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Requiring a benefit test is a good idea for VA refinance

Veteran Homeowners Win Fight Against Predatory Lenders

Veteran Homeowners Receive a Huge Win Against Predatory Lenders.

Any VA streamline refinance loan started after March 25th, 2018 now requires that the lender actually prove that they are helping the Veteran homeowner.  Sounds like a no-brainer, right?  It hasn’t always been.


  • Waiting Period – You must wait the lesser of 210 days, or have made 6 mortgage payments on your VA Loan before being eligible to refinance using an Interest Rate Reduction Refinance Loan (IRRRL)
  • Net Tangible Benefit – If refinancing from a fixed rate mortgage to another fixed rate mortgage, your interest rate must drop by a minimum of .50%.  If refinancing from a fixed rate mortgage to an adjustable rate mortgage (ARM), you must reduce your interest rate a minimum of 1.00%.
  • Recuperation of Costs – You must be able to recuperate the costs of your VA IRRRL in 36 months or less.  See calculation below.

Veteran Housing Advocate Interview

I invited Evan Wade, a Veteran Housing Advocate and mortgage broker with Philadelphia Mortgage Brokers to discuss the new new VA IRRRL changes.

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Evan is a professional mortgage loan officer that specializes in VA guidelines.  He was an obvious choice for having this discussion about the new rules.

VA Refinance Scam

Predatory lenders target Veteran Homeowners by offering a significant reduction of your interest rate.  The problem is, they are taking you out of your 30 year fixed rate mortgage, and putting you into a high risk, short term adjustable rate mortgage.

This practice was stopped dead in it’s tracks with these new rules.

The VA IRRRL (Interest Rate Reduction Refinance Loan) allows eligible Veterans to refinance an existing VA loan up to 100% of the value of the home with reduced documentation and no appraisal.

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A standard VA refinance will allow cash out up to 100% of the value of the home with an appraisal.

The  predatory nature of this scam occurs when lenders pursue Veterans and try to convince them to refinance over and over again.  This practice is also called “churning”.

There are certainly situations where a Veteran may need, or want to refinance more than once, but most of the “benefit” of churned loans is smoke and mirrors.

What was intended to be an amazing benefit for Veteran homeowners has turned into a money making machine for greedy lenders.

Real Cost of a VA Refinance

Knowing the real cost of refinancing your VA loan will help you quickly determine if it will benefit you, or cost you in the long run.

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  • VA Guarantee Fee – If you currently have a VA loan on your home, refinancing using another VA loan is going to trigger a fee called a subsequent use fee.  According to VA underwriting guidelines, a no-cash-out VA IRRRL has a fee of only .5% of the loan amount, whereas a cash out refinance will trigger a 1.25% to 3.3% guarantee fee depending on your equity.
  • Title, Escrow or Attorney Fees – Any time you refinance there are fees incurred by third party vendors that are required throughout the process.
  • Lender Fees – Lenders are businesses. There is always a cost of doing business.  These fees are paid for one of three ways, either the Veteran pays out of pocket, out of equity, or out of interest rate.

High Cost of Short Term Thinking

These scams target Veterans with a predatory message pushing a short term thinking agenda.

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Because the VA loan allows cash out refinancing up to 100% of the value of the home, Veterans become easy targets for short term benefits.

VA loans previously did not have a minimum benefit test that requires the lender to prove benefit to the borrower…that’s you!

Make an Educated Decision

As long as you understand the risk, any decision you make is an educated decision.  If you can make an educated decision about your VA refinance, then you’re making the right decision.

If you are unsure about whether or not you should refinance, you probably shouldn’t.  Not touching your equity is always the best policy.

Risky Factors Associated with Your VA Refinance:

  • Debt consolidation is a common lure, and often used to show deceiving “savings” by paying off credit card debt. As home values continue to increase, there is always room for cash out.
  • Every time you refinance you are resetting the term of the loan back to 30 years.  While your payments may be going down, so are the number of months you’ll be paying on this loan.
  • Your loan amount continues to increases from the current balance each time you refinance if you do not pay closing costs out of pocket.

Calculating Your Break Even

Here is a simple way to analyze the benefit you receive from a refinance.  There are costs associated with your refinance, you are probably being offered a VA refinance with no out of pocket cost.

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The cost can only be paid by either a lender credit, which means a higher interest rate, or equity that you pay for with a higher loan amount.

Step 1

New Loan Amount

 – Minus

Current Loan Amount (principle balance on current mortgage statement)

= Equals Cost of Refinance

Step 2

Cost of Refinance

/ Divided by

Reduction in Principle and Interest Payment

= Equals # of Months before breaking even on investment in refinance

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The new VA IRRRL rules require that you recuperate the cost of your streamline refinance in 36 months or less.

If you can cover all of your expenses in 12-24 months, you’re doing pretty good.  24 to 36 months should be reaching the edges of your comfort zone.  An ROI of longer than 48 to 60 months should have a long term financial plan in place.

Ignore any efforts to focus on missed mortgage payments as a reason for refinancing.  You’re not actually skipping mortgage payments when you refinance. Your current payment is calculated into the pay-off of the old loan (until the day you close) and closing costs (pre-paid interest) on the new loan you’re refinancing into.

Missing a payment is a convenience, not an actual benefit.  Use this calculation how long it will take you to break even after absorbing the cost of refinancing.

This calculation is valuable if you are attempting to lower your monthly payment.  There are obviously MANY times when refinancing, even soon after a previous refinance, is necessary and very beneficial.

Working with a Mortgage Expert

Choosing the best mortgage based on your qualifications requires that you work with a professional loan officer that has experience with all of the options that are available to you.

All mortgage companies are NOT created equal.  Big box lenders that advertise on TV, radio and the internet, often only target a very narrow qualifying criteria.

These popular lenders spend millions of dollars on marketing and advertising, only to dump you into a call center and put you in the hands of an inexperienced customer service telemarketer.

Big box lenders try to convince unsuspecting consumers that it’s the lender that matters, and never mention the fact that your loan officer is the gateway to you getting the best mortgage.

You should avoid these types of lenders at all costs if possible.  They do not offer lower rates or better service, but they do have more money to convince you that they do.

Set Yourself Up for Success

Not sure where to find a professional loan officer that you can trust?  You’re in the right place!

If you have any questions or comments about this topic, feel free to leave a comment below, or you can shoot me an email at questions@findmywayhome.com.

Now sure how to identify a professional loan officer?  Watch these expert interviews I’ve done with professional loan officer friends of mine.

I firmly believe that once you hear how a professional loan officer communicates, it will help you to avoid silly mistakes and errors that are common with inexperienced or uneducated loan officers.

About the Author

Scott Schang

A 20 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

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