38 CFR § 36.4306 - Refinancing of mortgage or other lien indebtedness.

§ 36.4306 Refinancing of mortgage or other lien indebtedness.

(a) A refinancing loan made pursuant to 38 U.S.C. 3710(a)(5) qualifies for guaranty in an amount as computed under 38 U.S.C. 3703, provided -

(1) The amount of the new loan must not exceed an amount equal to 100 percent of the reasonable value, as determined by the Secretary, of the dwelling or farm residence which will secure the loan.

(2) The funding fee as prescribed by 38 U.S.C. 3729 may be included in the new loan amount, except that any portion of the funding fee that would cause the new loan amount to exceed 100 percent of the reasonable value of the property must be paid in cash at the loan closing.

(3) The new loan must provide a net tangible benefit to the borrower. For the purposes of this section, net tangible benefit means that the new loan is in the financial interest of the borrower. The lender of the new loan must provide the borrower with a net tangible benefit test. The net tangible benefit test must be satisfied. The net tangible benefit test is defined as follows:

(i) The new loan must meet one or more of the following:

(A) The new loan eliminates monthly mortgage insurance, whether public or private, or monthly guaranty insurance;

(B) The term of the new loan is shorter than the term of the loan being refinanced;

(C) The interest rate on the new loan is lower than the interest rate on the loan being refinanced;

(D) The payment on the new loan is lower than the payment on the loan being refinanced;

(E) The new loan results in an increase in the borrower's monthly residual income as explained by § 36.4340(e);

(F) The new loan refinances an interim loan to construct, alter, or repair the primary home;

(G) The new loan amount is equal to or less than 90 percent of the reasonable value of the home; or

(H) The new loan refinances an adjustable rate mortgage to a fixed rate loan.

(ii) The lender must provide a borrower with a comparison of the following:

(A) The loan payoff amount of the new loan, with a comparison to the loan payoff amount of the loan being refinanced;

(B) The new type of loan, with a comparison to the type of the loan being refinanced;

(C) The interest rate of the new loan, with a comparison to the interest rate of the loan being refinanced;

(D) The term of the new loan, with a comparison to the term remaining on the loan being refinanced;

(E) The total the borrower will have paid after making all payments of principal, interest, and mortgage or guaranty insurance (if applicable), as scheduled, for both the loan being refinanced and the new loan; and

(F) The loan to value ratio of the loan being refinanced compared to the loan to value ratio under the new loan.

(iii) The lender must provide the borrower with an estimate of the dollar amount of home equity that, by refinancing into a new loan, is being removed from the reasonable value of the home, and explain that removal of this home equity may affect the borrower's ability to sell the home at a later date.

(iv) The lender must provide the information required under paragraphs (a)(3)(i) through (iii) of this section in a standardized format and on two separate occasions: Not later than 3 business days from the date of the loan application and again at loan closing. The borrower must certify that the borrower received the information required under paragraphs (a)(3)(i) through (iii) on both occasions.

(4) The dollar amount of discount, if any, to be paid by the borrower must be reasonable in amount as determined by the Secretary in accordance with § 36.4313(d)(7)(i).

(5) The loan must otherwise be eligible for guaranty.

(b) If the loan being refinanced is a VA-guaranteed or insured loan, and the new loan amount is equal to or less than the payoff amount of the loan being refinanced, the following requirements must also be met -

(1)

(i) The lender of the refinanced loan must provide the Secretary with a certification of the recoupment period for fees, closing costs, and any expenses (other than taxes, amounts held in escrow, and fees paid under 38 U.S.C. chapter 37) that would be incurred by the borrower in the refinancing of the loan;

(ii) All of the fees and incurred costs must be scheduled to be recouped on or before the date that is 36 months after the date of loan issuance; and

(iii) The recoupment must be calculated through lower regular monthly payments (other than taxes, amounts held in escrow, and fees paid under 38 U.S.C. chapter 37) as a result of the refinanced loan.

(2) The new loan may not be guaranteed or insured until the date that is the later of 210 days from the date of the first monthly payment made by the borrower and the date on which the sixth monthly payment is made on the loan.

(3) In a case in which the loan being refinanced has a fixed interest rate and the new loan will also have a fixed interest rate, the interest rate on the new loan must not be less than 50 basis points less than the loan being refinanced.

