When Mortgagee Letter 2025-03 raised market-rate 223(f) leverage from 85% to 87% and lowered the coverage requirement from 1.176x to 1.15x, the headline was straightforwardly good for borrowers. The letter also contains a qualifier that most secondary summaries omit: there is no change to the cash-out refinancing loan-to-value under Criterion 10.
Cash-out remains capped at 80% LTV, across all three categories — market rate, affordable, and rental-assisted alike. The 87% and 90% figures apply to a refinance that is not taking equity out.
| Category | Refinance (no cash-out) | Acquisition (LTC) | Cash-out |
|---|---|---|---|
| Market rate | 87% | 80% | 80% |
| Affordable | 90% | 80% | 80% |
| 90%+ rental assistance | 90% | 80% | 80% |
Sources: ML 2025-03 for the refinance and acquisition columns; Criterion 10 cash-out LTV expressly unchanged by that letter.
Why this trips people up
Two reasons. First, the gap between 87% and 80% is seven points of value, which on a $30 million valuation is $2.1 million of proceeds — enough to change whether a deal works. A borrower who modeled 87% and planned a distribution finds the loan sized down late.
Second, "cash-out" is a term of art here. It does not require that the borrower receive a check. If the insured loan amount exceeds the eligible costs of the refinance — existing debt payoff, transaction costs, repairs, escrows and reserve deposits — the excess is cash-out, and the 80% ceiling applies to the whole loan. Deals get recharacterized as cash-out transactions without the sponsor ever having described them that way.
The coverage test still applies independently
LTV is one criterion among several, and the insurable mortgage is the lowest result. A market-rate cash-out refinance must satisfy both the 80% LTV cap and the 1.15x coverage test at the 7% minimum underwriting vacancy, plus the statutory per-unit limits. On a high-value, moderate-NOI property the coverage test often binds well before 80%, and the cash-out ceiling never comes into play.
Recently completed properties: half the cash-out is deferred
If the property has not reached three years from final certificate of occupancy, it can still qualify under the post-2020 standard — but 50% of cash-out proceeds are held back until the property demonstrates the required coverage over six consecutive months. See the three-year rule article.
A draft mortgagee letter on HUD's drafting table would, among other things, cap cash-out holdbacks at $1 million. That draft is not effective and should not be built into a model.
Healthcare: no cash-out at any leverage
None of this transfers to Section 232. The healthcare handbook prohibits using insured proceeds for equity takeout entirely — there is no 80% cash-out tier for a nursing facility or assisted living property. See Section 232 forbids cash-out.
If cash-out is the objective
Size the transaction against the 80% ceiling and the coverage test from the outset, and get a value indication early. The most common avoidable failure here is a sponsor who runs the deal at 87%, markets the distribution to partners, and then has to go back and explain a seven-point haircut that was knowable on day one.
Primary sources for this article
- Mortgagee Letter 2025-03 — DSCR and LTV/LTC requirements
- MAP Guide, Handbook 4430.G, Chapter 8 (loan sizing criteria)
Figures stated as current are current as of October 13, 2026. HUD revises mortgagee letters and handbooks frequently; where a provision is a draft rather than operative guidance we say so on the page. This is general information, not legal, tax or financial advice, and not a commitment to lend.
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