined loan-to-value ratio, provided the homeowner qualifies for making scheduled payments on all liens.
All co-borrowers or co-signers are occupants of the property.
Now for the bad news, the FHA used to require two appraisals only if the loan amount exceeded $417,000 and was limited to loans in the 85%LTV category. Now, HUD is requiring a second appraisal for 95% LTV applications as well. Worse, the new regulations specifically require the borrower to bear the cost of the second appraisal.
For some people, this could mean an additional thousand dollars out of their pocket. Home-owners seeking FHA cash-out refinancing can also no longer avoid the requirement for a second appraisal by exempting the property due to its location (property considering to exist in “declining areas” was previously exempt).
There is still worse news to come, because of the new regulations the FHA will be over-selecting LTV that exceed 85% for PETR (post-endorsement technical review) to ensure the quality of the underwriting procedure. The FHA sets out these specific requirements for an approved 2nd appraisal:
The appraiser must be FHA approved and chosen by the lender.
All costs associated with the appraisal are to be carried by the borrower.
If the 2nd appraisal value is more than 5% below the original appraisal, the maximum mortgage will be determined based on lower value.
Good news and bad news for anyone seeking an FHA cash-out refinancing loan. The easiest way to insure that you are meeting all of the new requirements is to make sure that you choose a company that is professional and up-to-date with the new FHA requirements and you will be far more successful in your application.