California VA cash out refinances in 2020 are a little different that they were at the beginning of 2019. As the result of a Circular issued by VA in 2019, and then a Memorandum issued by Ginnie Mae on August 1, 2019, there are restrictions in the underwriting guidelines that must be met for a California Veteran to pull equity from his or her home with a VA loan. The VA cash-out refinance loan program is still the most flexible mortgage program out there when it comes to pulling cash out through a refinance, it's just not quite a flexible as it used to be,
The Previous VA Cash-Out Refinance Guideline
At the beginning of 2019 it was possible to pull cash out to 100% of the property value, not including the VA Funding Fee. Not including the VA Funding Fee is the key term here. As an example, if a California Veteran owed $300,000 on his home that was valued at $400,000, he could get a $400,000 VA loan. The VA Funding Fee could be financed on top of $400,000. If the VA Funding Fee was 3.3% (subsequent use cash out VA Funding Fee) the $13,200 Funding Fee added to the $400,000 base VA loan resulted in a $413,200 VA loan. The Veteran would receive the full $100,00 cash out, less typical closing costs.
Circular 26-18-30 - VA Guaranteed Cash-Out Refinancing Home Loans
Circular 26-18-30, issued on Valentines Day, December 19, 2018, brought about significant changes to cash-out refinancing. Effective February 15, 2019, VA would no longer allow the final VA loan, INCLUDING the VA Funding Fee, to be higher than 100% of the property value. Going back to our example above, if that same California Veteran did a maximum cash-out refinance, the total VA loan, INCLUDING the Funding Fee, would be $400,000. This means the base VA loan would be $387,221. This also means the Veteran receives $87,221 cash-out, less closing costs, instead of $100,000 less closing costs. In this example, the Veteran receives $12,779 less cash out with the new guideline.
All of this really started with the issuance of VA Circular 26-18-13 on May 25, 2018. This circular "brought about important changes that go into effect immediately". It was brought about as a result of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018. It included The Protecting Veterans From Predatory Lenders Act of 2018. Several lenders got in trouble for "churning" loans, which negatively affected how the VA loan program was perceived on the Secondary Market.
Ginnie Mae All Participants Memorandum 19-05
On August 1, 2019, Ginnie Mae issued All Participants Memorandum 19-05, which brought about a further significant change to VA cash-out refinancing. Ginnie Mae would no longer allow VA cash-out refinances where the loan amount was greater than 90% of the property value to be included in Ginnie Mae I Single Issuer Pools and Ginnie Mae II Custom Pools.
First, a quick explanation of who Ginnie Mae is. Ginnie Mae is a government owned corporation that issues Mortgage Backed Securities (MBS) which directly support housing programs by the Federal Housing Administration, the Department of Veterans Affairs, and Department of Agriculture Rural Housing Service. Ginnie Mae had begun to see that their Primary MBS pools were losing favor on the market due to excessive refinance churning. To protect the pools, which in turn helps to keep VA loan interests lower than other types of loan programs, Ginnie Mae made these changes to make it tougher refinance multiple times within a short period of time. 100% cash out refinancing is still allowed, but must be placed in a Ginnie Mae II Custom Pool. Without getting any more technical than we already have, just know that the interest rate for a loan placed in the a Ginnie Mae II Custom Pool will be quite a bit higher than for VA loans placed in the larger primary pools, Ginnie Mae I Single Issuer Pools and Ginnie Mae II Custom Pools.
In addition to the changes mentioned already. Ginnie Mae also spelled out seasoning requirements for any VA loan in their MBS Pools.
The note date of the refinance loan must be on, or after, the later of:
- the date on which the borrower has made at least 6 monthly payments on the loan being refinanced; and
- that date is 210 days after the first payment due date of the loan being refinanced.
If a California VA cash out refinance meets the #2 requirement of 210 days after the first payment due date then it will surely also meet the 6 payment requirement. As an example, if a California Veteran bought a property and closed escrow on March 15, 2019, then their first payment due date would be May 1. To meet the 210 day seasoning requirement, the Note date of the refinance (most likely the signing date) could not be until November 27, 2019. A quick way to calculate the 210 days is using a Days Between Dates Calculator. By November 27, the California Veteran would have made 7 payments, so the 6 payment requirement would also have been met.
The Bottom Line on VA Cash Out Refinancing in California
Compared to any other type of cash-out refinancing, even at 90% loan to value VA comes out ahead. Especially considering the interest rate comparison and the fact that there is no Mortgage Insurance on a VA loan. However, the VA Funding Fee is harsh. VA Funding Fees for cash out refinancing are increasing in 2020 from 3.3% to 3.6%. Even at 3.3% it was high. For those Veterans in California who have a service connected disability rating with VA the Funding Fee is waived, which is awesome. But if there is no Funding Fee waiver, then it will be important to thoroughly review the numbers to make sure a cash-out VA refinance makes sense. And the best way to do a thorough review of the number for your refinance is to have a local California VA Loan Officer prepare a Side by Side VA Total Cost Analysis, which will show a comparison of several options, side by side compared to your current loan.
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 714-478-3049. I will prepare custom VA loan scenarios that 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.