Cash-out refinance guidelines | Current mortgage market
Many homeowners would benefit from a cash-out refinance in advance of retirement, but they will find guidelines stricter than in the past. Warning: the guidelines keep changing and any loan-to-value (LTV) greater than 80% requires mortgage insurance (and each MI company has its own rules). 

Here is a brief survey of the basic guidelines: 
Fannie Mae/Freddie Mac conforming loans can go to a maximum of 90% LTV for single family and townhomes. Condos have a maximum of 85% LTV. Planned unit developments have an 80% LTV limit.  All require a minimum credit score of 660 and are very strict on the debt-toincome ratio (no more than 45%).  Note: MI companies will basically not insure any cash-out loans, except for some special circumstances, making loans with LTVs above 80% difficult.

Jumbo loan programs vary widely, but typically with an 80% LTV and a credit score of at least 660, you can take out a maximum of $250,000 in cash. With a score above 700, the maximum cash-out limit is $500,000.  At a 70% LTV and a minimum score of 620, the cash-out limit is $200,000.  At the same LTV and a 680 credit score, the cash-out limit is $700,000.

FHA will allow cash-outs ($200,000 maximum) up to 95% of the value of the home so long as you don’t exceed the FHA loan limits for your area. If your home is in a “declining” market, the limit is 90%.  If you want to take advantage of the higher, temporary FHA limits that will take you over the regular area limits, your LTV is maxed at 85%.

Fannie Mae/Freddie Mac conforming jumbo loans have a 75% LTV loan limit.  Fannie Mae will do these loans with a minimum score of 700, while Freddie Mac requires a 720 score.
© 2007, Real Estate Information Services, Capitol Assets, Choice Real Estate, Inc. & Choice Finance®

     Mark Zaidan of Choice Finance®

The new Fannie Mae policy, effective June 1, once again allows it to buy or guarantee mortgages with downpayments of as little as 3 to 5 percent, regardless of geographic location.  This will be a big help if you are a first-time homebuyer with a small bankroll.  Until now, your only alternative for a low downpayment loan was one from FHA in so-called “declining markets”. 

The rollback only applies to purchases of single-family primary residences.  “Downpayment requirements will vary for other occupancy, property and transactions types.”

That means condos, second homes, investment properties and refinances will probably continue to be subject to more stringent requirements.  Why did Fannie change its mind?  Fannie says it is due to “our goal to support successful home-owning, not just home-buying, as we seek to bring liquidity to all communities and help the housing market recover.”

FHA currently does not require credit scores to guarantee a mortgage, but individual lenders originating FHA loans often have minimum score requirements before they will submit a loan for FHA approval. 

FHA is on the verge of moving to a risk-based pricing system that, for the first time, will use credit scores and require higher mortgage premiums from those whom it believes pose a higher risk of default.

The change had been proposed in September 2007, with the intention of starting January 1, 2008, but the proposal stalled after opposition to it stiffened.  Now it looks like the change will finally happen some time after mid-year.

While FHA has not revealed its final risk-based pricing plan (it is likely to do so 30 days before it starts), it will probably closely follow the schedule that was proposed last year.  Under that plan, those with credit scores between 680 and 850 would qualify for the lowest mortgage insurance premiums, as little as 0.75% of the loan amount for those making a downpayment of 10%, 1% for a 5% downpayment and 1.25% for 3% down.  At the other end of the credit spectrum, those with scores of as low as 300 to 499 could still get loans, so long as they put 10% down and pay a 1.75% premium. Even those with no reportable score (because of insufficient credit data) could qualify for 5% and 10% down loans with premiums of 2.25% and 2%. 

FHA has said it would use the middle score from the three credit reporting agencies as the “decision score.”  © 2007, Real Estate Information Services, Capitol Assets, Choice Real Estate, Inc. & Choice Finance®

GFE proposed changes
The Department of Housing and Urban Development has proposed major changes to the 30-year old mortgage settlement rules.  The centerpiece of the new Real Estate Settlement Procedures Act rules would be creation of a standard good faith estimate (GFE) disclosure of settlement charges, which lenders are required to give borrowers who inquire about the rates and terms of a home loan.

HUD says standardizing the GFE will provide a more open disclosure of the key elements of a loan that will help borrowers make better comparisons among their loan options.  They are hoping the new process will also address an issue that some mortgage borrowers have faced:  being confronted with charges or loan terms at settlement that were unexpected.

The new GFE will require that, along with the interest rate and monthly payment, the disclosure states clearly whether that interest rate and the principal balance can increase and by how much, and whether the loan has a prepayment penalty or balloon payment. Yield spread premiums, which affect the interest rate charged must also be disclosed on the GFE.  Total estimated settlement charges will be prominently displayed on the first page of the new GFE for ease of cost comparisons.  HUD proposes to specify which charges can and can’t change at settlement and by how much.  The familiar HUD-1 form will also change to help compare the charges on the GFE with actual costs.

HUD proposes that settlement agents read a “closing script” to borrowers at settlement, detailing the terms of the loan and comparing the GFE with the actual costs.  HUD says consumer tests have shown that the new procedures helped borrowers to choose the lowest cost loan more than 90% of the time.  This is without a doubt the most over-regulated industry in the U.S.   More red tape, more disclosures, more babying the entire group because of the few “victims” hurt by bad brokers.   Hopefully the changes implemenented will make sense and allow capitalism to prevail and not the government overregulation and dumbing down of everything.
© 2008, Real Estate Information Services, Capitol Assets, Choice Real Estate, Inc. & Choice Real Estate of VA, Inc., & Choice Finance®