VA Thought of the Week: What’s new with Type II Cash Out Refinance Loans?
Type II Cash Out Refinance Loans are very close to the original VA Cash Out refinance loans, but there are a lot of new rules in place to ensure the loan is in the best interest of the Veteran.
- LTV cannot exceed 100% INCLUDING the funding fee
- The loan being refinanced must be seasoned
- This loan does not require recoupment certification
- You must meet one of 8 Net Tangible Benefits for the loan
- A Comparison Certification must be provided to the borrower with the original disclosures and again before closing
These are the basic rules for the new Cash Out refinance loans:
- 100% LTV: Prior to this new law, VA allowed the LTV to be up to 100% of the value PLUS the funding fee. The new law changed that and the regulatory guidance from VA now requires that the funding fee be included in the LTV calculation. This cannot exceed 100% of the value as provided in the appraisal.
- Loan Seasoning: The loan being paid off must be seasoned at least 210 days or 6 full payments. Most people don’t understand the specifics of the 210-day seasoning. The law was written requiring seasoning of 210 days from the DATE THE FIRST PAYMENT WAS MADE. This is not the date the first payment was due or the date the old loan closed. It is the specific date the first payment was applied by the servicer on the loan being refinanced. In order to accomplish this, VA has also required that a lender provide the payment history on any loan seasoned less than 12 months. They have also indicated that if the credit report or loan payoff reflects the date the first payment was applied, then that will satisfy this requirement. However, this is rare, so you will be required to get the payment history on any loan being refinanced that is less than 12 months old. Also, for safety’s sake, do not set the closing date on the 210th day. At the very least, plan for it on the 211th day.
- Recoupment: For Type I and IRRRL transactions, you must recoup the cost of the refinanced within 36 months. In these new Type II loans, the borrower is obviously increasing the principal balance of the loan and in many cases the rate. It would be impossible then to recoup the cost of the loan because the payment will increase. For that reason, VA has waived the requirement for recoupment under the permissions in the law.
Stay tuned next week to cover the Net Tangible Benefits and the Comparison Certification.