It seems VA home loans, just like conventional loans, are not immune to unscrupulous lending practices.
Recently, federal regulators have been taking a close look at the VA Cash-Out Refinance Loan product and wondering if the practice of subprime lending—largely responsible for the financial crisis of 2007-2008—has simply re-emerged under a different name.
The primary concern is that some lenders are taking advantage of veteran borrowers by attracting them with the promise of readily available cash, then charging them steep refinance fees and saddling them with higher mortgage rates they are often unable to pay. The lender then reaches out to the homeowner a few months later with another, seemingly better refinance option, tacks on even more fees, and so on and so forth. This practice of luring veterans into unnecessary refinancing is known as mortgage churning or loan churning.
Unfortunately, as diligent as the Government National Mortgage Association (Ginnie Mae) is about monitoring its lending partners, some lenders will still find ways to take advantage of veterans with VA home loans.
The VA Cash-Out Refinance Loan: A smart move for many military borrowers
If they meet the eligibility requirements, veteran homeowners can use a government-backed Cash-Out Refinance Loan to borrow up to 100% of the value of their home. In doing so, they agree to a new loan whose amount is higher than what they currently owe on their mortgage.
Borrowing cash from your home equity can be a smart move, provided the potential savings are enough to justify the added fees and higher mortgage rate. A Cash-Out Refinance Loan can help you pay for large expenses such as home repairs or renovations, college tuition or personal debt, and doing so can often improve your credit rating in the long run.
The problem comes when homeowners can’t afford to make the new mortgage payments.
Concerns about dishonest lending practices may lead to new restrictions.
Traditionally, VA Cash-Out Refinance Loans have fewer constraints than other refinance products, but this may not be the case for much longer.
In an effort to crack down on dishonest lending practices and protect veteran homeowners from the risk of foreclosure, federal regulators may place tougher restrictions on the VA Cash-Out Refinance Loan product—including making sure they provide an actual benefit to the homeowner.
In addition, Ginnie Mae will likely continue to ban disreputable lenders from government mortgage bond programs.
Ready to apply? Make sure you have a copy of your DD214 close by.
As with any benefit or service tailored specifically to veterans and military families, the VA Home Loan and Mortgage Assistance Program requires individuals to provide a Certificate of Eligibility to prove to the lender that they are, in fact, qualified to receive a government-backed loan. This typically requires providing a copy of your DD214.
For members of the Armed Forces (the Army, Air Force, Marine Corps, Navy and Coast Guard), a DD Form 214 is issued upon separation or discharge from active duty, including when a service member retires. Officially known as a Certificate of Release or Discharge from Active Duty, your DD214 is possibly the most important document you possess when it comes to documenting your time spent in the military and proving your honorable discharge.
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