by Tim Storm | Mar 4, 2019 | Blog, VA Refinance
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
by Tim Storm | Jan 22, 2018 | Blog, VA Refinance
The VA mortgage program is an excellent option for California’s Veterans when it comes to refinancing home to pull cash out. Similar to how VA allows for 100% financing on a home purchase, VA also allows 100% financing on cash out refinances.
There are two main types of refinance programs available using VA financing. The VA IRRRL or Interest Rate Reduction Refinance Loan, which is also known as a VA Streamline Refinance, is an extremely simplified process that doesn’t require a new appraisal and only needs a minimal amount of documentation. With a streamline refinance, a veteran has the ability to lower their interest rate and/or take time off of their loan term. The VA IRRRL is strictly a “VA to VA” refinance, meaning you must already have a VA loan to take advantage of the IRRRL program. Also, a VA IRRRL DOES NOT ALLOW CASH OUT. And this is where the other VA refinancing program comes into play. A VA cash out refinance is a much more thorough process but allows cash out up to 100% of the property value.
9 Things to Know about a VA Cashout Refinance
- The current loan being refinanced does not need to be a VA loan. Yes, you can refinance an FHA or Conventional loan into a VA loan. Many Veterans refinance their CalVet loans into a VA loan since CalVet does not offer refinancing.
- VA allows for cashout refinancing up to 100% of the property value. No other program even comes close.
- The VA program is not a one time benefit. It can be used multiple times.
- VA allows a cashout refinance to payoff a Chapter 13 bankruptcy. This is just an example of how flexible the qualifying is.
- Unlike the IRRRL program, a VA cashout refinance is a fully qualifying loan. Full income and asset documentation, appraisal, and clear termite report are required.
- It only takes 30 days to close.
- VA interest rates tend to be very competitive with other loan programs, despite the fact that VA will allow 100% financing.
- There is no PMI, or monthly Mortgage Insurance (like you would have on other loan program that allow financing above 80% loan to value.
- There is a VA Funding Fee, except for those Veterans with a disability rating. (VA waives the Funding Fee for Veterans who have a Disability Rating)
In order to get a VA cash out refinance, California Veterans will need to provide the lender their income and employment documentation. The lender will also need to order a new appraisal of the property to verify the property value and establish the maximum loan amount.
While VA cash out refinances are able to be completed up to 100% value of the property, not all lenders follow will do everything VA allows. With many VA cash out refinances, some lenders will limit the maximum cash out amount to 90% of the property value. If you run into a situation where the lender is limiting your cashout to less than 100% of the property value (and you want the higher loan amount), find another California VA lender who can get you the loan amount you want.
When checking into your options for refinancing, it is important to research and give consideration to all available possibilities. A VA refinance is a great option for California Veterans, but the VA Funding Fee can be steep (unless you get the waiver). If you only need cash out to 80% of the property value, then a Conventional loan may be a better option. Have your favorite California VA Loan Specialist prepare a Side by Side comparison of the programs so that you can see your options.
Authored by Tim Storm, a California VA Loan Officer specializing in VA Loan. MLO 223456. – Please contact my office at the Home Point Financial. My direct line is 949-640-3102. www.CaliforniaVALoanExpert.com. 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 the your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.
by Tim Storm | Mar 27, 2017 | Blog, VA Refinance
There is more than one type of VA refinance program available for California Veterans. While the most common type of VA refinance program is the VA Interest Rate Reduction Reduction Refinance, or VA IRRRL, the VA cashout refinance is also very a very popular VA refinance program.
What is a VA IRRRL?
A VA Interest Rate Reduction Refinance, also know as an IRRRL or VA Streamline Refinance, is only for current VA borrowers.You must already be in a VA loan. It offers a great benefit to current VA loan borrowers because it allows for an easy way to take advantage of improving interest rates.
- The Veteran must already have a VA loan
- No cash out is allowed. This program is strictly a “Rate and Term” refinance.
