VA streamline refinance pros and cons

Veteran with familyThe Veteran's Administration revised the refinance loan program. The change applies to VA cash-out refinance loan applications taken on, or after February 15, 2019. The VA views any loan that exceeds the current loan balance as a cash out refinance. Rolling in closing and escrow costs would constitute a cash out refinance because the new loan amount would exceed the current loan balance.

The VA has removed the "streamline" name from the new loan programs. There are three categories of refinance loans; Interest Rate Reduction Refinancing Loans (IRRRL), TYPE I Cash-Out Refinance, and TYPE II Cash-Out Refinance.

The TYPE I Cash-Out Refinance

A Type 1 refinance may not exceed the payoff amount of the loan being refinanced (including VA funding fee).

If the veteran desires to "roll in" the closing and escrow costs into the new loan, the lender must perform a "recoupment" test to determine whether the additional fees, closing costs, expenses, and incurred costs (excluding taxes, escrow, insurance, and like assessments) can be recovered within 36 months from the date of the date of the note date (i.e. mortgage settlement date.

The fee recoupment test is a simple calculation of the total closing costs by the monthly savings payment. For example, if the closing costs on the new loan equal $2,000 and the monthly mortgage payment is reduced by $100, the calculation would be as follows:

$2,000 divided by $100 = 25 months. However, if the savings was only $50 per month, it would take 50 months to recoup the closing costs and fees. In this scenario, the loan would not meet the fee recoupment test because the costs have to be recovered within 36 months.

The TYPE 2 Cash-Out Refinance

The Type 2 loan may exceed the payoff amount of the loan being refinanced (including VA funding fee).

Maximum loan to value percentage for Type 1 & 2 refinance loans

The maximum loan to value percentage for a type 1 & 2 loan is 100% of the Notice of Value of the property (LTV). Notice of Value is the VA term for appraised value. The maximum loan percentage is calculated by dividing the total loan amount (including VA funding fee, if applicable) by the appraised value.

VA Net Tangible Benefit (NTB) Test

The net tangible benefit test is required on many refinance programs. The benefit test is required by the VA to ensure that the refinance loan is in the veteran's best interest and not the lender's.

VA Net Tangible Benefit Test (NTB)

Lenders must ensure that all cash-out refinancing loans pass a NTB, which includes providing the Veteran with the following information no later than the third business day after receiving the Veteran’s loan application, and again at loan closing:

(a) The refinancing loan satisfies at least one of the following eight NTB:

(i) The new loan eliminates monthly mortgage insurance, whether public or private, or monthly guaranty insurance;
(ii) The term of the new loan is shorter than the term of the loan being refinanced;
(iii) The interest rate on the new loan is lower than the interest rate on the loan being refinanced;
(iv) The payment on the new loan is lower than the payment on the loan being refinanced;
(v) The new loan results in an increase in the borrower’s monthly residual income;
(vi) The new loan refinances an interim loan to construct, alter, or repair the home;
(vii) The new loan amount is equal to or less than 90 percent of the reasonable value of the home, or;
(viii) The new loan refinances an adjustable rate loan to a fixed rate loan.

(b) A comparison of key loan characteristics or terms for the existing and refinancing loan, including:

(i) Refinancing loan amount
vs. the payoff amount of the loan being refinanced.
(ii) Loan type (i.e., fixed, adjustable) of the refinancing loan vs. the loan being refinanced.
(iii) Interest rate of the refinancing loan vs. the loan being refinanced.
(iv) Loan term of the refinancing loan vs. the loan being refinanced.
(v) The total the Veteran will have paid after making all payments (principal and interest), and mortgage insurance, as scheduled, for both the refinancing loan and the loan being refinanced.
(vi) LTV of the refinancing loan vs. the loan being refinanced

(c) An estimate of the home equity being removed from the home as a result of the refinance and explain how the removal of home equity may affect the Veteran. SOURCE: Revisions to VA- Guaranteed Cash -Out Refinancing Home Loans. Circular 26-18-30

Interest Rate Reduction – Type I

An Interest Rate Reduction Refinance Loan (IRRRL) is a loan program to refinance an existing VA loan to a lower monthly payment.

