VA-Guaranteed Cash-Out Refinancing Home Loans

Veterans Benefits Administration
Department of Veterans Affairs
Washington, DC 20420

Circular 26-19-05
February 14, 2019

VA-Guaranteed Cash-Out Refinancing Home Loans (AQ42)
1. Purpose. This Circular clarifies the Department of Veterans Affairs’ (VA) new policies
regarding VA-guaranteed cash-out refinancing loans, including refinancing of construction
loans (construction-to-perm).
2. Background. Public Law 115-174, The Economic Growth, Regulatory Relief, and
Consumer Protection Act (the Act), was signed into law by President Donald Trump on May
24, 2018. Section 309 of the Act provides new statutory criteria to determine when VA may
guarantee a refinancing loan. The Act required VA to promulgate regulations for cash-out
refinancing loans, specifically refinancing loans in which the loan amount will exceed the
payoff amount of the loan being refinanced.
a. On December 17, 2018, VA published interim final rule (AQ42) in the federal register
setting forth requirements relating to cash-out refinance loans. See
https://www.federalregister.gov/documents/2018/12/17/2018-27263/loan-guaranty-revisionsto-va-guaranteed-or-insured-cash-out-home-refinance-loans. This includes the Regulatory
Impact Analysis (RIA) that provides details concerning VA’s analysis in developing this rule.
AQ42 amends VA regulations pertaining to all cash-out refinancing loans (38 CFR 36.4306).
This includes refinancing of construction loans (construction-to-perm loans), regardless of
whether there is a change in the principal loan amount. However, AQ42 does not implement
rules pertaining to interest rate reduction refinance loans (IRRRLs).
b. VA will update IRRRL regulations in an upcoming rulemaking.
3. Effective date. The rule is effective on February 15, 2019, and will apply to VA cash-out
refinance loan applications taken on, or after, this date. Loan applications taken prior to the
effective date that were submitted to an Automated Underwriting System (AUS) either before
or after the effective date, where subsequent and/or final AUS submissions result in a Refer
recommendation, require manual underwriting.
4. Action. All-VA guaranteed cash-out refinancing loans must comply with the Act and
AQ42. All refinancing loan applications taken on or after the effective date that do not meet
the following requirements may be subject to indemnification or the removal of the guaranty.
Failure to provide initial disclosures to the Veteran within 3 business days from the initial
application date and at closing may result in indemnification of the loan up to 5 years. There
are three categories of refinance loans; Interest Rate Reduction Refinancing Loans (IRRRL),
TYPE I Cash-Out Refinance, and TYPE II Cash-Out Refinance.
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a. Definitions.
(1) An Interest Rate Reduction Refinancing Loan (IRRRL) is a refinancing loan made to
refinance an existing VA-guaranteed home loan at a lower interest rate.
(2) TYPE I Cash-Out Refinance is a refinancing loan in which the loan amount (including
VA funding fee) does not exceed the payoff amount of the loan being refinanced.
(3) TYPE II Cash-Out Refinance is a refinancing loan in which the loan amount (including
VA funding fee) exceeds the payoff amount of the loan being refinanced.
b. Loan-to-Value (LTV). VA will no longer guaranty refinancing loans when the LTV
exceeds 100 percent. Inclusion of any funding fee that is financed, in part or whole, cannot
cause the loan to exceed the reasonable value of the property.
(1) LTV Calculation. Divide the total loan amount (including VA funding fee, if any) by the
reasonable value of the property determined by the appraiser.
c. Net Tangible Benefit (NTB). NTB standards apply to all cash-out refinancing loans. It
consists of the NTB test, Loan Comparison, and Home Equity Disclosure
(1) NTB Test. All cash-out refinancing loans must past pass the NTB test. This requirement
is met if the refinancing loan satisfies at least one of the following:
(a) The new loan eliminates monthly mortgage insurance; or
(b) Loan term of the new loan is less than the loan term of the loan being refinanced; or
(c) Interest rate of the new loan is less than the interest rate of the loan being refinanced.
(Note: If the loan being refinanced had an adjustable interest rate or was modified, the current
interest rate must be used when determining if this requirement has been met.); or
(d) The monthly (principal and interest) payment of the new loan is less than the monthly
(principal and interest) payment of the loan being refinanced; or
(e) The Veteran’s monthly residual income is higher as a result of the new loan. (residual
income, including refinancing monthly PITI (principal, interest, taxes, and insurance)
payment vs. current residual income, including monthly PITI payment of the loan being
refinanced.) In cases where TI amounts are changing between the application date and the
closing date of the refinance transaction, the new TI amount will be used in determining
residual income for both the current and refinanced loan); or
(f) The new loan is used to payoff the Veteran’s interim construction loan; or
(g) The new loan LTV is equal to or less than 90 percent of the reasonable value of the
home, i.e. LTV ≤ 90%; or
(h) Refinance of an adjustable-rate mortgage to a fixed-rate mortgage.
(2) Loan Comparison Disclosure. The lender must provide the Veteran a comparison of the
new loan to the existing loan being refinanced. VA requires lenders to generate two loan
comparison disclosures, one within 3 business days from the initial date of the loan

