VA considers all non-Interest Rate Reduction Refinancing Loan (IRRRL) refinances as cash-out refinances, regardless of whether or not the borrower receives cash at closing.
VA cash-out refinance transactions must pay off a lien secured by the subject property (e.g., mortgages, tax liens, judgment liens, etc.).
Note: The refinance of a free and clear property is not allowed.
For loans with an application date on or before February 14, 2019. The maximum loan amount is 100 percent of the appraised value plus the VA funding fee.
LTV Calculation: Divide the total loan amount (excluding VA funding fee, if applicable) by the reasonable value on the Notice of Value of the property determined by the appraiser.
For loans with an application date on or after February 15, 2019, VA has categorized cash-out refinance loans as the following with the published rules per Circulars 26-18-30, 26-18-30 Change 1, Circular 26-19-05 and 26-19-05 Change 1 :
TYPE I Cash-Out Refinance: A VA refinancing loan in which the loan amount (including VA funding fee) does not exceed the payoff amount of the loan being refinanced.
TYPE II Cash-Out Refinance: A VA refinancing loan in which the loan amount (including VA funding fee) exceeds the payoff amount of the loan being refinanced.
All Type I and Type II cash-out refinance loan applications must meet the following requirements to be eligible for guaranty by VA:
Loan-to-Value (LTV): Type I and Type II cash-out refinance loans cannot exceed 100% LTV.
LTV Calculation: Divide the total loan amount (including VA funding fee, if applicable) by the reasonable value on the Notice of Value of the property determined by the appraiser.
Net Tangible Benefit (NTB) Test- Type I and Type II cash-out refinance loans must pass a NTB test. The veteran borrower must be provided with a disclosure no later than the third business day after receiving the veteran’s loan application, and again at loan closing. The disclosure must include all of the following:
NTB: The refinancing loan satisfies at least one of the eight NTB requirements. See below for NTB Test Requirements list.
Loan Comparison: A comparison of key loan characteristics or terms for the new loan and the loan being refinanced. See below for NTB Test Requirements list.
Home Equity: 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.
Note: The disclosures (initial/final) must be signed/acknowledged by the Veteran/Borrower.
Loan Seasoning: VA will apply loan seasoning requirements. The requirement applies to TYPE I and Type II cash-out refinance loans. See the Loan Seasoning Requirements below.
Fee Recoupment: VA will apply fee recoupment requirements. This requirement only applies to TYPE I cash-out refinancing loans. See Fee Recoupment below.
A net tangible benefit (NTB) test for Type I and Type II must be provided to the veteran borrower, as follows:
NTB: The new loan must meet at least one of the following:
The new loan eliminates monthly mortgage insurance (public or private) or monthly guaranty insurance;
The term of the new loan is shorter than the term of the loan being refinanced;
The interest rate on the new loan is lower than the interest rate on the loan being refinanced. Note: The current rate must be used to determine NTB rate reduction, including ARMs and modified loans. (See additional requirements for Type I Interest Rate Reduction below);
The monthly (principal and interest) payment on the new loan is lower than the monthly (principal and interest) payment on the loan being refinanced;
The new loan results in an increase in the borrower’s monthly residual income. Residual income, includes monthly PITIA (principal, interest, taxes, insurance and HOA) payment. When taxes and insurance amounts are changing between the application date and the closing date, the new taxes and insurance amount will be used in determining residual income for both the new and current loan;
The new loan refinances an interim loan to construct, alter, or repair the home;
The new loan amount is equal to or less than 90% percent of the reasonable value of the home; or
The new loan refinances an adjustable rate loan to a fixed rate loan.
Loan Comparison: A comparison of key loan characteristics or terms for the new loan and the loan being refinanced:
The new loan amount vs. the payoff amount of the loan being refinanced
Loan type (i.e., fixed, adjustable) of the new loan vs. the loan being refinanced
Interest rate of the new loan vs. the loan being refinanced.
Loan term of the new loan vs. the remaining term of the loan being refinanced
The total the Veteran will have paid after making all payments (principal and interest) and mortgage insurance (as scheduled) for both the new loan vs. the remaining payments on the loan being refinanced.
LTV of the new loan vs. the payoff (including fees, escrow shortages and prorated interest) of the loan being refinanced.
Home Equity: 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.
If refinancing an existing VA guaranteed loan that has a fixed rate and using the interest rate reduction NTB option for a Type I cash-out, must meet one of the following:
Fixed Rate to Fixed Rate
The interest rate on the new loan must be lower than the interest rate for the loan being paid off by at least 0.50%
Fixed Rate to Adjustable Rate
The interest rate on the new loan must be lower than the interest rate on the loan being paid off by at least 2.00%
For loans in which the lower interest rate is due solely to discount points
The discount points must be paid at closing; or
Discount points may be added to the loan amount under the following conditions:
If discount points are less than or equal to 1 discount point the LTV must be 100% or less
If discount points are greater than 1 discount point the LTV must be 90% or less
This requirement applies to Type I cash-out loans that are existing VA guaranteed.
The recoupment period of all fees, closing costs, expenses (other than prepaids), and incurred costs must not exceed 36 months from the date of the note.
A certification confirming the loan meets the 36 months fee recoupment period is required in the loan file.
Fee Recoupment Calculation
Number of Months to Recoup: Divide the Total Closing Costs by the Monthly Savings Payment
Note: 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.
All VA-guaranteed loans must be seasoned for a period of time, before refinancing to a new VA-guaranteed loan. 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 being refinanced, and
The date on which the sixth monthly payment is made on the loan being refinanced.
Note: The date on which the 1st payment is made must be verified. Advance/prepaid payments to meet the 6 scheduled payment requirement is not permitted.
Loans seasoned less than or equal to 12 months from the date of closing, obtain a payment history/ledger from the servicing lender and/or credit bureau supplement documenting all payments were made within that timeframe.
Note: Ginnie Mae Seasoning Requirements must be met for all cash-out loans.