- No income documentation is needed. Employment is verified, but debt to income ratios are not reviewed.
- No asset verification, meaning no bank statements needed, unless the Veteran will need money to close the IRRRL.
- No appraisal or termite report required. This is the best part and makes the time to close a VA IRRRL very short since the lender doesn’t have to wait for an appraisal or termite inspection report.
- The Veteran must either be lowering their interest rate and payment, shortening the term (some qualifying requirements may be needed if the payment is going up), or going from an Adjustable Rate Mortgage to a Fixed rate.
The VA IRRRL is so easy to close that it is also advertised heavily by some lenders who don’t always have the Veterans best interest in mind. Current VA borrowers are used to receiving mailers from lenders offering interest rates that are “too good to be true” (in the words of many of my clients). Make sure to read the fine print, or contact a VA lender you trust for advice on whether a VA IRRRL makes sense for you. Also, while some lenders will advertise that you will “skip payments”, that is never the case with any type of refinance. Mortgage interest will be collected and paid on the loan being paid off every time. It’s just a matter of whether you choose to have it added to the new loan or pay it out of pocket. Make sure you know how much you will save monthly, as well as what the “breakeven” time period will be on your refinance. Make sure you will breakeven prior to when you think you will sell your home.
Any VA refinance that is not an IRRRL is a “cash out refinance”. Even if the Veteran will not be receiving cash out at closing, VA still considers the refinance to be “cash out” if the borrower is refinancing from a non-VA loan. And why, you ask, would someone choose to refinance from a non-VA loan into a VA loan. There are many reason, including:
- VA interest rates tend to be lower than most other types of loan programs. And the interest rate spread widens in favor of VA for borrowers whose FICO scores are lower than 740, or are pulling cash out, or have a loan to value of 80% or higher.
- Some lenders will allow VA refinancing for borrowers with FICO scores as low as 580. That can’t be done with Conventional financing.
- VA allows “cash out” refinancing up to 100% of the property value. Conventional programs cap out at 80% of the value. Also, unlike Conventional financing, there are no “pricing adjustments” for the worse for pulling cash out with a VA loan.
- VA has much shorter wait periods after major credit events like a bankruptcy (2 years after discharge for VA versus 4 years for Conventional), foreclosure (2 years for VA versus 7 years for Conventional) or short sale.
- VA allows for higher debt to income ratios (no cap – not unusual to have debt to income ratios above 50% on a VA loan versus a cap of 45% on Conventional financing)
- Jumbo VA program allows for cash out at a much higher loan to value than standard Jumbo programs. For example, in Orange or Los Angeles counties, where the VA loan limit for 100% financing is $636,150, a Veteran could pull cash out to a little over 90% of the property value if the appraisal was in the $1,000,000 range. And it would be at a lower rate than comparable Jumbo programs.
Typical Uses of Cash Out from a VA Refinance
The Veteran can use the cash out for just about any purpose. But the most common purposes are listed below.
- Debt Consolidation. This is a great way to pay off high interest rate credit cards that you are carrying the balance on.
- Home Improvements. – with property values increasing over the past few years, Veterans now can take advantage of their equity and improve their homes, whether it is paint, flooring, a kitchen remodel, etc. Since the loan can be up to 100% of the property value, it acts as a far easier way to improve your home versus a construction loan.
- Refinance from a CalVet Loan. Because CalVet does not refinance, Veterans end up locked into an interest rate that is higher than the market. They aren’t able to do a VA IRRRL because their loan is CalVet, not VA. Refinancing their CalVet loan into a VA loan can lower their payment and give them access to the VA IRRRL if rates drop later.
- Education. College is expensive. Many Veterans will take advantage of the VA cashout refinance program to help cover college expenses for their kids.
