VA continues to allow “Cashout refinances” to 100% of the property value. However, with the latest VA Circular 26-19-05, some fairly significant changes have been made which could affect the amount of cash a Veteran receives at closing.
New Guideline for VA Cash-Out Refinance
Effective for any new VA loan started on or after February 15, 2019, the Veterans Administration now looks at a cash-out refinance as either a Type I Cash-out Refinance or a Type II Cash-out Refinance.
- Type I Cash-Out Refinance: a refinancing loan in which the loan amount (including the VA Funding Fee) does not exceed the payoff amount of the loan being refinanced.
- Type II Cash-Out Refinance: a refinancing loan in which the loan amount (including the VA Funding Fee) exceeds the payoff amount of the loan being refinanced.
For intents and purposes, Type I VA Cash-Out Refinances will be rare. There is no “cash out” going to the borrower. And since the new loan amount, including the VA Funding Fee can’t be higher than the new VA loan, either the borrower would need to pay the closing costs and Funding Fee out of pocket, or the lender would need to adjust the interest rate up in order to generate a lender credit to cover closing costs and Funding Fee.
Type II VA Cash-Out Refinance
Most VA Cash-Out Refinances will be Type II. This is where the Veteran will actually receive funds at closing, which is generally the purpose of a “Cash-Out Refinance“. The big difference between the previous guidelines and the new guidelines is how the VA Funding Fee is treated, The VA Funding Fee was not previously included in calculation loan to value when determining the max loan amount. The Veterans Administration allowed the “base” loan amount to be 100% of the appraised value with the VA Funding Fee being financed on top of the loan. The VA Funding Fee is waived for those Veterans with a service-connected disability rating. But for all others, the VA Funding Fee on a cash-out refinance will be either 2.15% (First-time user of VA financing), 2.4% (First-time user who was in Reserves or National Guard) or 3.3% (anyone who has used their VA entitlement for a home previously). Most VA cash-out refinances are to Veterans who already have a VA loan and they are now pulling cash out for home improvements, debt consolidation, investments, or some other purpose. As a “subsequent” VA loan borrower, the Funding Fee would be 3.3% of the base loan amount.
Comparison of VA Cash-Out Refinance for Los Angeles Veteran
For Example, let’s assume Jimmy Smith bought a home in Los Angeles in January 2014 for $500,000. Now, in 2019 his home is valued at $600,000. He has paid the loan balance down to approximately $470,000. He has $130,000 of equity in the home. Jimmy is planning to do a room addition and also has some credit card debt he’d like to pay off. Under the previous guidelines, his base loan amount could have to go all the way to $600,000 (the current appraised value). The VA Funding Fee would have been financed on top of the base loan for a resulting loan amount of $619,800 (base of $600,000 * 3.3% = $19,800. $19,800 + $600,000 = $619,800).
Now, under the new guidelines, the total loan amount, including the VA Funding Fee, cannot be higher than $600,000. To determine the maximum base loan amount, and still assuming Jimmy is a subsequent user of VA Financing, we can divide $600,000/1.033 to get a base loan of $580,832. The total loan with VA Funding Fee will be $600,000. ($580,833 * 3.3% = $19,167. $580,833 + $19,167 = $600,000).
The difference in available cash-out to Jimmy is the amount of the VA Funding Fee, in this case, $19,167. This is not necessarily a bad thing and may not even matter to Jimmy, especially if he wasn’t trying to maximize the amount of cash-out he needed. But for someone who had a specific purpose for the cash-out, the new calculation could have a big effect on the amount of equity available.
Three Things to Consider When Applying for a VA Cash-Out Refinance
- Current interest rate versus the new interest rate. Is your interest rate going higher?
- VA Funding Fee. For Veteran’s with a service-connected disability rating and therefore do not have a Funding Fee added to there loan there is no concern. But for a subsequent user, adding a 3.3% Va Funding Fee to the loan should be given serious thought. One of the primary reasons for the rule changes from VA is because Veterans were being taken advantage of and unknowingly adding big fees to their loan.
- How long will you be in your home? If you plan to move in the next 3 to 5 years, then have your VA Loan Advisor run the numbers and review the breakeven. Especially if there is a VA Funding Fee, it may be best to find another way to pay off debts or pay for home improvements. A Home Equity Line of Credit may be a better option for some people depending on the amount of equity in the home.
Find a California VA Loan Advisor you Trust
Making the wrong decision on a VA cash-out refinance can cost a Veteran thousands of dollars in the short run, and maybe result in even more serious consequences down the line. There is a reason why VA has tightened the Cash-Out refinance guidelines. It is because lenders were taking advantage of the fairly liberal requirements to the detriment of Veterans. Make sure you are working with a California VA Loan Specialist who can prepare an analysis of the numbers and show you several options. Veterans deserve the best. Veterans deserve to have someone working for them with their best interest in mind.
Authored by Tim Storm, a California VA Loan Officer specializing in VA Loans. MLO 223456. – Please contact my office at Fairway Independent Mortgage Corporation NMLS 2289. My direct line is 949-640-3102. I will prepare custom VA loan scenarios which will be matched up to your financial goals, both long and short-term. I also prepare a Video Explanation of your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process