VA Loan Refinancing Guide

Eligible veterans can use the VA refinancing options to take advantage of their VA loan benefits. If you didn’t use your home loan benefit to buy your home, you can use it to refinance into a VA loan if desired.

If you used your VA home loan benefit to buy a home, you have many options to refinance your loan whether to get more attractive terms or take cash out of your home’s equity.

Who is Eligible for a VA Refinance?

Just like a VA purchase loan, you must meet the specific service requirements to use the VA refinance program.

This means you must:

  • Serve at least 90 days during wartime
  • Serve at least 181 days during peacetime
  • Serve at least 6 years in the National Guard or Reserves
  • Be a surviving spouse of a veteran who lost his/her life in service

You must have your COE to refinance into a VA loan unless you already used your benefit and are refinancing an existing VA loan.

Types of VA Refinance Loans

The VA offers two refinance options. One is for veterans with a current VA loan and the other is for veterans without a current VA loan but who are eligible for one.

VA Streamline Refinance

The VA streamline refinance or VA Interest Rate Reduction Refinance Loan helps veterans with a current VA loan take advantage of better terms. You might use it to lower your interest rate, to refinance out of an ARM into a fixed rate, or to shorten your term.

The refinance must have an advantage, such as saving you money on your monthly payment or giving you more attractive terms. You must prove you’ve made your last 12 months of payments on time with your current mortgage and can continue with the new mortgage.

This loan is only for veterans with a current VA loan.

How to Qualify for a VA IRRRL

To qualify for a VA IRRRL, you must meet the following:

  • You must refinance a property you bought with a VA loan
  • You must currently live in the property full-time
  • You must prove you’ve made at least the last 12 months of mortgage payments on time

You don’t need to prove your credit score, income, employment, or home value. The VA allows lenders to use the original appraised value of the home and your payment history on your current mortgage to qualify you for the loan.

Another unique aspect of this loan is you don’t have to say you’ll live in the home as your primary residence moving forward. If you use the VA IRRRL program, you can keep the home, but not live in it and not violate the terms of a VA loan.

The VA IRRRL Funding Fee

Every time you use your VA home loan benefit, you pay a funding fee, with only a few exceptions. The VA IRRRL, however, allows for a much lower funding fee. Typically subsequent use of your VA home loan benefit costs 3.6% of your loan amount. With a VA IRRRL, though, you pay only 0.5% of your loan amount.

The Benefits of a VA IRRRL Mortgage

It’s important to weigh the pros and cons of refinancing. Here are the most common benefits of the VA IRRRL mortgage.

  • You don’t need to provide a lot of documentation to qualify
  • You don’t have to worry about your home’s value
  • Your credit score doesn’t matter, so even if it decreased you may still qualify
  • You can lower your payment or get better terms
  • The closing costs are low

VA Cash-Out Refinance

The VA cash-out refinance is for any eligible veteran. You can use it if you have a different loan, such as an FHA loan, and want to refinance. Veterans with a current VA loan that want to use some of their home’s equity can also use the program.

The VA cash-out refinance requires you to verify your qualifying factors for the loan, just like you did when you bought the home. You must prove your credit, income, assets, and employment.

Because the loan amount may be higher than what you currently have, the cash-out refinance may have slightly higher interest rates, but they are usually competitive.

How to Qualify for a VA Cash-Out Refinance

Qualifying for a VA cash-out refinance is more difficult than qualifying for a VA streamline refinance, but for good reason. It’s open to any veteran with or without a current VA loan and you can tap into up to 90% of your home’s value, using the equity for any other purpose.

To qualify for a VA cash-out refinance, you must prove you have the credit, debt ratio, income, and assets to qualify.

Here’s a general idea of what you might see:

  • Minimum 620 credit score
  • Proof you will live in the property as your primary residence moving forward
  • A maximum 43% debt-to-income ratio
  • Proof of stable employment for the last 2 years
  • Proof of any assets needed to cover your closing costs

The VA Funding Fee for a VA Cash-Out Refinance

Unlike the VA streamline refinance, the VA funding fee for a cash-out refinance is much higher. The funding fee for anyone that already used their VA benefit is 3.6% of the loan amount. If you haven’t used your VA home loan benefit yet, it’s 2.3% of your loan amount.

The VA Loan Limits for a Cash-Out Refinance

If you use the VA cash-out refinance for what it’s meant to be – cash out of your home, you can refinance up to 90% of your home’s value. Let’s say for example your home is worth $300,000 and you have a $200,000 mortgage on it right now.

You can take out a mortgage for as much as $270,000. The first $200,000 will pay off your existing mortgage and you receive the remaining $30,000 to use how you want.

Common Uses for Cash Out Refinance Proceeds

There’s no right or wrong way to use your home’s equity. If you qualify for a VA cash-out refinance, you can use the funds however you want, but here are some common uses for it.

Debt Consolidation

If you have a lot of consumer debt, you might save money by using your home’s equity to pay it off. Since mortgage interest rates are usually much lower than consumer credit card interest rates, you can save money and only have one payment each month.

Be careful if you choose this option, though. When you roll the debt into your mortgage, you take it from unsecured to secured. In other words, before they couldn’t take your house if you didn’t pay your credit cards. If you don’t pay your mortgage, though, you could lose your house so make sure you can afford the payment.

Home Improvements

Home improvements are the most popular reason to use your home equity. You borrow money from your home but reinvest it back into the home. If you increase your home’s value with some of the changes, you’ll see a return on your investment right away.

Not all home improvements increase a home’s value so don’t do it only for that purpose, but it’s good to know that you’ll see a return on your investment with this option.

Pay for College

If your child isn’t eligible for federal student aid or scholarships, you may wonder where you’ll get the money to pay for college. If you have built up equity in your home, you may be able to use it to cover the college expenses and pay a much lower interest rate than you would on any personal loan.

Pay for Emergency Expenses

Emergencies happen all the time and if your only assets are tied up in your home, it can make it difficult to cover them. You can tap into your home’s equity, take it out, and put it in a safe place to use only for emergencies. This provides many people with peace of mind knowing they have the money available should they need it.

How Soon can you Cash Out your Home’s Equity?

To take out your home’s equity, you must have a ‘seasoned’ loan. This means you must have the loan for a specific amount of time.

In general, you must have the loan for at least 210 days and have made at least 6 payments on it. This gives us a chance to see that you can make your payments on time since a cash-out refinance is for a higher amount which means a higher loan payment. We must make sure you can afford it.

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