Loans Involving Temporary Interest Rate Buydowns

Deciphering the VA Lender’s Handbook Chapter 7 Part 18

 

While something you may have not heard about before, something you’ll likely want to know about and keep an eye out for, is the possibility that home builders, sellers, or lenders may sometimes establish and fund a special escrow account for the purpose of reducing a borrower’s loan payments during the initial years of the mortgage. This is often used as a marketing tool to attract more buyers. In some cases, a borrower may also fund an escrow on their own as a financial management tool. The VA has no problem with these types of situations, as long as the borrower is eligible for the VA loan being offered and the lender is VA-approved. Additionally, such an interest rate buydown can be used with any type of loan except for a GPM.

 

There are some special rules that govern the way the escrow account works in these cases. First, whichever party is establishing the escrow (builder, seller, lender, borrower), the escrow must be out of reach of their creditors. In other words, it must be something protected from seizure should a creditor have legal cause to seek payment of a debt. The only exception to this rule is if the holder of the loan is the Federal National Mortgage Association. If FNMA is the holder, they can take direct custody of the funds. The escrow agent (not the party that established and funded the escrow, but the party that has the ability to access the funds), is required to make payments out of the escrow directly to the lender or servicer of the loan. The funds from the escrow can only be used for payments currently due on the note, and cannot be used for past due amounts. If the loan is foreclosed, the funds are credited against the veteran’s indebtedness.

 

Temporary Interest Rates Obviously, such an arrangement affects the borrower’s first year or several years of making payments on the loan. This begs the question of which monthly payment amount should be used to underwrite the loan and determine sufficient income. To clarify, if the payments the first year are $900/month and $1,100/month after the buydown runs out, should the lender use the $900 figure or the $1,100 figure in determining eligibility? For the most part, the lender will use the $1,100 figure. However, the VA does have provisions that allow the lender to use the $900 figure in certain cases. The main factor is whether the borrower’s income is likely to increase enough over the next few years to keep pace with the increase in payments as the buydown runs out. Generally, the lender is expected to use information such as an increase in wage guaranteed by a labor contract (teachers, auto workers, etc.) and other factors that strongly indicate that the borrower’s income will increase.

 

The buydown must run for at least 1 year, and the increases in payments (or interest rates) must be accomplished in equal amounts each year as the buydown runs out. If the borrower’s income cannot reasonably be expected to increase to keep up with the payments, then the loan must be underwritten using the full monthly payment that will be required after the buydown runs out. This ensures that the borrower will be able to keep pace with the payments even if their employment and income do not improve over the next few years. However, even in this case, the buydown arrangement can be considered a compensating factor if the borrower’s income or credit is not quite sufficient for loan approval, and may make the difference between getting approved for the loan and not, though usually more than one compensating factor is required to make that happen.
As a borrower, you should receive a clear, written explanation of the buydown agreement from the lender which you will need to sign. If there is anything about the buydown agreement that you do not understand, make sure to check it with your lender before moving forward. Buydowns are not very common and usually go pretty quickly when they crop up, but if you find a builder, seller, or lender offering a buydown, you should at least check it out to see how much benefit you will get out of it.

FAQ How Long Should a VA Refinance Take?

How Long do VA Refinance Loans Take?

 

This is one of those frequently-asked questions the applicant has more control over the answer than anyone else. How, you may ask? Because the single biggest variable that determines how long a loan takes to process is how quickly the borrower supplies the documents and information that the loan officer and underwriter need to move the loan forward. That being said, the “base time” that it is going to take is still very important and helpful for planning. Just know that your own responsiveness and cooperation will have the greatest effect in determining how long your loan takes to process. You can make it go much faster, or you can make it take longer. Quick tip: if you want to annoy your loan officer, take a long time getting documents and information to them, then complain about how long the loan is taking. the “base time” is going to be different depending on the refinance you are doing and what you are trying to accomplish.

How long will it take?

An uncomplicated IRRRL can be completed extremely quickly – in as little as 10 days in some cases. IRRRLs are meant to be very fast, however – that’s why they are called a streamline refinance option. Even an IRRRL can take a long time if the borrower does not provide the necessary information in a timely manner, however. On the lender’s side, the process is very quick and easy. IRRRLs can commonly take around 20 days, and a more complicated IRRRL that waits on information from the borrower can take up to 30 days. It is extremely odd for an IRRRL to take longer than 30 days. You can check with your lender about whether the loan will need to be sent to the VA for prior approval. Most IRRRLs do not (even if the lender you’re working with doesn’t have automatic authority), but some will, and having to send the loan application to the VA for prior approval can add a week to the time it takes to close.

