The U.S. Department of Veterans Affairs (VA) recently published a list of precautions veterans and servicemembers should consider when deciding between a VA refinance or cashout refi transaction, which lenders could refer to when guiding their veteran borrowers through the process of selecting the right option for their needs.
As with other refi programs, the VA’s Interest Rate Reduction Refinancing Loan (IRRRL) program IRRRLs allows qualified homeowners to refinance their VA-guaranteed loans to obtain a lower interest rate, lower monthly mortgage payment or refinance an adjustable-rate mortgage into a fixed-rate mortgage.
IRRRLs often do not require appraisals and generally close quicker and require less paperwork than the VA’s cash-out option. Cash-out refis are well-suited for veteran homeowners who need funds for home improvements or repairs, as well as those needing to cover major expenses.
NewDay USA Chief Revenue Officer Franco Greco called the report a “healthy reminder” about the relative affordability of a VA cash-out refi compared to high-interest debt alternatives, such as credit cards or personal loans.
“The VA’s guidance is important because too many veterans still do not fully understand how much equity they may have available,” Greco said in comments provided to Dodd Frank Update. “We regularly speak with borrowers who are trying to consolidate high-interest debt or cover major expenses and are surprised to learn they have a lower-cost option than a traditional cash-out refi.”
He also stressed the importance of choosing the right lender, who will take the time to evaluate a veteran borrower’s situation.
“Many veteran borrowers do not fit neatly into automated underwriting models, particularly if they are self-employed or have nontraditional income sources,” Greco said. “We often see veterans who were declined elsewhere qualify with a lender that manually underwrites its own loans and takes a broader view of their financial situation.”
Whereas automated underwriting systems some lenders rely on often fail to capture a veteran’s full financial picture, Greco said there are real benefits to choosing a lender who manually underwrites loans, asserting that doing so can increase an applicant’s chances of approval.
The VA referenced enforcement actions federal regulators have taken against institutions for engaging in deceptive advertising and false statements targeting veterans looking to refinance their VA home loans. The agency said veterans who believe their lender is engaging in fraudulent practices should contact VA Loan Guaranty Service and the VA Office of Inspector General to report the lender and end refinancing discussions at that time.