- Pay off a HERO or PACE loan. The HERO loan program is used for energy efficient improvements to the home. It is most typically used for solar panels, but can include other energy efficient improvements as well. In many cases it is then paid through the annual property tax bill. Depending on the size of the HERO loan, the tax bill increase can catch some people off guard. And if they have an impound account for property taxes, it can also throw their lender off guard when the property tax bill comes in much higher than expected, resulting in the lender increasing the monthly mortgage payment to make up for the higher tax bill. Using a VA cash out refinance to payoff the HERO loan will put the property tax payment back down to a reasonable level.
For someone who has never had a VA loan it is important to know that VA does require a few things that are not required with other types of financing. With VA, there will most likely be an impound/escrow account for property taxes and insurance. This means you will pay 1/12 of your property taxes and homeowners insurance each month as part of your mortgage payment. Also, VA requires a clear termite report prior to closing. And the last important thing to know is that VA requires a Funding Fee on cash out refinances (and purchases). Depending on whether you have used VA financing previously, the Funding Fee can be as high as 3.3% of the loan. It can be financed into the loan amount. For Veterans who have a disability, their Certificate of Eligibility will inform the lender to waive the VA Funding Fee.
The best way to determine whether a VA refinance is for you, and what your option are, is to call a California VA loan offer who specializes in the VA loan program. The Loan Officer should be able to provide custom loan scenarios that will not only show the payment breakdown, but also accurately estimate the closing costs and cash going back to you.
Authored by Tim Storm, a California Loan Officer specializing in VA home Loans. MLO 223456. – Please contact my office at the Home Point Financial. 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 the your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.
by Tim Storm | Mar 19, 2017 | Blog, VA Refinance
The VA cash out refinance is one of the most under utilized VA benefits available for California Veterans. The advantages of using the VA loan program for pulling equity out of your home include being able to borrower up to 100% of your home value, flexibility when it comes to credit and income qualifying compared to other types of financing, and lower interest rates compared to other types of programs. With those advantages over other home loan programs you would think all Veterans would at least compare their VA loan options when considering a cash out refinance. But many Veterans either don’t realize how good the VA loan program is, or don’t realize it is even an option.
Who is Eligible for a VA Cash Out Refinance?
Any California Veteran is most likely eligible for a cash out VA refinance. The loan being refinanced does not need to be a VA loan. As a matter of fact, many Veterans have found over the last few years that because VA allows financing up to 100% of property value with no monthly mortgage insurance, even “rate and term” refinancing from a Conventional or FHA loan into a VA loan can save a lot of money. Even if you have had a VA loan previously, your Entitlement can be restored in most cases so that you can get another VA loan. It is even possible to have more than one VA loan at a time, as long as the new VA loan is on your Primary Residence.
What are the Credit Requirements for a Cash Out VA Refinance?
VA has very flexible credit and FICO score requirements compared to Conventional loan programs. While most California VA lenders will allow a cash out refinance for Veterans with a FICO score over 620, there are some California VA lenders who go allow for the FICO score to be as low as 580. Try that on a Conventional loan 🙂 . Also, VA has a very short wait period after bankruptcy and foreclosure. VA will allow a cash out refinance only two years after a bankruptcy, foreclosure, or short sale. It’s even possible to use a VA cash out refinance to pay off a Chapter 13, as long as the scheduled payments have been made on time and the Chapter 13 bankruptcy has been going for 24 months.
What is the Maximum VA Loan Amount?
There is not a “maximum VA loan amount”. That statement may not sound right to some, but it is true. There is a maximum 100% financing VA loan limit which varies for each county. But it is possible to get a Jumbo VA Loan if your loan amount is higher than the 100% loan limit. The base 100% VA loan limit in 2018 is $453,1100, but there are 25 “high cost” counties in California with 100% VA loan limits higher than $453,100. The highest 100% loan limit in California in 2018 is $679,650. Some of the California counties with the maximum loan 100% loan limit are Orange, Los Angeles, Alameda, Contra Costa, and San Mateo. Jumbo VA loans over $1,000,000 are not unusual.