(4) In a case in which the loan being refinanced has a fixed interest rate and the new loan will have an adjustable rate, the interest rate on the new loan must not be less than 200 basis points less than the previous loan. In addition -

(i) The lower interest rate must not be produced solely from discount points, unless such points are paid at closing; and

(ii) Such points are not added to the principal loan amount, unless -

(A) For discount point amounts that are less than or equal to one discount point, the resulting loan balance after any fees and expenses allows the property with respect to which the loan was issued to maintain a loan to value ratio of 100 percent or less; and

(B) For discount point amounts that are greater than one discount point, the resulting loan balance after any fees and expenses allows the property with respect to which the loan was issued to maintain a loan to value ratio of 90 percent or less.

(c) If the new loan amount exceeds the payoff amount of the loan being refinanced -

(1) The borrower is deemed to have recouped the costs of the refinancing if the requirements prescribed in paragraph (a) are met.

(2) The new loan may not be guaranteed or insured until the date that is the later of 210 days from the date of the first monthly payment made by the borrower and the date on which the sixth monthly payment is made on the loan; however, this requirement applies only when the loan being refinanced is a VA-guaranteed or insured loan.

(d) For the limited purpose of calculating entitlement, nothing shall preclude guaranty of a loan to an eligible veteran having home loan guaranty entitlement to refinance under the provisions of 38 U.S.C. 3710(a)(5) a VA-guaranteed or insured (or direct) mortgage loan made to him or her which is outstanding on the dwelling or farm residence owned and occupied or to be reoccupied after the completion of major alterations, repairs, or improvements to the property, by the veteran as a home, or in the case of an eligible veteran unable to occupy the property because of active duty status in the Armed Forces, occupied or to be reoccupied by the veteran's spouse as the spouse's home.

(e) A refinancing loan may include contractual prepayment penalties, if any, due the holder of the mortgage or other lien indebtedness to be refinanced.

(f) Nothing in this section shall preclude the determination that a loan is being made for a purpose authorized under 38 U.S.C. 3710, if the purpose of such loan is the refinancing of the balance due for the purchase of land on which new construction is to be financed through the proceeds of the loan, or the refinancing of the balance due on an existing land sale contract relating to a borrower's dwelling or farm residence.

(g) A veteran may refinance (38 U.S.C. 3710(a)(9)(B)(ii)) an existing loan that was for the purchase of, and is secured by, a manufactured home in order to purchase the lot on which the manufactured home is or will be permanently affixed, provided the following requirements are met:

(1) The refinancing of a manufactured home and the purchase of a lot must be considered as one loan;

(2) The manufactured home upon being permanently affixed to the lot will be considered real property under the laws of the State where it is located;

(3) The loan must be secured by the same manufactured home which is being refinanced and the real property on which the manufactured home is or will be located;

(4) The amount of the loan may not exceed an amount equal to the sum of the balance of the loan being refinanced; the purchase price, not to exceed the reasonable value of the lot; the costs of the necessary site preparation of the lot as determined by the Secretary; a reasonable discount as authorized in § 36.4313(d)(6) with respect to that portion of the loan used to refinance the existing purchase money lien on the manufactured home, and closing costs as authorized in § 36.4313.

(5) If the loan being refinanced was guaranteed by VA, the portion of the loan made for the purpose of refinancing an existing purchase money manufactured home loan may be, guaranteed without regard to the outstanding guaranty entitlement available for use by the veteran, and the veteran's guaranty entitlement shall not be charged as a result of any guaranty provided for the refinancing portion of the loan. For the purposes enumerated in 38 U.S.C. 3702(b), the refinancing portion of the loan shall be considered to have been obtained with the guaranty entitlement used to obtain VA-guaranteed loan being refinanced. The total guaranty for the new loan shall be the sum of the guaranty entitlement used to obtain VA-guaranteed loan being refinanced and any additional guaranty entitlement available to the veteran. However, the total guaranty may not exceed the guaranty amount as calculated under § 36.4302(a); and

(6) All other requirements of this section are met.

(h) Any refinancing loan that might be guaranteed under this section, when made or purchased by any financial institution subject to examination and supervision by any agency of the United States or of any State may, in lieu of such guaranty, be insured by the Secretary under an agreement whereby the Secretary will reimburse any such institution for losses incurred on such loan up to 15 percent of the aggregate of loans so made or purchased by it.

(Authority: 38 U.S.C. 3703, 3709, 3710)
[73 FR 6310, Feb. 1, 2008. Redesignated at 75 FR 33705, June 15, 2010, as amended at 75 FR 65238, Oct. 22, 2010; 83 FR 64468, Dec. 17, 2018]

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