This piece originally appeared in the June 2022 edition of MReport magazine, online now.
Adam Mercado is a military veteran and the Director of Operations for ClearPath Lending, where he has been employed since August 2016. He began his financial services career in 2002 as an Operations Assistant at IndyMac. Since then, his career has grown, and he has worked for organizations including Experian Consumer Direct, HomeBridge Wholesale, and People’s Choice Home Loan. Mercado served in the U.S. Marines from May 1998 through May 2002.
How has the market for VA cash-outs changed over the past year or so?
Recent data from the Department of Veterans Affairs indicate that while overall VA originations during the three months ended March 31, 2022, tumbled by more than half from a year earlier, the volume of cash-out VA transactions soared 88% during the same period.
What is driving the rise in cash-out refinancing?
This significantly large increase in cash-out loans has really been happening for the past couple of years. Data shows this is mostly consumer-driven, as borrowers have taken advantage of their home equity that has increased given the current high demand for residential real estate.
What impact on the VA cash-out marketplace did the COVID-19 pandemic have?
Financial necessity played a role in the rise of VA cash-outs as many non-VA lenders tightened their guidelines during the recession. Finding it difficult to meet new stiffer requirements for credit score and debt-to-income ratios, veterans and active-duty service members started turning to their VA loan benefits and applied in record numbers. The lockdowns caused by the pandemic also incentivized homeowners to upgrade their homes with additional space and renovations.
What trends are you seeing in the VA cash-out marketplace specifically?
For homebuyers in expensive housing markets, VA loans became more appealing in 2020 thanks to the Blue Water Navy Vietnam Veterans Act of 2019. This legislation, which went into effect on January 1, 2020, eliminated loan limits for most borrowers. Prior to this legislation, VA borrowers who exceeded maximum loan amounts had to make a down payment to bridge the difference.
With the uncertainty of the pandemic ending anytime soon, should VA borrowers be wary of changes in the market
Homeowners gained a lot of equity during the pandemic. One big reason why cash-out refinancing may still be beneficial for homeowners is that, after two years of rapidly rising home values, this group has a lot of equity available to them that they can still take advantage of if they meet VA’s easier lender requirements. The key is a cost-benefit analysis that ensures the borrower is improving their own situation.
Would you encourage veterans needing extra cash to do this?
A VA loan is an important benefit earned by our military. A cash-out refinance can present a great opportunity for eligible borrowers, who can use these financial programs to put more money back in their pocket to help fund repairs and renovations, save for retirement, or pay for educational expenses.
What is your outlook for VA cash-out activity?
Given the record level of home equity that military and veteran families are sitting on, and the loss of interest rate reduction refinance loan (IRRRL) business that will drive many originators into cash-out transactions, I think that continued significant growth is ahead for the next couple years.
What is the process to get a VA-backed cash-out refinance loan?
Because terms and fees will vary among lenders, prospective borrowers should first contact several lenders to compare what they have to offer. Once a lender is selected, the applicant will need to show their VA Certificate of Eligibility confirming they meet the minimum requirements to qualify for a VA-guaranteed loan as well as W-2s and other income and lender requirements. The lender will order a home appraisal before the loan can be approved.
What are the benefits of offering VA cash-out loan programs?
VA cash-out refinances are considered less risky by lenders and investors who are willing to offer lower rates than available on other agency products.