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New VA Cash Out Refinance Requirements

On December 19, 2018 VA published Circular 26-18-30 regarding an interim final rule addressing requirements for VA cash out refinances. This rule implements requirements of The Economic Growth, Regulatory Relief, and Consumer Protection Act which was enacted by congress.

 

Beginning with loan applications taken on or after February 15, 2019 lenders are required to provide the VA Cash Out Comparison Certification disclosure to the borrower within 3 business days of the application date and again at closing. The disclosure must be completed in good faith and signed by the borrowers. The regulation requires that the disclosure includes a comparison of the existing loan being refinanced, the new loan, disclosure of the Net Tangible Benefit of the new loan and a statement regarding the loss of equity due to the new refinance. The VA Cash Out Comparison Certification is available on JMAC’s website at https://help.jmaclending.com/hc/wholesale/resources. Broker’s will be responsible for completing this disclosure, and obtaining the borrower’s signatures within 3 business days of the application date.

 

All VA cash out refinances must now have a Net Tangible Benefit. There are 8 options for this benefit test: (The loan has to meet only one of the following 8 benefit tests - 8 options for meeting NTB requirements)

  1. The new loan eliminates monthly mortgage insurance, whether public or private, or monthly guaranty insurance;

  2. The term of the new loan is shorter than the remaining term of the loan being refinanced by at least 6 months;

  3. The interest rate on the new loan is lower than the interest rate on the loan being refinanced by at least 0.125% with no discount points;

  4. The P&I payment on the new loan is lower than the P&I payment on the loan being refinanced by at least 1% (i.e. current P&I payment $2500, new payment must be at least $25 [1%] lower);

  5. The new loan results in an increase in the borrower’s monthly residual income by at least 1% of the total qualifying income (i.e. monthly qualifying income $5000, residual must increase by $50 [1%]);

  6. The new loan refinances an interim loan to construct, alter, or repair the home;

  7. The new loan amount is equal to or less than 90 percent of the reasonable value of the home, or;

  8. The new loan refinances an adjustable rate loan to a fixed rate loan.

 

In addition to the net tangible benefit requirements, VA has also changed the LTV Calculation for cash out refinances. Effective with applications dated on or after February 15, 2019 the funding fee must be considered in the LTV. This would mean that the LTV will now be based off the TOTAL loan amount vs. BASE loan amount which has been used up to now. The total loan amount, including the funding fee may not exceed 100% LTV.

Clarification: Loans where the application was taken BEFORE 2/15/19 do not need to meet these requirements, however they may no longer receive an AUS approval (DU is being updated with new LTV calculations). If the AUS is run, and we receive a Refer – we must then manually underwrite the loan. This has major implications because many of our DU approved borrowers wouldn’t qualify under manual underwriting for many different reasons. We will work through these as they come, but the easiest solution would be to reduce the loan amount so the LTV (including FF) is 100% or less based on the new calculations, This should ensure the AUS approval is retained.

 

NEW Requirement: For loans being refinanced within 1 year from the date of closing, lenders must obtain a payment history/ledger from the servicing lender documenting all payments. If the loan is selected for audit by VA, the lender must include the payment ledger/history of the loan being refinanced in the loan file for VA review.