Deciphering the VA Lender’s Handbook Chapter 6 Part 8
The last bunch of articles has focused on the VA’s streamline refinance option, called the Interest Rate Reduction Refinance Loan, or IRRRL. The IRRRL can be most advantageous when the borrower is refinancing primarily to take advantage of lower interest rates. However, there are times when a borrower would like to refinance to take advantage of the equity they have in their homes. Equity is how much the home is worth minus how much the borrower still owes on it. Borrowers can use the equity they have in their home to get a cash-out refinance. This article will cover everything that Chapter 6 in the VA Lender’s Handbook has to say about cash-out refinances. The VA considers cash-out refinances as any refinance that can be used to pay off any liens against the secured property. Specifically, the handbook states that the liens can be either current or delinquent, and from any source. Usually, liens against homes come from taxes, judgment liens, or other mortgages. However, proceeds from the loan above and beyond the amount to cover liens on the home can be used for any purpose acceptable to the lender. If you need to purchase a new car (or pay off credit card debt), you can usually do so with a cash-out refinance. An important rule to remember is that the cash-out refinance must be secured with a first lien on the property. The amount of equity is very important in regards to a cash-out refinance because you cannot get a loan amount higher than 100% of the value of your home (plus the VA funding fee and energy efficiency improvements). Since the bulk of the loan amount will go towards the money you still owe on the home, you have only the amount of equity you have in your home to cover whatever you wanted cash out for. You can even use cash out from the refinance to pay for discount points to your interest rate for the new loan. Borrowers will be glad to know that the maximum guaranty for cash-out refinances is the same as for new purchase loans. This is a rather new development, however. Prior to October 10, 2008, the maximum guaranty allowable on a cash-out refinance was $36,000. The VA recently made a change to its program to have cash-out refinances have the same maximum guaranty as regular new purchase loans. The maximum guaranty depends on where you live and your lender will be aware of what the maximum guaranty will be for your cash-out refinance. You should make sure that you have sufficient entitlement available for the cash-out refinance. This is usually not a problem when refinancing an existing VA loan, as the VA will consider entitlement restored because the new loan will be paying the balance of the old loan. There can be a problem with this if you are trying to use all of the equity in your home, but had to make a down payment on the original loan in order to get the loan amount low enough for your eligibility to cover it, but this happens less often than you might think. The occupancy requirement on these refinances is the same as for new purchase loans, which is that the borrower must certify that he or she is intending to occupy the home as their primary residence. Depending on whether your lender has automatic authority, they will be able to approve the cash-out refinance without needing to submit the application to the VA for approval. If your lender does not have automatic authority, be aware that there will be a delay in closing your loan for the VA to give prior approval on the loan. As far as processing the loan goes, cash-out refinances are nearly identical to normal new purchase loans. A new appraisal of the home, new credit information, and new underwriting are all required as part of the refinance. The benefits of a cash-out refinance are that you are able to take advantage of the equity in your home, while the benefits of an IRRRL is that the process is much faster, simpler, and cheaper.