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Requiring a benefit test is a good idea for VA refinance

Will VA Refinance Changes Stop Predatory Lenders?

VA refinance guidelines may change after April 1st, 2018 as Ginnie Mae steps in to stop predatory lenders from “churning” Veteran loans.

Ginnie Mae is a government corporation that insures timely payment of the bonds backed by government loan programs, like loans insured by the VA and the Federal Housing Administration (FHA).

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Within the past couple of years, a predatory trend has emerged.  Lenders target Veterans with VA loans, encouraging them to refinance their homes multiple times in a short period of time.

This problem was identified by Ginnie Mae because these loans were being paid off so soon after a previous refinance.

Beginning April 1st, 2018, Ginnie announced that it will not allow VA streamline and cash-out refinances in pools of mainline securities until have made a minimum of (6) six consecutive payments, and (7) seven months have passed after the first monthly payment.

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VA Refinance Scam

The VA IRRRL (Interest Rate Reduction Refinance Loan) allows eligible Veterans to refinance an existing VA loan up to 100% of the value of the home with reduced documentation and no appraisal.

A standard VA refinance will allow cash out up to 100% of the value of the home with an appraisal.

The  predatory nature of this scam occurs when lenders pursue Veterans and try to convince them to refinance over and over again.

There are certainly situations where a Veteran may need, or want to refinance more than once, but most of the “benefit” of churned loans is smoke and mirrors.

What were designed to be amazing benefits for Veterans has turned into a money making machine for greedy lenders.

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Real Cost of a VA Refinance

You don’t have to wait until April 1st, 2018 to protect yourself from predatory lenders.  Knowing the real cost of refinancing your VA loan will help you quickly determine if it will benefit you, or cost you in the long run.

  • VA Guarantee Fee – If you currently have a VA loan on your home, refinancing using another VA loan is going to trigger a fee called a subsequent use fee.  According to VA underwriting guidelines, a no-cash-out VA IRRRL has a fee of only .5% of the loan amount, whereas a cash out refinance will trigger a 1.25% to 3.3% guarantee fee depending on your equity.
  • Title, Escrow or Attorney Fees – Any time you refinance there are fees incurred by third party vendors that are required throughout the process.
  • Lender Fees – Lenders are businesses. There is always a cost of doing business.  These fees are paid for one of three ways, either the Veteran pays out of pocket, out of equity, or out of interest rate.

High Cost of Short Term Thinking

These scams target Veterans with a predatory message pushing a short term thinking agenda.

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Because the VA loan allows cash out refinancing up to 100% of the value of the home, Veterans become easy targets for short term benefits.

VA loans previously did not have a minimum benefit test that requires the lender to prove benefit to the borrower…that’s you!  FHA requires that the same six payments be paid, as well as the effective interest rate must be a minimum of .50% lower than the current rate.

Make an Educated Decision

As long as you understand the risk, any decision you make is an educated decision.  If you can make an educated decision about your VA refinance, then you’re making the right decision.

If you are unsure about whether or not you should refinance, you probably shouldn’t.  Not touching your equity is always the best policy.

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Risky Factors Associated with Your VA Refinance:

  • Debt consolidation is a common lure, and often used to show deceiving “savings” by paying off credit card debt. As home values continue to increase, there is always room for cash out.
  • Every time you refinance you are resetting the term of the loan back to 30 years.  While your payments may be going down, so are the number of months you’ll be paying on this loan.
  • Your loan amount continues to increases from the current balance each time you refinance if you do not pay closing costs out of pocket.

Calculating Your Break Even

Here is a simple, yet informative way to analyze the benefit you receive from a refinance.  This isn’t a pass or fail kind of calculation, but more of a way to look at the costs associated with the transaction.

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There are costs associated with your refinance, you are probably being offered a VA refinance with no out of pocket cost.  The cost can only be paid by either a lender credit, which means a higher interest rate, or equity that you pay for with a higher loan amount.

Step 1

New Loan Amount

 – Minus

Current Loan Amount (principle balance on current mortgage statement)

= Equals Cost of Refinance

Step 2

Cost of Refinance

/ Divided by

Reduction in Principle and Interest Payment

= Equals # of Months before breaking even on investment in refinance

If you can cover all of your expenses in 12-24 months, you’re doing pretty good.  24 to 36 months should be reaching the edges of your comfort zone.  An ROI of longer than 48 to 60 months should have a long term financial plan in place.

Ignore any efforts to focus on missed mortgage payments as a reason for refinancing.  You’re not actually skipping mortgage payments when you refinance. Your current payment is calculated into the pay-off of the old loan (until the day you close) and closing costs (pre-paid interest) on the new loan you’re refinancing into.

Missing a payment is a convenience, not an actual benefit.  Use this calculation how long it will take you to break even after absorbing the cost of refinancing.

This calculation is valuable if you are attempting to lower your monthly payment.  There are obviously MANY times when refinancing, even soon after a previous refinance, is necessary and very beneficial.

Final Thoughts

These changes should slow down the telemarketers and junk mail, and take some of the pressure off of these Veterans. VA loans continue to be the single best loan program available anywhere in the marketplace.

Any policy that protects Veterans is a good one, and this is good policy.  Ginnie Mae is asking the Veteran’s Administration to change underwriting guidelines to enforce a “net-tangible-benefit” calculation.

We hope the VA is listening. Matching FHA’s Streamline Refinance benefit guidelines should also apply to VA loans.  The ability to give exceptions to the rule is a small price to pay to slow that roll.

Will this move stop predatory lenders?  One can hope.  Veterans continue to be one of the main recipients of major advertising dollars pushing VA home loans.

Education is amazing.  I support that 100%.  Making an Educated Decision is even better!  One way to prevent predatory lenders is to build a relationship with a loan officer you trust.

The opinion of a career professional is far more valuable than some stranger calling or mailing you postcards.  These lenders have a lot of advertising costs to cover.

If you don’t have someone that you can ask, you can ask here, we can answer your questions.  If you’re looking for an experienced loan officer, we can help with that too!

Use a link above, or ask a question below – I respond to everyone. I respond quickly!

About Your Expert

Scott Schang

As a 19 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

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