VA Thought of the Week: The Net-Tangible Benefits Test
VA has established 8 different possible Net Tangible Benefits (NTB). All new Type II Cash Out refinance loans must meet at least 1 of the 8 possible NTB options.
- The new loan eliminates MI or PMI. If you are refinancing a conventional or FHA loan, this is simple, and you need go no further that this one NTB.
- The term of the new loan is shorter than the loan being refinanced. If the original loan was a 30-year mortgage, and you reduce the term to 25 years, then this satisfied the NTB. Making a 29-year loan is not the intent of VA and would not be acceptable.
- The interest rate on the new loan is lower than the interest rate on the loan being refinanced. There is no definition of “lower,” but the VA intent is to lower the rate in normal 1/8th (.125%) point amounts.
- The payment on the new loan is lower than the payment on the loan being refinanced. Again, there is no definition to the amount, but the VA intent is that the P&I must be reduced.
- The new loan results in an increase in the borrower’s monthly residual income. This means that by paying off borrower’s consumer debt that the residual income is increased. Be careful that the increased PB and interest rate don’t offset the savings from the consumer debt.
- The new loan finances an interim loan to construct, alter, or repair the primary home. This does not mean paying off credit card debt that was used to remodel a home (see #5). This means that a loan such as a HELOC or second mortgage debt used to remodel is being paid with the new loan.
- The new loan amount is equal to or less than 90% LTV. This is simple but limits the cash out to the borrower if you have no other NTB and the reason for the refinance is just simply to take out available cash equity.
- The new loan refinances an adjustable rate mortgage to a fixed rate loan. Another simple case that takes away the unstable payments on an ARM.
As you can see from these NTB factors, VA has provided a framework for refinancing any loan into a VA loan. The new factors establish a clear statement from Congress and VA that simply using home equity as a piggy bank is not really the intent of the VA Refinance loan. If the borrower just wants to take out cash, they are limited to 90% LTV so that there is still an equity position in the loan.
Stay tuned for next week, when we will cover in detail the Comparison Certification. This is just as important as all the rest, but often overlooked for its requirements.