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application and at loan closing. The borrower must certify receipt of both disclosures (i.e.
signature, e-signature, email from borrower certifying receipt, email read receipts, system
time/date stamp where a borrow certified receipt, etc).
(a) Initial 3-Day Disclosure. Lender’s shall provide a reasonable estimate within 3 business
days of loan application. Reasonably accurate estimates, may involve the use of borrower
documentation, such as their mortgage statement, closing documents, their own estimation of
the existing loan terms, online property valuation tools, and manual calculations. Lenders are
encouraged, but not required, to continually update the disclosure as additional, and more
accurate, information becomes available throughout the origination process.
(b) Final Loan Closing Disclosure. The final loan comparison disclosure provided at loan
closing shall be accurate with respect to the new loan information, while the initial loan
information may be a generally accurate representation of the existing loan, given that
payments may be in transit, tax and insurance amounts may be pending, and payoffs may
fluctuate when the final closing date has not been determined.
(c) Contents of the Initial 3-Day Disclosure and the Final Loan Closing Disclosure. VA has
provided a sample disclosure in Exhibit A that includes both the loan comparison and home
equity provisions stated in this Circular. The following information will be provided in the
disclosures:
1. Refinancing loan amount (including VA funding fee, if financed into the loan) vs. the
payoff amount (including fees, escrow shortages, and prorated interest) of the loan being
refinanced.
2. Interest Rate
3. Mortgage Loan Type (i.e., fixed, adjustable)
4. Loan term of the refinancing loan vs. the remaining term of the loan being refinanced.
The term may be expressed in months or years and months.
5. The total payments the Veteran will have paid after making all payments (principal and
interest) as scheduled on the refinancing loan vs. the total remaining payments the Veteran
will have paid after making all remaining payments of principal, interest, and mortgage
insurance (if applicable) as scheduled on the loan being refinanced.
6. LTV of the refinancing loan vs. loan payoff (including fees, escrow shortages, and
prorated interest) to current value of the loan being refinanced.
(3) Home Equity Disclosure. The lender must disclose the amount of home equity being
removed from the home as a result of the new loan to the Veteran within 3 business days from
the initial date of the loan application and at loan closing. The disclosure must also explain to
the Veteran how the removal of home equity may affect the sale or refinance of the home in
the future. Similar to the Loan Comparison Disclosure, the borrower must certify receipt of
the Home Equity Disclosure (i.e. signature, e-signature, email from borrower certifying
receipt, email read receipts, system time/date stamp where a borrow certified receipt, etc.).
VA has provided a sample disclosure in Exhibit A that includes both the loan comparison and
home equity provisions stated in this Circular.

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February 14, 2019

(a) For the initial home equity disclosure, lenders may use estimated loan payoff or unpaid
principal balance and estimated current property value to determine the home equity being
removed from the home. However, the lender must use the final payoff amount (including
fees, escrow shortages, and prorated interest) and the reasonable value shown on the Notice of
Value (NOV) to determine the home equity being removed from the home on the home equity
disclosure provided to the Veteran at loan closing.
d. Loan Seasoning. Loan seasoning applies to all cash-out refinancing loans made to
refinance a VA-guaranteed home loan (VA-to-VA). A cash-out refinancing loan, Type I nor
Type II, is not eligible for guaranty by VA, if the VA-guaranteed loan being refinanced has
not been seasoned as of the date of closing. A loan is considered seasoned if both of the
following conditions are met as of the date of loan closing:
(1) The first monthly payment of the loan being refinanced was made 210 days or more
prior to the closing date of the refinancing loan; and
(2) Six monthly payments have been made on the loan being refinanced.
(3) For loans being refinanced within 1 year from the date of closing, lenders must obtain a
payment history/ledger from the servicing lender documenting all payments. If the loan is
selected for audit by VA, the lender must include the payment ledger/history of the loan being
refinanced in the loan file for VA review.
e. Fee Recoupment. Fee recoupment applies to TYPE I cash-out refinancing loans made
to refinance a VA-guaranteed home loan (VA-to-VA). To obtain a Loan Guaranty
Certificate (LGC) the lender must certify that the recoupment period of fees, expenses, and
closing costs (included in the loan and paid outside of closing), do not exceed 36 months
from the date of the loan closing.
(1) Recoupment Calculation: The recoupment period is calculated by dividing all fees
(not including VA funding fee per), expenses, and closing costs included in the loan and
paid outside of closing by the reduction of monthly principal and interest (PI).
(a) Example:
PI (VA loan being refinanced): $654.00
PI (new VA refinancing loan): - $604.00
Reduction of monthly PI:
= $ 50.00
If the loan being refinanced loan has been modified, the reduction of monthly PI should be
computed using the modified monthly PI of the loan being refinanced.
(b) Example:
Fees/expenses/closing cost: $1,436.49
Reduction of monthly PI: ÷ $
50.00
Fee Recoupment Period: = 29 months (28.72 months rounded)
(c) Escrow and prepaid expenses, such as, insurance, taxes, special assessments, and
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homeowners’ association (HOA) fees shall be excluded from the recoupment calculations.
(d) VA allowable fee as established in 38 C.F.R. § 36.4313 offset by lender credits and/or
premium pricing may also be excluded from the recoupment calculation.
4. Rescission: This Circular is rescinded April 1, 2021.

By Direction of the Under Secretary for Benefits

Jeffrey F. London
Director, Loan Guaranty Service

Distribution:
SS (26A1)

CO: RPC 2021
FLD: VBAFS, 1 each (Reproduce and distribute based on RPC 2021)

5.