The Veteran's Administration revised the refinance loan program. The change applies to VA cash-out refinance loan applications taken on, or after February 15, 2019. The VA views any loan that exceeds the current loan balance as a cash out refinance.
Rolling in closing and escrow costs would constitute a cash out refinance because the new loan amount would exceed the current loan balance.
The VA has removed the "streamline" name from the new loan programs. There are three categories of refinance loans; Interest Rate Reduction Refinancing Loans (IRRRL), TYPE I Cash-Out Refinance, and TYPE II Cash-Out Refinance.
The TYPE I Cash-Out Refinance
A Type 1 refinance may not exceed the payback amount of the refinanced loan (including VA funding fee).
If the veteran wishes to "roll in" the closing and escrow costs into the new loan, the lender must conduct a "recoupment" test to determine whether the additional fees, closing costs, expenses, and incurred costs (excluding taxes, escrow, insurance, and other similar assessments) can be recovered within 36 months of the note date (i.e. mortgage settlement date).
The fee recoupment test involves dividing the entire closing expenses by the monthly savings payment. For example, if the new loan's closing expenses are $2,000 and the monthly mortgage payment is lowered by $100, the computation would be as follows:
- Divide $2,000 by $100 to get 25 months. However, if the monthly savings are just $50, it will take 50 months to repay the closing expenses and fees.
- The loan would fail the fee recoupment criteria in this case because the expenses must be repaid within 36 months.
The TYPE 2 Cash-Out Refinance
The payback amount of the refinanced loan may be more than the payoff amount of the Type 2 loan (including VA funding fee).
Maximum loan to value percentage for Type 1 & 2 refinance loans.
The maximum loan to value proportion for a type 1 & 2 loan is 100% of the property's Notice of Value (LTV).
The appraised value is referred to as a Notice of Value by the VA.
The maximum loan percentage is determined by dividing the entire loan amount (including any applicable VA financing charge) by the assessed value.
VA net tangible benefit (NTB) test
Many refinancing schemes need the net tangible benefit criteria. The benefit test is needed by the VA to verify that the refinancing loan is in the best interests of the veteran rather than the lender.
VA Net Tangible Benefit Test (NTB):
All cash-out refinancing loans must pass an NTB, which involves sending the following information to the veteran no later than the third business day after receiving the veteran's loan application, and again at loan closing:
(a) At least one of the following eight NTBs is met by the refinancing loan:
(i) Monthly mortgage insurance, whether public or private, and monthly guaranty insurance are no longer required under the new loan.
(ii) The new loan's duration is shorter than the length of the refinanced loan;
(iii) The new loan's interest rate is lower than the interest rate on the refinanced loan;
(iv) The new loan payment is lower than the payment on the refinanced loan;
(v) The borrower's monthly residual income increases as a consequence of the new loan;
(vi) The new loan pays off an interim loan used to build, remodel, or repair the house;
(vii) The new loan amount is equal to or less than 90% of the home's fair market value, or
(viii) An adjustable-rate loan is converted to a fixed-rate loan with the new loan.
(b) A comparison of the current and refinancing loan's key loan characteristics or conditions, including:
(i) The refinancing loan amount vs. the refinanced loan's payback amount.
(ii) The refinancing loan's loan type (fixed or adjustable) compared to the refinanced loan.
(iii) The refinancing loan's interest rate compared to the refinanced loan's interest rate.
(iv) The refinancing loan's term vs. the refinanced loan's term.
(v) The veteran will have paid the entire amount due after making all regular payments (principal and interest) and mortgage insurance for both the refinancing loan and the loan being refinanced.
(vi) The refinancing loan's LTV vs. the refinanced loan.
(c) An estimate of the amount of home equity that will be taken from the house as a consequence of the refinancing, as well as an explanation of how this will impact the veteran.
Interest rate reduction – Type I
An Interest Rate Reduction Refinance Loan (IRRRL) is a loan program to refinance an existing VA loan to a lower monthly payment.
The loan proceeds may only be applied to paying off the existing VA loan and to costs of obtaining or closing the IRRRL. Cash out at settlement is prohibited, however, the VA will permit up to $500 at settlement for adjustments due to computational errors and changes in final pay-off figures.
The new loan may include any late payments and late charges, however, the existing loan must be current at time of refinance. Allowable fees and charges (includes up to two discount points). The VA funding fee and any energy efficiency improvements may be included in the new loan.
The Interest Rate Reduction Refinance Loan requires the new loan to meet the VA Net Tangible Benefit test (see above). The Fee Recoupment test must also be met.
There must be an interest rate decrease:
Current fixed-rate to fixed-rate refinances must reduce the interest rate by at least .50 in rate.
Current fixed-rate to adjustable-rate refinances must reduce the interest rate by at least 2.00 in rate.
An appraisal is required if discount points are charged. If no discount points are charged an appraisal is not required.
An appraisal is required if discount points are charged. (VA Circular 26-18-13 Exhibit A)
The maximum loan to value is 100% if the discount point less than or equal to 1%
If the discount points are greater than 1%, the maximum loan to value is 90%.
Bankruptcy, foreclosure, deed-in-lieu, and short sale:
Must meet VA guidelines and must be seasoned for a minimum of 2 years.
Collection accounts are not required to be paid off.
Tax liens and judgments:
In all cases, outstanding tax liens and judgments must be paid at or before closing.
Employment or source is not verified.
- Income is not documented.
- The loan application should not reference income.
- Exception: When the PITIA will increase 20% or more it must be determined that the borrower has a stable and reliable income to support the proposed payment along with other recurring monthly obligations.