 

A cash-out refinance has a lot of variation as to how long it might take. The general rule of thumb for a new purchase loan is 45 days. Refinances generally go somewhat faster, and 30 days is usually a safe bet. However, while a cash-out refinance won’t often be much quicker than 30 days, it can be a good deal longer – sometimes taking as long as 90 days. One major variable in how long a cash-out refinance can take is whether the lender you’re working with has automatic authority. Lenders can apply for automatic authority from the VA to approve most loans without first submitting them to the VA. Most lenders (especially those who specialize in VA loans) will have this authority, but some reputable VA-approved lenders may not. If a lender does not have automatic authority, they will have to send the refinance application to the VA for prior approval before they can close on the loan. As mentioned above, if a loan must be sent to the VA for prior approval, it can add a week to the loan processing time.

 

Loans with special circumstances may have to be sent to the VA for approval regardless of whether the lender has automatic authority. Your lender should advise you on whether your loan is one of those cases, but if you have a unique circumstance or situation, you may want to bring it up with your lender directly to find out if it will need to be sent to the VA. It’s not a big deal if it does, it simply adds some time to how long the loan will take to process. Chances are your situation will not be dramatically affected if the loan takes a week longer than you expected. If you are worried about it, simply start the loan process a few weeks earlier than you necessarily need to.

 

In summary, if you’re using an IRRRL, don’t expect it to be faster than 10 days, but it should most definitely be faster than 30 days. If you’re using a cash-out refinance, expect around 30 days, but remember it might be as long as 45 days even if you are prompt in providing your paperwork. The biggest variable you can control is how quickly you respond to your loan officer’s requests for documentation and information.

 

FAQ- What can a Refinance be used for?

What can a VA Refinance be Used for?

 

Perhaps a better question would be what can’t a VA refinance be used for? However, we’ll stick to the original question and hope that we can cover all of the uses for a VA refinance in just one article. The VA has several different refinance options depending on why you’re refinancing, which help to diversify the VA loan program and make it more able to accomplish a variety of different purposes. A refinance can be used to get a lower interest rate, change the type of interest rate you have, change your loan term, get cash-out on the equity you have on your home, make a large lump sum payment to lower the principal in the loan, and consolidate higher-interest rate debt.

 

If you’re wanting to get a lower interest rate than what you currently have, your best bet is to use the Interest Rate Reduction Refinance Loan (IRRRL), which is the VA’s streamline refinance option. The IRRRL is optimized for the purpose of getting a veteran a lower interest rate and monthly payment if at all possible. Lower interest rates can also be secured using a standard refinance, but can take longer, be more expensive, and be more complicated. Either an IRRRL or a standard refinance can be used to change the type of interest rate you have. The different types of interest rates are fixed-rate, adjustable-rate, and hybrid adjustable-rate. Most people prefer the sense of security that comes with a fixed-rate mortgage, but those who take on a hybrid adjustable-rate nearly always save money compared to their fixed-rate counterparts.

 

If you want to change your loan term, you can do so with any type of VA refinance, but you will be limited in the case of an IRRRL. On an IRRRL, your new term cannot be more than 10 years longer than the original term of the loan, not to exceed 30 years and 32 days, of course. Where this can become problematic is when you’re wanting to refinance a 15-year mortgage to a 30-year: can’t be done with an IRRRL. The longest term you can refinance a 15-year mortgage to with an IRRRL is 25 years. With a cash-out or cash-in refinance, there are no such restrictions; you can refinance a 15-year to a 30-year or vice versa with no problem.

 

If you’re wanting to get cash-out on your refinance, most likely you’ll need to go with the aptly named cash-out refinance. An IRRRL does allow for an Energy Efficiency Mortgage to be added on, but EEMs are tightly regulated such that they money gotten from one must be used specifically for pre-approved energy efficient improvements on the home. No more than $6,000 is available on an EEM. EEMs are also available on cash-out refinances, along with the ability to take advantage of the equity you have in your home for any purpose agreeable to the lender. You can pay off credit card debt, purchase a new car, make an improvement to your home, or pay for your children’s college. Anything you can convince your lender is a worthy cause is open to you.

What to do with a Refinance

 

Talking a little bit more about consolidating debt, we really want to emphasize how big of an advantage this is. Some credit cards (especially ones that have a past-due balance), can have extremely high interest rates compared to your mortgage – it’s not unheard of for borrowers to be being charged 20% interest on some of their credit card debt. Taking equity out of your home to pay off that high-interest debt will make paying off your home take longer, sure, but will save you potentially thousands of dollars in saved interest. You should remember that auto interest rates are even lower than mortgages right now, so paying off your car with the equity in your home may not actually save you money, though it will certainly make paying bills less complicated.
Lastly, you can take advantage of a cash-in refinance to pay off a major chunk of principal in your loan. You can always make more than the minimum monthly payment, sure, but if you use a cash-in refinance to make a large lump sum payment, you can also refinance to a shorter term while still having a lower monthly payment. This can save you money because the amount of interest you pay is calculated on how much principal you have left – so if you have less principal left you’ll be paying less interest. This in turn lowers your monthly payment, which enables you to pay off more principal each month if you keep paying the same amount you did before the refinance.

