In September 2018, cash outs accounted for 86% of all VA refinancing. Cash out refinancing options offer cash up front to homeowners, while charging higher interest rates, trumped-up banking fees, and longer terms. In some cases, all the associated costs were comparable to charging $70 on a $100 loan.
When complaints began to roll in, it was clear to Congress that regulations were required. As of February 15, 2019, new regulations were introduced to protect homeowners when applying for VA cash-out refinances and applying for loans.
VA Cash-Out Refinance Loans
VA cash-out refinance loans allow homeowners to access the equity of their homes in cash. The equity is the difference between how much is owed on a mortgage and how much the home is currently worth. In theory, this is an excellent option as it provides cash when it is needed, without having to sell the home.
Adding to the situation, many banks were coming back to veterans again to encourage them to refinance, increasing their debt and associated fees substantially.
How the Scam Works
Lenders were spamming service members with offers to access cash using their new homes. However, lenders were not explaining that the refinancing being offered came with a higher interest rate to be paid out over a longer period of time. Although these “churning” scams did provide veterans with cash, they were not aware they had to agree to far less attractive terms than those they had for their initial mortgage.
Adding insult to injury, lenders were also charging many additional costs during the refinancing process, including closing costs, inspection costs, appraisal costs, and more. Thousands of service members were signing on the dotted line, allowing scamming lenders to take full advantage of the situation.
Congress took action in February to introduce the following regulations:
- There is now a waiting period before such a loan can be granted. It’s either 210 days after the first loan payment is made or following six monthly payments being made, whichever takes longer.
- Lenders will have to completely disclose all the details of the refinanced loan, so borrowers are not misled. That will include documents explaining what is involved, such as both when the loan is offered and once the new loan is closed.
- Veterans have to pay off new fees for the refinanced loan within 36 months.
- All interest rates applied to refinanced loans must be at least ½ of 1% lower than the original loan.
With these new regulations in place, it will be harder for lenders to scam veterans out of their hard-earned money. It will provide them with a fairer way to use the equity in their homes if and when it is needed.
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