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.
Seasoning Requirement
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.
The biggest question on every California home buyer's mind right now is how will the impending recession affect home prices. Before we really get into it, let's first look at the definition of a Recession.
re·ces·sion/rəˈseSH(ə)n
A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.
A few more important questions are will there even be a recession, and if yes, when will it happen. A popular answer to that question among economists is 2020, although if it doesn't happen in 2020 then there is still a good chance of a recession in 2021 and 2022 according to the chart below.
Everyone remembers what happened in 2008 when property values dropped during the recession. But what was the cause of that recession? And do property values always drop during a recession? Let's look at a chart of the 6 most recent recessions dating back to 1980.
The year that stands out of course is 2008. Property values dropped 19.7% on a national level and even more in many areas of California. But look at the recessions in 1980, 1981, 1991, and 2001. Property values actually went up in 1980, 1981, and 2001. In 1991 properties values only went down 1.9%, which can hardly be called a bubble. So what is the explanation for why values dropped so much in 2008? Well in 2008 it was real estate that led the US economy into the recession. In 2008 you pretty much just needed a pulse to get a mortgage. There were stated income programs for people with low FICO scores and no down payment. People were buying homes with mortgage payments they couldn't afford on adjustable rate mortgages. The thinking at the time was property values would continue to go up forever.
In 2019, it is far more difficult to get a mortgage. You need to have verifiable income, good credit, and except for the case of a Veteran using the VA loan program, a down payment. And while we're on the subject of the Zero Down VA loan program, it is important to note that even in 2008 VA did not loosen their underwriting standards. Even though VA has always allowed for 100% financing, VA had the lowest default rate of any loan program after 2008. A big reason for that is because VA makes sure the Veteran can afford the payment before closing the loan.
The chart below shows the Mortgage Credit Availability Index going back to 2004. Notice that in 2006 and 2007 the index reached a very high peak before crashing down in 2008. That is when underwriting guidelines tightened. And over the last 10 years underwriting standards have remained tight.
Interest Rates During a Recession
During a recession mortgage rates will typically drop. We are in an interesting situation right now because interest rates are already very low. The Federal Reserves is not expected to lower rates further, UNLESS there is a recession. For now, interest rates are expected to stay in the same current range of 3.7% to 3.8%. While home prices may be high in California, there are still plenty of renters who would like to buy a home and can afford it. Interest rates are doing their part to help with mortgage affordability.
Property values are affected by several factors. But when you really get down to it, supply and demand is what real estate values are all about. Are there more willing and able buyers than sellers? If so, then property values will continue to rise. Low interest rates and rising rents will also help to push values higher. Unemployment is at or near all time lows. So even though home values in California are unaffordable for many, there are still plenty of renters who can afford to buy and will be looking to dive into the real estate market in the next couple of years.
An interesting analysis looks at birth rates going back to 1928. The median age of a first time buyer is 33. To see how many people will be turning 33 each year we have to go back 33 years and review birth rates. The chart below shows birth rates increased significantly from 1986 for the next several years. These millennial's are established in their jobs, getting married, and ready to buy their first home. There will be more buyers entering the market each year for the next several years. This will increase demand at a time when supply continues to be low. This will result in prices continuing to rise whether there is a recession or not.
Property values are expected to increase each year through 2022, ranging from 2.2% to 5.4% per year. Price appreciation between 2% and 3% per year is a nice steady range. For a home buyer, there is not a better return on investment than buying a home. If we assume a home buyer purchases a $500,000 home with 20% down ($100,000) and values increase 2.5% to $512,500, the home buyer has realized a 12.5% return on his $100,000 down payment. If the buyer only put 10% down ($50,000), then the return is 25%. ($12,500 return on $50,000 down payment). If the down payment was only 5%, the return is 50%. And for a Veteran with $0 down payment, the return can't even be calculated since there was no initial investment. But let's assume the Veteran did have $10,000 in closing costs. The return is 125% in the first year. And don't forget, part of your monthly payment is Principal, which is not an expense. It is the actual paying down of the loan. A home owners future net worth will be far higher with these types of returns versus a renter who is helping their landlord payoff the mortgage.
As we head into 2020, all signs point to a continued strong real estate market, whether we have a recession or not. Interest rates are expected to stay low. Demand for homes from new buyers will continue to be strong as Millennial's reach prime home buying age. Supply will continue to be tight in most markets. And based on all these factors, including supply and demand, property values are expected in appreciate. This is a great time to buy a home in California.
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.
There are 7 steps to buying a California home with a VA loan. These easy steps will provide a map for making the home buying and VA financing process easy and stress-free. The VA loan is a unique home financing program that allows for $0 down payment. There are things that your real estate professionals need to be aware if you are to have an easy time in finding and financing your home with the VA loan program.