FAQ Qualify for a VA Refinance

How Do I Qualify for a VA Refinance?

 

This is a great question, and has more to it than it might originally seem. There are two aspects to this question – what makes a borrower eligible for the VA loan program at all, and what types of VA loans are available to borrowers in different situations. A borrower who didn’t use a VA loan to purchase their current home will be looking at different options than a borrower who has already used a VA loan. Eligibility may be different for a borrower who has already purchased a home with a VA loan than for someone who has not yet purchased one.

 

VA Refinance QualificationsAt its core, qualifying for a VA refinance is very similar to qualifying for a new purchase VA loan. You will need to get a Certificate of Eligibility (COE), need to have sufficient entitlement for the loan you’re trying to take out, and you’ll need to have sufficient income and reliable employment. One of the differences between a veteran who has already used the VA loan program and one who hasn’t is the question of sufficient entitlement. A veteran who has not used the VA loan program before obviously has not used up any entitlement, but a veteran who has may run into issues in a cash-out refinance, depending on how much equity the veteran has in the home (generally this will only be a problem if the value of the home has increased substantially from what the borrower originally bought it for, so it’s a good problem to have). A veteran who has not used the VA loan program before can still get a refinance, but also must have sufficient entitlement available for the loan amount of the refinance – a veteran who used a conventional loan to buy a $1 million home and still owes $800k on it may have difficulty refinancing with a VA loan, depending on where he or she lives.

 

Anyone who is eligible for the VA loan program is also eligible for VA refinances – most veterans and surviving spouses of veterans who died in service or from service-related disabilities. However, an eligible borrower that is wanting to refinance a home from a conventional loan to a VA loan will not be able to qualify for an Interest Rate Reduction Refinance Loan (IRRRL) – the VA’s streamline refinance option. Only a standard refinance can be used to take a conventional or FHA loan to a VA loan. You can still get a lower interest rate with a standard refinance, it just won’t be as quick, easy, or cheap to do so. There are other concerns about qualifying for a standard refinance as well. If you’re trying to get cash out of the loan using the equity in your home, you may not qualify for the cash-out refinance if the purpose of taking cash out is not acceptable to the lender. The VA makes no judgment call on what should be considered acceptable or not – it’s completely up to the lender.
A veteran who purchased their home with a VA loan will have the same concern with a cash-out refinance: their reason for wanting cash will not be accepted by the lender. As mentioned above, if you qualified for a new purchase VA loan, you will not have trouble being eligible for either type of refinance – an IRRRL or a cash-out. The larger concern becomes which refinance type will best help you meet your goals for refinancing in the first place. Taking cash-out to add a pool to your backyard may or may not be approved on a cash-out refinance, but will certainly not be permitted on an IRRRL. If you have something unique in mind you’d like to do with the cash from a cash-out refinance, speak with your VA loan officer or contact us here at LowVARates to see if the purpose you have in mind is likely to be approved if you apply for a cash-out refinance. If it won’t work out, your loan officer will probably at least have an idea of what your options are elsewhere for funding. Your best bet is to be open and honest with your lender so he or she can best assist you in making a decision.

FAQ How Many Times can I Refinance

How Many Times can I do a VA Refinance?

 

How Many RefinancesThis is a question that most borrowers get the answer they want from. The reason is that there is no theoretical maximum placed on the number of times a borrower can refinance, or even how many years must be in between refinances. For most borrowers, that’s everything they need to know, but for those who have an itch for more information on the topic, we’ll dive in deeper here. The VA has a policy in place that a refinance cannot be approved unless there is “substantial net benefit” for the borrower. This benefit is often (but not always) a lower interest rate and/or lower monthly payment. The benefit can be an Energy Efficiency Mortgage (EEM), cash-out for a suitable purpose, or substantially lowered principal from a cash-in refinance. This policy, however, does place a number of practical restraints on the amount of refinances a borrower can do even though there is no theoretical limit. Those practical restraints make it difficult if not impossible to get substantial net benefit from a refinance more than two or three times during the life of a mortgage. These practical restraints include market conditions, the ever-changing lives of the borrowers, and the income of the borrowers.

