Lenders made a staggering $41 billion off VA cash-out refinances in 2018 and now the U.S. Department of Veterans Affairs wants to make sure homeowners with VA loans know exactly what they’re paying in fees.
An interim final rule on VA-guaranteed cash-out refinance loans was published on February 19 to protect borrowers from predatory lenders. The rule executes some provisions of the Economic Growth, Regulatory Relief, and Consumer Protection Act, while adding new regulatory protections, including mandating clear communication about the cost of cash-out refinances.
The new rule states that lenders must be transparent about fees at the time of application and at closing. Lenders must show a comparison of costs between the existing loan and the new loan. The rule mandates “loan seasoning” which requires that a minimum of 210 days pass and six monthly payments are made before the borrower can refinance the loan.
See Bankrate’s current rates for VA mortgages and refinancing in your area.
Finally, to get a cash-out refinance loan a VA borrower must pass the “net tangible benefits” test, defined by VA in the rule. This test is designed to make sure that homeowners are benefitting from the new loan, rather than falling prey to a predatory loan which puts the lender’s profits over the borrower’s needs.
The VA defined eight different ways a homeowner might benefit from a cash-out refinance; they must qualify for just one to be eligible for a cash-out refi.
The 8 net tangible benefits defined by the VA rule are:
- The new loan would eliminate monthly mortgage insurance, whether public or private, or monthly guaranty insurance.
- The new loan has shorter terms.
- The interest rate on the new loan is lower.
- Mortgage payments are lower on the new loan.
- The borrower’s monthly residual income would increase with the new loan.
- The new loan would fund repairs or additions to the home.
- The new loan is equal to or less than 90 percent of the home’s value.
- The rate would change from an adjustable to a fixed rate after refinancing.
Red flags VA homeowners should watch out for
A major red flag concerns fees, says Kevin Parker, vice president of field mortgage at Navy Federal Credit Union. The fees associated with financing a home should be clearly itemized in the loan estimate at the start of the application process.
Some lenders charge “junk fees” at the closing of a new mortgage, including cash-out refinances. These are optional add-ons designed solely to profit the lender. The VA prohibits some of these junk fees, such as brokerage fees. Commissions and “buyer broker” fees are also non-allowable fees, per VA rules.
Other warning signs borrowers should watch for include high interest rates, which might be due to the borrower’s credit score. Refinancing generally is beneficial if you can get a better interest rate; if not it doesn’t make sense to replace your mortgage with a higher rate.
Predatory lenders will often focus on the money you can get out of your house without communicating how much you’ll end up paying in fees or the risks involved.
Often predatory lenders will target people with poor credit by tempting them to get a loan using the equity in their house as collateral. The risk in this is that if you can no longer afford to make payments you could end up losing your home. The monthly payments are usually higher after a cash-out refi, so it’s important to examine your budget before you refinance your mortgage.
Parker recommends researching lenders who are well-known and have a good reputation.