In Loan Guaranty Circular 26-20-25, dated June 30, 2020, the U.S. Department of Veterans Affairs (VA) addresses the effect of a CARES Act forbearance, or some other COVID-19 credit relief, on the eligibility of a veteran for a VA purchase money or refinance loan. The guidance is effective immediately and applies to any loan closed on or after the date of the Circular, and will remain in place until further notice or when the Circular is rescinded.
The VA advises that while lenders should continue to follow all applicable authorities regarding VA loans, the “VA is temporarily waiving certain regulatory and policy requirements in an effort to help Veterans and the private sector close essential housing loans.”
Purchase Money and Cash-Out Refinance Loans
The VA states that while lenders must continue to follow VA underwriting standards generally, “lenders should not use a CARES Act forbearance as a reason to deny a Veteran a VA-guaranteed loan.” However, when a Veteran has obtained a CARES Act forbearance, the Veteran, through the lender, must provide reasons for the loan deficiency and information to establish that the cause of the delinquency has been corrected.
The VA will not consider a Veteran an unsatisfactory credit risk “based solely upon the fact that the Veteran received some type of credit forbearance or experienced some type of deferred payment during the COVID-19 national emergency.” The VA advises that while deferred payments may not be considered for credit risk purposes, the lender should consider the monthly obligation if the debt will remain active after the closing of the new VA loan.
Interest Rate Reduction Refinance Loan (IRRRL)
Although IRRRLs generally are not subject to standard VA underwriting requirements, if the loan being refinanced is more than 30 days past due, the Veteran must meet VA underwriting standards and the VA must provide prior approval for the IRRRL. The VA announces in the Circular that it will not require prior approval regardless of the delinquency status of the current loan if:
- The VA has already approved the lender to close loans on an automatic basis;
- The borrower has invoked a CARES Act forbearance relating to the loan being refinanced;
- The borrower has provided information to establish that the borrower is no longer experiencing a financial hardship caused by COVID-19; and
- The borrower qualifies for the IRRRL under specified VA credit standards (the standards set forth in 38 C.F.R. § 36.4340(c) through (j)).
When a borrower seeking an IRRRL has obtained a CARES Act forbearance on the loan being refinanced, for purposes of the maximum loan amount, the IRRRL may include the following:
- Any past due installment payments, including those a borrower deferred under a CARES Act forbearance;
- Allowable late charges, consistent with the note, the CARES Act, and all other applicable laws;
- The cost of any energy efficiency improvements;
- Allowable closing costs and discount points; and
- The VA funding fee.
With regard to the seasoning requirement for the current loan that applies when a Veteran is seeking an IRRRL, any periods of forbearance do not count toward the required seasoning. However, the mere fact that the current loan was subject to a CARES Act forbearance does not cause the loan to fail to meet the seasoning requirement. Pursuant to the Circular, a loan being refinanced is seasoned if both of the following conditions are met as of the date the borrower closes the refinance loan:
- The borrower has made at least six consecutive monthly payments on the loan being refinanced. For example, in a case where a borrower made five consecutive payments before invoking a CARES Act forbearance, such borrower would need to make six additional consecutive payments, post forbearance, in order to meet the seasoning requirement; and
- The date of closing for the refinance loan is 210 or more days after the first payment due date of the loan being refinanced.
With regard to the consideration of a Veteran for an IRRRL and the imposition of fees on the Veteran, the VA makes the following statement: “VA encourages lenders to carefully consider whether an IRRRL is in the best financial interest of a Veteran. VA strongly supports and encourages the fee waivers that many lenders have adopted, including the waiver of origination fees, discount points, and premium pricing offsets, for Veterans affected by COVID-19.”