There are three major types of VA home loans:
The new regulations affect cash-out refinance loans and apply to loans issued on or after Feb. 15, 2019.
What Is a VA Cash-Out Refinance Loan?
Basically, a VA cash-out refinance loan allows you to get a new mortgage on your house and take the equity (the difference between what your house is worth and how much you owe on it) as cash.
With a cash-out refinance loan, the equity you take out is yours to use for whatever you want: paying bills, home improvements or repairs, college costs, medical bills, etc.
Related: Learn more about VA loans
The problem is that many unscrupulous lenders will try to sell veterans these types of loans by playing up the fact that the homeowner walks away with a big chunk of cash. The lenders fail to explain that "oh, yeah, you now owe us more money than before, and you will be paying us back that money for the next 30 years."
Many cash-out refinance loans also have higher fees than a normal mortgage, so veterans end up paying a lot more in the long run.
Don't get me wrong: The cash-out refinance option can be a good deal if you do your homework and have no other way to get a loan. The problem is that most people don't do their homework; they see only dollar signs.
Enter the Government Regulators
When I got my VA home loan and moved into my new house, the first five pieces of mail that showed up in my shiny new mailbox were letters from finance companies to refinance my VA loan.
After signing about 75 pieces of paper and 50 different checks to finalize my mortgage, the last thing I wanted to do was get a new loan. But apparently I wasn't the only one getting spammed. Regulators realized this was a big enough problem to make a law about it.
The process is called "churning" because shady lenders get as many new loans (and the associated closing costs) as possible from unsuspecting veterans by turning around loans really fast.
The benefit of these loans to the veteran may be small. In fact, it may even be a worse deal than the existing loan when all the costs are figured in.
If you multiply the closing costs, inspection costs, appraisal costs etc. by 1,000 or even 20,000 veterans, we are talking serious money to be made by shady lenders.
As a result of complaints against several lenders, Congress realized that regulations were necessary to keep this from happening. So this new law does four main things:
- Most veterans won't be able to get a VA cash-out refinance loan until either 210 days after their first loan payment or after they've made six monthly payments, whichever takes longer.
- Lenders will now be required to give veterans documents that explain all the details of the refinanced loan, so borrowers have a complete picture of what they're paying and saving over time. These documents must be provided when the loan is offered and again at closing.
- Any new fees associated with the refinanced loan must be paid off within 36 months.
- All refinanced loans must have an interest rate at least ½ of 1 percent lower than the original loan.
Hopefully, these new regulations will prevent a few of the scammers out there from ripping off unsuspecting veterans.
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