The FHA Cash-out option could be the best option to get the cash-out

The FHA cash-out program is probably your best option if you need to withdraw the maximum possible cash-out of your home because right now it is the only loan program that allows you to borrow up to 85% of the value of your home. Fannie Mae and Freddie Mac loan programs now only go to 80% loan to value and rules for qualifying are much stricter.

The percentage of your home that can finance is called the loan-to-value ratio, or LTV.

Cash-out Refinance loans down to 80% LTV

Fannie Mae and Freddie Mac recently cut their maximum LTV for cash-out refinance loans down to 80% LTV. In addition, private mortgage insurance companies no longer provide mortgage insurance for cash-out refinance loans with LTVs over 80%, so lenders would not be able to offer this product above 80% LTV even if they wanted to.

Fannie Mae and Freddie Mac have also increased the minimum credit score required for cash-out refinance loans with LTVs between 65% and 80%. Most cash-out refinance programs now require minimum credit scores of 680 to 700, up from 620 just twelve months ago. Getting approved is harder today as well, with maximum debt-to-income ratios now lower, cash reserve requirements higher, and rules regarding payoffs of existing debt to qualify becoming tighter.

While the FHA program did reduce the maximum LTV for cash-out refinances from 95% to 85% in April of 2009, it still offers the maximum cash allowed of any loan program today. When FHA made the change, they did indicate that they considered the change temporary and would monitor market conditions to determine when they could restore the higher 95% LTV limit.

Assistant Secretary for Housing Brian D. Montgomery stated in April, "This reduction to the maximum LTV for cash-out refinances is being instituted on a temporary basis." Montgomery said, "while FHA further analyzes the housing and mortgage industry as well as its own portfolio to determine whether permanent measures should be taken."

FHA Cash-out Easier to Qualify

In addition to allowing borrowers to borrow up to 85% LTV, the FHA program is easier to qualify for as well. First, FHA cash-out refinance loans only require a 620 credit score, much lower than the 680 or 700 credit scores required by Fannie Mae or Freddie Mac. While maximum allowable debt-to-income ratios are now similar, rules for qualifying are easier than Fannie Mae or Freddie Mac loans.

Requirements for Cash-out Refinancing

One caution for borrowers considering the FHA program for a cash-out refinance: be aware that you will need to own the home for at least 12 months to use the current market value of your home to take cash-out. For example, if you purchased a home 6 months ago for $100,000 with a 3.5% down payment under the FHA program (for example, in a distress sale at a great bargain) and now it appraises at $150,000, you may be tempted to refinance for 85% of $150,000 or $127,500. Even though the property actually is worth $150,000 and the FHA program does allow 85% LTV, FHA has what is called a minimum seasoning requirement of twelve months. This means that for the first twelve months that you own a property, the FHA underwriter must use the original purchase price.

Finally, many borrowers may find that the interest rate and costs for an FHA cash-out refinance loan between 65% and 80% LTV may actually turn out to be less expensive than a fixed rate loan through Fannie Mae or Freddie Mac.

To find out whether the FHA cash-out option is better for your cash-out refinance needs, call today or click here.