In their Circular 26-19-05, the VA clarified policies regarding cash-out refinancing loans, including refinancing of construction (construction-to-perm) loans. The VA will update IRRRL regulations in an upcoming rulemaking. This rule became effective on February 15, 2019. The circular addresses new requirements for: 1) loan-to-value requirement on refinance loans; 2) net tangible benefit test; 3) loan seasoning; and 4) fee recoupment;
- The circular states that the VA will no longer guaranty refinance loans where the loan to value ratio exceeds 100%.
- Net Tangible Benefit (NTB) Test must be passed for all cash-out refinancing loans. The Circular lists eight different ways the NTB requirement may be met. Additionally, the circular requires the lender to provide the borrower with the following disclosures:
- A Loan Comparison Disclosure comparing the new loan to the existing loan being refinanced are required to be made within 3 business days from the initial date of the loan application and at closing. These disclosures are required to be certified by the borrower. VA provides a sample Loan Comparison Disclosure as Exhibit A to the Circular.
- A Home Equity Disclosure showing the amount of home equity being removed from the home as a result of the new loan must be provided to the Veteran within 3 business days from the initial date of the loan application and at loan closing. These disclosures are also required to be certified by the borrower.
- Loan Seasoning. Seasoning applies to all VA-VA cash-out refinancing loans and a new Type I or Type II loan will not be eligible unless it meets the seasoning requirements as of the date of closing. In order to meet the seasoning requirements, the first monthly payment of the loan being refinanced was made 210 days or more prior to the closing date of the refinancing loan; AND six monthly payments have been made on the loan being refinanced. NOTE: Change 1 to Circular 26-19-05 replaced Page 4, section d, subsection (3) with “For loans being refinanced within 1 year from the date of closing, lenders must obtain a payment history/ledger documenting all payments, unless a credit bureau supplement clearly identifies all payments made in that timeframe. If the loan is selected for audit by VA, the lender must include the payment ledger/history and/or credit bureau supplement of the loan being refinanced in the loan file for VA review.”
Fee Recoupment applies to Type I refinancing loans. The recoupment of fees, expenses and closing costs cannot exceed 36 months from the date of loan closing. Closing costs include those paid outside of closing. Fees excluded from the computation are discussed in the Circular and the Circular provides examples of computations.