Updates to Policy Guidance for VA IRRRLs

Overview

The Veteran’s Administration (VA) published Circular 26-19-22 on August 8, 2019. The Circular is effective immediately and clarifies the Recoupment, NTB, Appraisal, Seasoning Requirements (for all Refinances including Cash-out), and Loan Comparison Statement requirements for all VA IRRRLs.  All previous Circulars pertaining to VA IRRRLs are superseded by this new Circular.  The Circular is effective immediately.
Summary
This Circular impacts all active loans and new loans submitted to Carrington Mortgage Services.  The VA has made these changes effective immediately for all IRRRLs:

1. All IRRRLs must meet the 36 month Recoupment requirement regardless of term reduction or Loan Term chosen. The VA funding fee is not included in fees for recoupment calculation.
2. Fixed-to-Fixed refinances require at least 50 basis points (0.50%) rate reduction from the prior loan’s current interest rate.
3. ARM-to-Fixed refinances do not require a rate reduction. If the P&I payment is increasing from prior loan, the veteran cannot be charged any closing costs.  The VA Funding fee may be charged.
4. Appraisals are no longer required for CMS IRRRL transactions.  Appraisal is only required on Fixed-to-ARM, which CMS does not offer, when discount points are charged.
5. Loan seasoning requirement is 6 consecutive monthly payments and closing date (note date) is at least 210 days form the 1^st payment due date of the loan being refinanced.  Sourcing the date the initial payment was made on the prior loan is no longer required.  The seasoning requirements apply to VA IRRRL and VA Cashout transactions.

IMPORTANT:  All loans in process, regardless of submission date, must meet these requirements. 
Below is a chart that summarizes the requirements for VA IRRRLS:

*only if Discount points charged
**CMS does not offer ARM loans at this time.

Requirements for VA IRRRL Loans

IRRRL requirements are now determined by Loan Amortization Type of the refinanced and new loan and payment increase or decrease of the old loan vs. the new loan.  Term reduction is not a valid Net Tangible Benefit and should not be considered when determining Recoup or rate reduction requirements.

Qualifying Recoupment

• Applies to ALL IRRRLs including loans in which:
  • principal balance is increasing
  • term is decreasing
  • refinanced loan is an ARM

• If P&I payment is declining, recoupment of closing costs (excluding taxes, escrow and VA funding fee) cannot exceed 36 months from loan closing.
• If P&I payment is increasing, the veteran cannot be charged any fees other than taxes, escrow and VA funding fee.
• For Guaranty purposes recoupment is calculated by dividing all fees, expenses, and closing costs, whether included in the loan or paid outside of closing (i.e., an appraisal fee), by the reduction of the monthly P&I payment, which is calculated off the base loan amount excluding the VA Funding fee. The VA Funding fee, escrow, and prepaid expenses, such as, insurance, taxes, special assessments, and homeowners’ association (HOA) fees, are excluded from the recoupment calculations. Lender credit for interest rate chosen and any other lender credits reduce the qualifying closing costs for recoupment purposes. This calculation is different than the one shown on the Veteran Comparison Statement.  All Loans must be underwritten to the Guaranty/Qualifying Calculation not the Veteran Comparison Statement Calculation. 

Net Tangible Benefit (NTB)

• Fixed Rate to Fixed Rate IRRRLs -- New interest rate must be at least 50 bps lower than rate on loan being refinanced
• ARM Rate to Fixed Rate IRRRLs do not require rate reduction

Appraisal Requirements
Appraisals are no longer required except on Fixed-to-ARM transactions with discount points, which CMS does not offer at this time.
Loan Seasoning
Both of the following conditions must be met as of the date of loan closing:

• Closing Date (Note Date) of the new loan is at least 210 days after the first payment due date of the prior loan; AND
• Six consecutive monthly payments have been made on the loan being refinanced

Veteran IRRRL Comparison Disclosure and Recoupment Certification

• Initial Loan Comparison statement must be provided to veteran within 3 business days from initial application date.  CMS will require borrower signed initial disclosure form prior to closing.
• The figures on the comparison statement may change as long as the final figures are delivered and acknowledged by the Veteran at closing.
• The Final Comparison statement will be provided to the veteran in the closing document package for Wholesale loans.  Correspondent sellers should provide final borrower signed version with their purchase package.
• CMS does not require use of a particular form as long as the disclosure meets those requirements identified in the VA Circular.

• The recoupment calculation on the Veteran Comparison Statement differs from the Guaranty/Qualifying recoupment:

• • Recoupment period in months includes all fees, expenses and closing costs including taxes, escrow and VA funding fee, whether included in loan or paid outside closing.
  • Lender credit for interest rate chosen and any other lender credits reduce the qualifying closing costs for recoupment purposes.
  • Monthly P&I payment on the comparison statement is calculated using total loan amount including any financed VA funding.