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Veterans Benefits Administration

Veterans Benefits Administration. Loan Guaranty Service Cash-Out Refinance. Briefed by: Amy Berumen and Kent Koehler Date: April 2019. CASH-OUT REFINANCE.

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Veterans Benefits Administration

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  1. Veterans Benefits Administration Loan Guaranty Service Cash-Out Refinance Briefed by: Amy Berumen and Kent Koehler Date: April 2019

  2. CASH-OUT REFINANCE A VA cash-out refinance loan is a loan, other than an Interest Rate Reduction Refinancing Loan (IRRRL), made to refinance any existing home loan or other indebtedness secured by a lien of record on a dwelling or farm residence owned and occupied (or re-occupied, as applicable), as a home, by an eligible Veteran or Veteran’s spouse.

  3. OBJECTIVE To help lenders orient themselves with recently enacted authorities. NOTE: Nothing in this presentation supplements, overrides, or supersedes any provisions of applicable statutes, regulations, or the rulemaking process.

  4. CASH-OUT REFINANCE • Public Law 115-174, The Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act), was signed into law by the President on May 24, 2018. • On December 17, 2018, VA published an interim final rule (83 FR 64459) implementing standards for cash-out refinance loans, as required under section 309 of PL 115-174. • The rule was effective on February 15, 2019 and applies to all VA cash-out refinancing loans.

  5. TYPE I CASH-OUT REFINANCE TYPE I • A VA Type I cash-out refinance loan is a loan in which the loan amount is equal to or less than the payoff amount of the loan being refinanced. • The loan is made to refinance an existing VA-guaranteed home loan. (VA-to-VA)

  6. TYPE I CASH-OUT REFINANCE REQUIREMENT: (Fixed-to-Fixed) • Interest rate reduction is required for Type I cash-out refinances, in which the loan being refinanced has a fixed interest rate and the new loan will also have a fixed interest rate. • The interest rate on the new loan must not be less than .50 percent (50 basis points) less than the interest rate of the loan being refinanced.

  7. TYPE I CASH-OUT REFINANCE REQUIREMENT: (Fixed-to-ARM) • Interest rate reduction is required for Type I cash-out refinances, if the loan being refinanced has a fixed interest rate and the new loan will have an adjustable rate, the interest rate on the new loan must be 2 percent (200 basis points) less than the interest rate of the loan being refinanced.

  8. TYPE I CASH-OUT REFINANCE REQUIREMENT cont.: (Fixed-to-ARM) • The lower interest rate must not be produced solely from discount points, unless such points are paid at closing and not added to the loan amount.

  9. TYPE I CASH-OUT REFINANCE REQUIREMENT cont.: (Fixed-to-ARM) Discount points may be added to the loan amount provided that, • Discount points equal to or less than one discount point, the loan-to-value (LTV) ratio does not exceed 100 percent of the reasonable value. • Discount point greater than one discount point, the LTV ratio does not exceed 90 percent of the reasonable value.

  10. TYPE II CASH-OUT REFINANCE TYPE II • A VA Type II cash-out refinance loan is a loan in which the loan amount, including VA funding fee (if financed), is larger than the payoff amount of the loan being refinanced. • The loan is made to refinance existing VA-guaranteed or non-VA guaranteed home loans.

  11. CASH-OUT REFINANCE Cash-out refinancing loans that do not meet the following requirements will not be eligible for guarantee by VA. • Net Tangible Benefit (NTB), • Loan Seasoning (as applicable), and • Recoupment (as applicable) Other stakeholders, such as investors, lenders, and government-sponsored enterprises, may also have authority to overlay additional requirements.

  12. NET TANGIBLE BENEFIT • Net tangible benefit (NTB) means that the new loan is in the financial interest of the Veteran. • It applies to ALL cash-out refinances.

  13. NET TANGIBLE BENEFIT REQUIREMENT: • All cash-out refinancing loans must provide a net tangible benefit (NTB) to the Veteran. • The lender must disclose the NTB to the Veteran no later than 3 business days from the date of loan application and at loan closing. • NTB test must be satisfied.

  14. NET TANGIBLE BENEFIT The NTB test is satisfied if the new loan does one or more of the following. • Eliminates monthly mortgage insurance • Shorter loan term • Lower interest rate • Lower monthly payment • Increase monthly residual income • Refinances an interim construction loan • LTV is equal to or less than 90% • Refinances an ARM to a fixed rate mortgage

  15. LOAN SEASONING • Loan seasoning refers to the age of the loan being refinanced. • It applies to Type IandType II cash-out refinance loans made to refinance existing VA guaranteed loans. (VA-to-VA)

  16. LOAN SEASONING REQUIREMENT: All Type I and Type II cash-out refinances made to refinance existing VA guaranteed loans must be seasoned on or before the new loan closes.

  17. LOAN SEASONING For VA refinancing purposes, a loan is considered seasoned when both of the following conditions are met: • The first monthly payment of the loan being refinanced was made 210 days or more prior to the closing date of the new loan; AND • Six monthly payments have been made on the loan being refinanced.