 

Market conditions provide a great deal of practical restraints on the net benefit of refinances. For example, right now interest rates are at historic lows, but in 10 years from now, they will likely be higher. Since a lower interest rate is one of the most common ways to get a substantial net benefit from a refinance, 10 years from now it will be much more difficult to get benefit from a refinance simply because the market shifted. Going from a 4.5% interest rate to an 8% interest rate is the exact opposite of a net benefit. Market conditions also affect the value of your home, which will in turn affect how much cash you can get on a cash-out refinance. If you aren’t able to get a sufficient amount of cash out for the purpose you want it for, it’s very likely that there won’t be enough substantial net benefit to the refinance for it to be approved. The restraints brought upon by market conditions make the opportunities for highly-advantageous refinances less frequent.

 

Along with market conditions, the lives of the borrowers are constantly changing. You may not think of it as such, but deciding to move and buy a new home is a practical restraint on the number of refinances you do on a given home loan. If you no longer own the home, you’re not likely to get a refinance on it, are you? Also, if there is a divorce, marriage, or some other major event in the lives of the borrowers that is going to affect the obligors on the VA loan, the streamline refinance option, the IRRRL, is not likely to be available to you, which may limit your ability to do a refinance on the home, especially if you don’t have sufficient savings to pay the closing costs and VA funding fee on the standard refinance option. There are many practical restraints on how many times a refinance can be done on a home that stem from nothing but the lives of the borrowers themselves.
What can be considered part of the borrowers’ lives, but is also worth talking about all on its own, is the inconsistency of the borrowers’ own income and employment. Once you’ve purchased a home, you’re not going to lose the home as long as you’re making your payments on time. This is true even if you’ve since lost your job and are living on welfare and mercy checks from your rich, eccentric uncle. However, if you are living on welfare and mercy checks from a rich relative, you will almost certainly not qualify for a refinance because you’ll be subjected to the same scrutiny as you were when you first purchased the home. While this is an extreme example, a borrower whose hours were cut or a wife who stops working to have a baby can also affect the income of the household in a way that would disqualify you from having a refinance. In many cases, the VA streamline refinance option is still available to you, but often a standard refinance will not be.

Loan Officer- VA Streamline Refinance

Here is the outline of this slide video presentation:

VA Fixed Rate Streamline Program Overview

This presentation will help families to better understand how VA streamline refinances work and the benefits they can expect by taking advantage of this program.

  • VA Interest Rate Reduction Loan (Streamline) Overview
  • Purpose
  • History
    • In 1980 the VA designed this program as a way of improving you current loan
    • Paying off old loan and replace it with a new loan that has a better interest rate and better terms
    • Civilians have been doing this for years
  • You don’t have to . . .
    • No full appraisal
    • No full credit report
    • No income verification
    • No asset verification
    • No employment verification
    • No inspections
  • VA Fixed Rate Loan
    • Very popular VA Loans
    • Number 1 most popular goal of the majority of families I speak with= lower monthly payment as much as possible
    • Lowest Interest Rate
    • Drop our sample veteran from 6.25% to as low as 4.5%
  • Fixed rate for the life of the loan
    • Interest rate will never change. Safe Stable and secure
    • The VA offers 30 year, 25 year, 20 year and 15 year terms
  • Sample Veteran
  • History of the 30 Year Fixed
  • Government Has Been Buying Rates Down
    • This Program Almost Over
  • Additional Cash Benefits
    • Miss two payments
    • Refund of escrow refund
  • At this point I get a lot of questions . . .
    • Is this legitimate?
    • What’s the catch?
    • Is this too good to be true?
    • You can verify at: www.homeloans.va.gov
  • 3 Reasons Your Loan Might Go Up
    • Two missed payments
    • Escrow refund check
    • Closing costs
  • 4 Good Things About Closing Costs
    • No cash out of pocket. The VA allows them to be rolled into new loan
    • 100% tax deductible
    • They are optional: The VA allows you to take a higher interest rate to pay for the closing costs
  • The VA performs a test to ensure this loan will save you more interest than what it costs
  • Rates change every day
  • What Happens Next?
    We need to explore your actual numbers

    • Please give me a call 801-341-7028
    • Or email me at ryan@yourvapro.com
    • Email you a VA Loan Application
    • You complete the paperwork and fax it back along with mortgage statement, homeowners insurance statement, mortgage note, copies of drivers license and social security number verification (takes most families about 20 minutes)
    • When we receive paperwork your VA Processors prepare your file for closing
    • After the underwriters review and give us the clear to close we will have an authorized representative come to your home within the next four weeks to help you to endorse the final closing paperwork and finalize the new loan
  • Please let me know how I can help

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