Typical Reasons for a VA Cash Out Refinance
- Cash out for home improvements – kitchen remodel, windows, room addition, etc
- Cash out for debt consolidation – paying off credit card debt or other installment loans, student loans
- Cash out to pay off HERO Loan/PACE loan for solar panels.
- Cash out for emergency reserves or investment
- Refinance from Conventional loan to VA to lower the interest rate, especially when there is less than 20% equity in the home and the Conventional loan has PMI.
How Difficult is it to Qualify for a Cash Out VA Refinance?
We already discussed the relative flexibility in credit standards. VA is also flexible in allowing a higher debt payments to income ratio than other programs. While Conventional financing caps the debt to income ratio at 45% in most cases, VA does not have a cap. VA is more concerned with the “disposable income”. It is not unusual for VA loans to fund with debt to income ratios higher than 50% or even 55%. Some California VA lenders may have an “overlay requirement” and not allow debt to income ratios over 45% or 50%, so it’s important to work with a California VA lender that follows VA underwriting guidelines as closely as possible.
To learn more about a VA Cash Out refinance, contact a California VA Loan Expert. Working with someone who specializes in VA financing is important because the VA program is unique. Most loan officers don’t understand many aspects of the VA loan program and may even talk a Veteran out of using the program because of their lack of knowledge. Don’t let that happen to you. Find out how you can benefit from a VA cash out refinance.
*Updated Jan 22, 2018 for new loan limits.
Authored by Tim Storm, an Orange County VA Loan Officer specializing in VA Loan. MLO 223456. – Please contact my office at the Home Point Financial. 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 the your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.
by Tim Storm | Jan 12, 2015 | Blog, VA Refinance
The VA IRRRL refinance program is a great way for California VA loan borrowers to take advantage of low interest rates. An IRRRL, or Interest Rate Reduction Refinance Loan is also sometimes called the VA Streamline Refinance. The reason it is called a “Streamline” refinance is because of how easy the loan process is. There is probably not another refinance that is easier to close that this program.
IRRRL – The Easiest Refinance You’ll Ever Do
Going through the IRRRL loan process is nothing like going through a purchase loan process. With the IRRRL there is no appraisal required. There is no termite inspection needed, and the qualifying couldn’t be easier. There is no income documentation needed since the debt to income ratios and residual income are not calculated for this program. Also, no bank statements are needed. So what is needed? In most cases a credit report will be run in order to get the California VA borrowers FICO scores and the mortgage rating. The VA borrower must be current on their loan in order to take advantage of the program. Also, many lenders require that at least 6 payments have been made in prior to getting approved, although there are some lenders who will close with less seasoning. The FICO score will have some effect on the interest rate and pricing of the new loan, so it’s always nice to have the highest FICO score possible.
Who is Eligible for an IRRRL?
In order to qualify for an IRRRL the borrower must already have a VA loan. The VA Streamline refinance is strictly for VA to VA refinances. Unfortunately the IRRRL does not work for Cal Vet Loan borrowers. Cal Vet does not have a refinance program, but it is possible to do a standard VA refinance from a Cal Vet loan into a VA loan. A standard VA refinance does require full qualifying, with income documentation, bank statements, appraisal, termite inspection (for California single family homes), and a bigger VA Funding Fee than what occurs with the IRRRL program. Still, it can be worth it for a Cal Vet borrower if their interest rate is above the current VA interest rate.
When Does it Make Sense to Refinance using the IRRRL Program?