  18. LOAN SEASONING CALCULATION: When calculating loan seasoning, the actual date of payment should be used.

  19. LOAN SEASONING Example: • The loan closed March 8, 2019. • The first payment is due May 1, 2019. • The Veteran made the first payment on April 29, 2019. If six monthly payments have been made by the Veteran, loan seasoning will be met 210 days* from April 29, 2019. (*November 25, 2019)

  20. LOAN SEASONING Q. What documentation is needed as evidence of loan seasoning? • During VA’s audit process, VA will look for evidence confirming that the loan being refinanced was properly seasoned. Such evidence could include, a payment history/ledger documenting all payments or a credit bureau supplement clearly identifying all payments made in that timeframe, etc.

  21. RECOUPMENT • Recoupment describes the length of time it takes for a Veteran to pay fees, closing costs, and expenses (other than taxes, amounts held in escrow, and fees paid under 38 U.S.C. Chapter 37). • It applies to all Type I cash-out refinances.

  22. RECOUPMENT REQUIREMENT: The lender must certify that the recoupment period of fees, closing costs, and expenses (other than taxes, amounts held in escrow, and fees paid under 38 U.S.C. chapter 37) that would be incurred by the Veteran, will not exceed 36 months from the date of loan closing.

  23. RECOUPMENT CALCULATION: • Recoupment must be calculated through lower principal and interest (PI) monthly payments as a result of the new loan. • VA funding fee, escrow, and prepaid expenses, such as, insurance, taxes, special assessments, and homeowners’ association (HOA) fees shall be excluded from the recoupment calculations.

  24. RECOUPMENT Example: • PI payment of the loan being refinanced is $654; PI payment of the new loan will be $604; Reduction of monthly PI payment as a result of the refinance is $50 ($654 minus $604). • Fees/expenses/closing cost included in the loan amount is $1,000. Appraisal and credit report fee paid outside of closing total $436.49. $1,436.49 (fees/expenses/closing costs) ÷ $50.00 (PI reduction) = 29 months* *28.72 months rounded to the nearest month

  25. RECOUPMENT Q. Does recoupment apply to Type I cash-out refinances, if the monthly payment (PI) is not reduced as a result of the refinanced loan? A. Yes, recoupment applies to all Type I cash-out refinances. Q. Does recoupment apply to Type I cash-out refinances when the monthly PI payment is increased due to the reduction of loan term or the refinance of an adjustable rate to a fixed interest rate mortgage? A. Yes, recoupment applies to all Type I cash-out refinances, regardless of the loan term.

  26. CASH-OUT REFINANCE DISCLOSURES The lender must disclose the following information to the Veteran in a standardized format. • Net Tangible Benefit Test • Comparison Statement • Equity Statement The lender must provide initial disclosures to the Veteran no later than 3 business days from the date of loan application and final disclosures at loan closing.

  27. CASH-OUT REFINANCE DISCLOUSRES REQUIREMENTS: The Veteran must certify that he/she received the disclosures timely.

  28. CASH-OUT REFINANCE DISCLOUSRES Example: On March 1st the Veteran could certify that he received the disclosures on both occasions, e.g. January 1st (one day after submitting the loan application) and February 1st (date of closing). NOTE: Certification may include, a signature, an e-signature, or email from the Veteran. .

  29. COMPARISON STATEMENT • The loan comparison statement provides the borrower with upfront information about the overall cost of the new loan. • It applies to ALL cash-out refinances.

  30. COMPARISON STATEMENT The comparison statement must compare the following of the new loan to the loan being refinanced: • Loan Amount / Payoff Amount • Loan Type • Interest Rate • Loan Term • Loan-to-Value (LTV) • Total Payments

  31. COMPARISON STATEMENT • Loan Amount / Payoff: The loan amount of the new loan compared to the payoff amount of the loan being refinanced. • Loan Type: The new loan type compared to the type of loan being refinanced (i.e. fixed, adjustable). • Interest Rate: The interest rate of the new loan compared to the interest rate of the loan being refinanced.

  32. COMPARISON STATEMENT • Loan Term: The term of the new loan compared to the remaining term of the loan being refinanced. • LTV: The LTV ratio of the loan being refinanced compared to the LTV ratio of the new loan.

  33. COMPARISON STATEMENT • Total Payments: The total principal and interest (PI) payments the Veteran will have paid after making all payments as scheduled on the new loan compared to the total remaining principal, interest, and mortgage insurance (if applicable) payments the Veteran will have paid after making all remaining payments of as scheduled on the loan being refinanced.

  34. EQUITY STATEMENT • VA defines home equity as the difference between the reasonable value of the property and the amount needed to payoff and/or satisfy all liens attached to the property. • It applies to ALL cash-out refinances.

  35. EQUITY STATEMENT REQUIREMENTS: • The lender must provide the Veteran an estimate of the amount of home equity being removed from the property as a result of the new loan, and • Explain that the removal of home equity may affect the borrower’s ability to sell the home at a later date.

  36. QUESTIONS & ANSWERS

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