New VA Rule for Cash-Out Refinances
On December 17th, 2018, the Veteran’s Administration (VA) published an Interim Final Rule addressing VA guaranty requirements for cash-out refinance loans. The rule will be effective for loan applications taken on or after February 15th, 2019 and applies to all Full Doc refinance loan transactions (even if the existing loan is NOT a VA loan). The rule does not apply to VA IRRRL loans.
This rule change is intended to ensure Veteran borrowers continue to have access to responsible credit options for refinancing. In addition, the rule provides Veteran borrowers with sufficient information regarding the impact of a refinance loan on their current and future financial position. Highlights of the new rule include:
- New Comparison Disclosure form
- New Total Loan to Value (TLTV) calculation limited to 100% TLTV
- Expanded Net Tangible Benefit options
- Recoupment Certification only required on VA to VA Rate/Term refinances
Note: Loan Seasoning requirements are not changed.
The Comparison Disclosure within three (3) days of loan application and at closing. The Veteran borrower is required to sign and acknowledge receipt of the form.
The disclosure shows the refinancing loan passes NTB and provides a comparison of key loan characteristics for the existing and refinancing loan, including:
- Current Balance (UPB) vs. New Loan Amount
- Amortization type (Fixed/ARM) for Prior and New Loan
- Interest rate (Prior/New)
- Loan term (Remaining vs. New Term)
- Total amount the Veteran will have paid after making all payments as scheduled (Prior/New)
- LTV (Based on UPB versus Note Amount)
- Home equity being removed from property
To comply with the three (3) day disclosure requirement:
Broker Disclosed loans: Brokers are required to meet the requirements and provide the Comparison Disclosure dated within three (3) days of application. CMS will ensure compliance at Submission Acceptance or reject the loan submission.
CMS Disclosed loans: CMS will complete NTB form. If any required data elements are missing, CMS will condition the broker and cannot accept the submission until the missing items are received.
Total Loan-to-Value (TLTV)
Under the rule, the LTV is now calculated based on the total loan amount and not the base loan amount, resulting in a higher TLTV when there is a funding fee. VA will no longer guaranty refinancing loans when the TLTV exceeds 100 percent; therefore, it may be necessary to reduce the loan amount to qualify or if the Veteran borrower chooses to close a loan in which the loan amount exceeds 100 percent of the reasonable value of the property, they must pay the amount which exceeds 100 percent of the property value at loan closing.
New TLTV Calculation: Divide the total loan amount (including VA funding fee, if applicable) by the reasonable value on the Notice-of-Value (NOV) of the property determined by the appraiser.
Net Tangible Benefit (NTB) Requirements
All cash-out refinance loans must pass NTB. The refinancing loan must satisfy at least one of the following:
- Eliminate monthly mortgage insurance
- Decrease the loan term
- Decrease monthly (P&I) payments (changes from PITI to PI Only)
- Reduce the interest rate
- Maintain TLTV equal to or less than 90%
- Refinance an interim construction loan
- Increase monthly residual income
- Refinance from an adjustable-rate loan to a fixed-rate loan
Recoupment is only required on VA to VA Rate/Term refinance transactions.
Recoupment Calculation – Divide all fees, closing costs, expenses, and incurred costs (excluding taxes, escrow, insurance, and like assessments), by the reduction of the monthly principal and interest payment as a result of the refinance. If the loan being refinanced has been modified, the principal and interest reduction must be computed / compared to the modified principal and interest monthly payment.
The rule does not affect existing loan seasoning requirements and all VA-guaranteed cash-out refinance loans must be seasoned for a period of time. The required seasoning is the later of:
- The date that is 210 days after the date on which the first payment is made on the loan, and;
- The date on which the sixth monthly payment is made on the loan