Just because you’re receiving mailers offering an interest rate lower than your current rate is doesn’t mean it automatically makes sense to refinance. It’s not unusual for companies that market for IRRRL’s to advertise an extremely low interest rate that comes with big closing costs that will be added to the new loan. A VA borrower should be careful to make sure they will break even with the refinance in a reasonable time period based on several factors, including the time they plan to remain in the home and their long and short term financial goals.The California VA lender should be able to prepare a Side by Side Total Cost Analysis for the VA borrower that will compare several IRRRL scenarios to the borrowers current loan. The Side by Side Analysis should make it easy for the borrower to see what the new loan amount will be, what the monthly savings will be, and how much the total costs for each loan scenario will be. Quite often the best option is a No Closing Cost VA IRRRL. With a No Closing Cost IRRRL the lender will offer an interest rate that allows for a lender credit, which is used to offset the closing costs. This helps to speed us the Breakeven Analysis, sometimes to the point where the Breakeven occurs immediately upon closing. VA borrowers who don’t closely review the numbers to make sure they are choosing the right IRRRL scenario (if refinancing even makes sense) could end up paying thousands extra in closing costs or mortgage interest over the life of their loan.
Authored by Tim Storm, a California VA Loan Officer specializing in VA Loans. MLO 223456. – Please contact my office at the Home Point Financial. 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 the your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.
by Tim Storm | Dec 17, 2013 | Blog, VA Refinance
A refinance from an FHA home loan into a VA home loan is a great way to drop FHA monthly mortgage insurance, at least for those Veterans who are eligible. The monthly mortgage insurance on an FHA loan can really add on to your mortgage payment. And for FHA loans with case numbers pulled after June 3, 2013, the monthly mortgage insurance may never drop off. Even for FHA loans will Case numbers pulled prior to June 3, 2011 the monthly mortgage insurance will be on the loan for anywhere from 5 years to 11 years, depending on the original loan to value and term of the loan.
Why Would a Veteran Have an FHA Loan?
It is surprising that a Veteran would even have an FHA loan in the first place. Except for situations where the Veteran didn’t have full entitlement available for a home purchase, the VA program will be better for the Veteran in almost any situation. However, because not all California lenders are familiar with the VA home loan program Veterans will sometimes be pushed into an FHA loan. Also, sometimes Veterans are not aware of the advantages the VA program has over FHA.
- VA will allow for $0 down payment | FHA requires 3.5% down payment.
- VA does not have monthly mortgage insurance | FHA uses a factor of 1.35% for monthly mortgage insurance when the down payment is less than 5%. (1.3% when 5% or more is put down). A $400,000 FHA loan would have monthly mortgage insurance of $450, versus $0 for VA. Huge savings for VA.
- VA only requires a two year wait after a foreclosure. | FHA requires three years.
- While VA does have a 100% loan limit, which is based on the county where the property is located, it is possible for a Veteran to get a loan amount above and beyond the 100% VA loan limit by coming in with a small down payment. This is referred to as a Jumbo VA Loan. There are lenders in California who will loan up to $1,500,000 on a VA Jumbo Loan. FHA also has limits based on the county of the property, which cannot be breached.
Refinance from FHA to VA
A refinance from a non-VA loan into a VA loan is not a “streamline refinance” or IRRRL. It is a full refinance, with income and asset documentation, appraisal, and credit. Also, in California a clear termite inspection report is required. The refinance process typically can take less than 30 days. Also, depending on whether there is equity in the property it may be possible to consolidate some debt. Some lenders will allow a refinance up to 100% of the appraised value. Also, combining a 2nd mortgage or equity line to 100% loan to value is possible. If a VA borrower wants to consolidate credit card debt, or pull cash out for another purpose (home improvement), most lenders will cap the loan at 90% of the property value. However, there are lenders who will allow cash back to the borrower all the way to 95% of the appraised value.
A refinance from FHA to VA does not make sense 100% of the time, so its important to talk with a California VA lender who can prepare custom loan scenarios, as well as a Side by Side Analysis comparing your current loan to the refinance loan options.
Authored by Tim Storm, a California VA Loan Officer specializing in VA Loans. MLO 223456. – Please contact my office at the Home Point Financial. 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 the your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.
