Every loan program has limits regarding the LTV they will allow and the FHA program is no exception. Understanding the FHA refinance LTV limits will help you understand what you can and cannot do with your FHA loan and how much you can borrow. There are several types of FHA refinances including the standard rate/term refinance; streamline refinance and a cash-out program. The program you wish to use will determine your maximum allowed LTV alongside the lender’s requirements.
Why are there FHA Refinance LTV Limits?
The FHA refinance LTV limits are put in place in order to protect the lender as well as yourself. If there was not a maximum LTV, borrowers could eat up all of the equity in their home and even get themselves upside down on their loans. With maximum LTVs in place, FHA lenders are able to provide borrowers with loans which they can afford and are less likely to default on, causing them to lose their homes. This protects the lender from a financial loss and borrowers from losing their homes.
Rate/Term FHA Refinance
The standard rate/term FHA refinance is not incredibly popular because the FHA offers the easier FHA Streamline refinance. However, there are borrowers who wish to use the standard FHA refinance. These borrowers cannot have a loan which exceeds 97.75% of the value of the home. This coincides with the standard LTV allowed for a home purchase with FHA financing.
You can use the rate/term FHA refinance to lower your interest rate or change the term of your loan, such as refinancing from a 30-year to a 20-year term. Borrowers opting for this program will need an appraisal to determine the value of 97.75% of the appraised value. The remaining requirements for the rate/term refinance include the need to be current on your mortgage payments and you may not receive more than $500 in cash at the closing.
You are eligible to refinance into an FHA loan with this program from any other loan program, including conventional and VA loans. Some borrowers end up refinancing into an FHA loan because the interest rates are lower, enabling them to save more money every month as well as over the entire term of the loan.
FHA Streamline Refinance
The FHA Streamline Refinance pertains only to borrowers who currently hold an FHA loan. If you have a conventional or VA loan, you cannot use this program. The stipulations remain similar to the rate/term refinance, with a few exceptions. Most notably, you do not have to verify your income, assets or the value of your home. The original purchase price/appraised value is what the lender uses to determine your maximum loan amount.
The FHA refinance LTV limits for the streamline refinance also equal 97.75% of the appraised value, if you choose to secure an appraisal. This is usually up to the borrower, but sometimes the lender requires it as well. If the lender knows your area recently declined in value, they might want to see for themselves if the loan is worth funding. If the value dropped too significantly, they may not want to provide the new loan. This is why if you obtain an appraisal on the FHA Streamline Refinance, your LTV cannot exceed 97.75%.
If you opt for the streamline refinance without an appraisal, there is no maximum LTV, per se. Instead, the lender maximizes your new loan amount as the amount of your current outstanding principal plus the new upfront mortgage insurance premium you must pay. The upfront mortgage insurance premium equals 1.75% of the new loan amount minus any upfront mortgage insurance premium refund you receive from your original FHA loan. If you obtained your original FHA loan within the last 3 years, you will receive a portion of the UFMIP back towards your new MIP.
Cash-out FHA Refinance
If you know you have equity in your home and you wish to take some of it out now rather than waiting until you sell the home, you can do so with a cash-out FHA refinance. This loan requires an appraisal without exception. Right now, most borrowers can take out as much as 85% of the appraised value of the home in a cash-out refinance.
In order to qualify for a cash-out refinance, you have to meet slightly stricter qualification guidelines. Lenders usually want to see higher credit scores, a clean housing payment history, a debt ratio which does not exceed 29/41, and a purpose for the cash. For example, if you plan to use the cash to pay down other debts, the lender can recalculate your debt ratio based on the debts you plan to pay off. This can help you qualify for the loan since you will be increasing the principal amount of the loan by taking cash out of the home.
The FHA refinance LTV limits are among the most flexible in the industry. For example, a conventional cash-out refinance can usually only take out up to 80% of the appraised value of the property, whereas an FHA borrower can obtain up to 85%. The same is true for the FHA streamline refinance – with no real maximum LTV and no appraisal required, it is among the most flexible programs available. If you need to save money every month or take cash out of the equity of your home, the FHA loan offers many possibilities to help you get ahead.