Step 1: Choose a local California VA Approved Lender
Choosing a local California VA approved lender is a critical step in the home buying process. While many California Veterans may start with a real estate agent, beginning the process with a lender will be beneficial for the three following reasons:
You will immediately find out if you’re even eligible for the VA loan.
The lender will help you to determine your maximum purchase price.
The lender can then refer you to a real estate agent who is knowledgable in working with the 100% financing VA loan program.
Step 2: Retrieve your Certificate of Eligibility
Your Certificate of Eligibility is your ticket to the VA loan program. It verifies for the lender that the California Veteran is eligible for the VA loan. It shows the amount of entitlement available for the purchase. If there is “full entitlement” then the Veteran will be able to finance any purchase price with no down payment (there are no more loan limits in 2020 for the VA loan program). As long as you followed the directions in Step 1, then you can have your California VA Lender retrieve your Certificate of Eligibility. Your California VA lender will have direct access to the VA portal and can retrieve the Certificate of Eligibility in minutes in many cases. Sometimes more information may be needed and it can take a couple of days. Either way, making sure you are eligible prior to getting too far in the process is critical.
Step 3: Prequalify for your VA Loan
Getting Prequalified is the initial step to getting fully PreApproved for your VA loan. Just like having your financing in place before you buy a car is important, having your VA loan in place prior to shopping for a home is very important. Your California VA Loan Officer will carefully walk you through the numbers and make sure you have a thorough understanding of the payment breakdown including the principal, interest, property taxes, homeowners insurance, and homeowners association dues in the case of a California VA approved condo. Your VA lender will also provide a VA Total Cost Analysis, which shows a detailed side by side breakdown of strategies for your home purchase. Every buyer is different. It’s important to understand that even though there is no down payment required, there are still closing costs and prepaid expenses that will need to be paid just like with any other loan program. If you don’t have the funds for covering those costs then you will want to know your options for achieving a VA No No, which is where a VA buyer not only has no down payment but also no closing costs paid out of pocket. There are advantages and disadvantages to some of these VA No No strategies and understanding which strategy will work best for you BEFORE you make an offer is critical to a stress-free closing.
Step 4: Find Real Estate Agent Familiar with 100% VA Loan Program
If you don’t already have a trusted real estate agent, then you will want to make sure you are working with an agent who has experience and knowledge in what it takes to get a VA offer accepted. Your California VA lender will be able to refer you to an agent who has proven skills in getting a VA offer accepted. There are several myths of the VA loan program that can sometimes make it difficult in a competitive environment to get a VA offer accepted. An agent who specializes in working with Veterans will be able to turn those myth’s around to become strengths.
Step 5: House Hunt and Make Offer
This is the fun part. If you have followed the steps then you already know you’re good with the loan. You know the numbers and how they fit into your budget. You have a VA knowledgable real estate agent who is helping you find a home and its now time to narrow down the search. Your real estate agent will help you make sure the homes you see are eligible for VA financing. For example, if you are in the market for a condo then you will want to make sure you are seeing condos located in VA Approved condo projects. If a condo project is not VA approved then you won’t be able to get a VA loan (unless you work with your lender and the Condo Homeowners Association to get it approved, which can take be an uphill battle). You California VA Lender can help in determining which condo projects are VA approved which will speed up the search. Another reason to work with California VA loan specialist if you’re planning on buying a property in California. There are some local websites that specifically list VA approved condos for sale within that county. For example, to find VA approved condos in Orange County there is www.OrangeCountyVACondos.com. There is also another website in Orange County for VA approved condos at www.OrangeCountyVeteransHomes.com.
Once you find a potential home, your real estate agent will help you write up an offer based on your VA loan PreApproval, making sure all the VA protections and provisions are included in the contract.
Step 6: Lender Processes VA Loan and orders VA Appraisal
Immediately upon having an accepted offer, your California VA lender will jump into action. The loan disclosures will be prepared and the VA appraisal will be ordered. There will likely be updated income and asset documentation needed (paystubs and bank statements), but since you have already been through the PreApproval process, this will be very easy. It will mostly be about the property you are purchasing. You will have property inspections, which re facilitated by your real estate agent.
Step 7: Close your VA Loan and Move-in
The typical time it takes to close a VA purchase transaction is 30 days or less. If you are working with a lender who does not specialize in the VA loan program, or you did not go through the PreApproval process, then there could be some bumps in the road that delay closing. But as long as you have followed the steps, be ready for a fast and easy closing. Get your moving vans ready because you have just bought your home with No Down Payment.
Now that you are in your new home it’s time make sure you are protecting your investment, your home. Your California VA Lender (this depends on who you work with) should be able to show you strategies for paying yor loan off faster than 30 years. A good lender does not go away after the closing. A good lender will remain a valuable resource for years to come.
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.
Contact Me
Tim Storm
MLO# 223456 Arbor Financial Group Mortgage Advisor 1805 E Garry Ave Santa Ana, CA 92705