The loan proceeds may only be applied to paying off the existing VA loan and to costs of obtaining or closing the IRRRL. Cash out at settlement is prohibited, however, the VA will permit up to $500 at settlement for adjustments due to computational errors and changes in final pay-off figures

The new loan may include any late payments and late charges, however, the existing loan must be current at time of refinance. Allowable fees and charges (includes up to two discount points). The VA funding fee and any energy efficiency improvements may be included in the new loan.

The Interest Rate Reduction Refinance Loan requires the new loan to meet the VA Net Tangible Benefit test (see above). The Fee Recoupment test must also be met.

There must be an interest rate decrease:

Current Fixed Rate to Fixed Rate refinances must reduce the interest rate by at least .50 in rate.
Current Fixed Rate to Adjustable Rate refinances must reduce the interest rate by at least 2.00 in rate.

Appraisals

Appraisals are required if discount points are charged. If no discount points are charged an appraisal is not required.

Discount Points:

An appraisal is required if discount points are charged. (VA Circular 26-18-13 Exhibit A)
The maximum loan to value is 100% if the discount point less than or equal to 1%
If the discount points are greater than 1%, the maximum loan to value is 90%.

Bankruptcy, Foreclosure, Deed-in-lieu and Short Sale:

Must meet VA guidelines and must be seasoned a minimum of 2 years.

Collection accounts:

Collection accounts are not required to be paid off.

Tax Liens and Judgments:

In all cases, outstanding tax liens and judgments must be paid at or before closing.

Employment:

Employment or source is not verified

Income:

Income is not documented
The loan application should not reference income
Exception: When the PITIA will increase 20% or more it must be determined that the borrower has stable and reliable income to support the proposed payment along with other recurring monthly obligations.

1. What is a VA home loan?

2. Are all VA loans no money down?

3. Are national guard members eligible for VA loans?

4. Are there closing costs associated with a VA loan?

5. Are there points on a VA loan?

6. Are there VA loan limits?

7. Are VA loan rates the same as conventional rates?

8. Are VA loan rates the same at all banks?

9. Can a buyer pay for a termite inspection on a VA loan?

 10. Can a veteran get a VA loan with bad credit?

11. Can a lender charge points on a VA loan?

12. Can a national guard member get a VA loan? Can a VA loan be denied?

13. Can a VA loan be for 15 years?

14. Can a VA loan be used for a duplex?

15. Can a VA loan be used for a rental property

16. Can a VA loan be used for new construction?

17. Can a VA loan be used on a second home?

18. Can a VA loan be used to refinance?

18. Can a buyer pay closing costs on VA loan?

20. Can closing costs be added to a VA loan?

21. Can I get a jumbo VA loan?

22. Can I get a VA loan after bankruptcy?
23. Can a VA loan be used for a vacation home?

24. Can a VA loan be used to build a house?

25. Can I get a VA loan if I had a foreclosure?

26. Can the seller pay all closing costs on a VA loan?

27. Can the VA funding fee be rolled into the loan?

28. Do I have to escrow my property taxes with a VA loan?

29. Do I have to have a down payment with a VA loan?

30. Do I have to pay mortgage insurance on a VA loan?

31. How is the VA funding fee calculated?

32. Do I need a home inspection for a VA loan?

33. Do VA loans have a lower interest rate?

34. Do VA loans have closing costs?

35. Do VA loans have prepayment penalties?

36. Do VA loans require an appraisal?

37. Does a seller have to pay closing costs on a VA loan?

38. Do VA loans require escrow?

39. Does VA have loan limits?

40. How does a VA jumbo loan work?

41. How much can I afford for a VA home loan?

42. How much is pmi on a VA loan?