VA Thought of the Week: What general terms did the VA change with the new Cash Out Refinance regulation?
Over the coming weeks, we will review a number of issues on VA Cash Out Refinance loans.
First, we will cover the general terms that the VA changed with the new Cash Out Refinance regulation.
For all of you technical folks, the new VA regulatory update to 38 CFR 36.4306 was issued last December as a result of changes to the law in May 2018. It is still an interim regulation but has the same scope and effect as if it was the final.
When the same rule changes on the Interest Rate Reduction Refinance Loan (IRRRL) program came into play in before the new law, a number of lenders suspended making IRRRLs and started using the loose rules for Cash Out refinance loans that would allow them to refinance borrowers without the seasoning of their current loans. Much of the changes in the new law and regulation were a result of lenders taking advantage of the VA home loan program that were not consistent with its intent.
The new regulation created two types of Cash Out Refinance loans. The Type I and Type II. We’ll start with Type I.
The Type I loan is very simple, and it’s rare to find a situation where this loan works:
- The loan being refinanced must be a current VA loan.
- The loan must meet the Net Tangible Benefits Test which calls for 36-month recoupment, rate reduction, and loan seasoning.
- The fees and charges associated with the new loan must be recouped in 36 months or less.
- When refinancing from one fixed rate loan to another, the new loan must have an interest rate at least 50 bps or .5% lower than the loan being refinanced. When refinancing from a fixed rate loan to an ARM, the reduction must be at least 200 BPS.
- The old loan must be seasoned the greater of 210 days from the date the first payment was made or 6 full monthly payments.
- The maximum loan, including the funding fee, cannot exceed the payoff of the loan being refinanced.
Because of the new requirements for a Type I loan, it will be nearly impossible for anyone to use this type of a loan to get around the issues that plagued the industry after the (IRRRL) rules were changed requiring recoupment, and rate improvements.
Next week, we will cover the details of Type II cash out refinance loans.