VA Refinance Loan Basics
If you are eligible for a VA mortgage, you also have the option to use a VA loan to refinance a VA or non-VA mortgage depending on the type of loan you currently have.
There are two basic types of VA mortgage, the VA Cash-Out Refinance Loan and the VA Interest Rate Reduction Refinance Loan also known as a VA IRRRL. Both of these loans are for specific purposes, but only one features cash back to the borrower at closing time.
VA Refinance Loan Basics
To qualify for a VA refinance loan you must meet the basic requirements of the VA loan program including minimum time served. That minimum will vary depending on when you joined the military, but the basic prerequisites are the same based on the “era of service” when you served.
Some who become eligible for the VA loan program already have home loans and in order to refinance with a VA mortgage, you need to apply for a VA Certificate of Eligibility the same way a new VA borrower would when applying for a VA purchase loan.
In these cases, a borrower has 100% of their VA loan entitlement to use on the refinance loan.
Refinance loan options require you to use your VA loan eligibility like for VA purchase loans. You will use your VA loan entitlement (100% for first-time borrowers) to take out your first VA mortgage.
When applying for VA refinancing you are paying off the original loan and starting a new one; paying off an existing VA mortgage restores your entitlement for the refi.
VA home loans generally require occupancy and you will be required to certify that the home you are refinancing is or has been your primary residence depending on the refi loan you choose.
And remember, investment properties, vacation homes, timeshares, and similar properties cannot be refinanced using a VA mortgage.
>> Interested in a no PMI, zero down payment possible home loan? For a no-obligation, free consultation regarding your VA Loan eligibility, please go here.
VA Loan Funding Fees For Refinancing
One thing to remember about VA refinance loan options is that a required VA Loan Funding Fee will apply to your transaction.
However, those who receive or are eligible to receive VA compensation for service-connected medical issues are able to apply for a funding fee waiver which can save thousands of dollars on the transaction.
That’s a very important advantage to be aware of when considering your refinance loan options. Ask your loan officer about this option if you aren’t sure or call the VA directly to get more information on how to claim your funder fee waiver.
VA refinance loans do not require private mortgage insurance, which is an advantage over conventional loans in general. VA loan rules do not allow your lender to charge a penalty for early payoff of the loan.
But if you have a non-VA mortgage such as a Fannie Mae or Freddie Mac conforming mortgage you may need to check the fine print before you refinance to see if an early payoff penalty applies when refinancing the non-VA mortgage.
VA Cash-Out Refinancing
VA Cash-Out Refinancing is similar to other cash-out refi loans in that you are borrowing against the equity in your home and getting cash back at closing time for any purpose acceptable to the lender. Basic cash-out refinance loan issues to consider include the fact that interest rates and loan terms may vary among participating lenders.
VA loans are not all identical and shopping around for the right lender is an important part of making an informed decision about your loan. If you have an existing VA mortgage, keep in mind that you are not limited to your existing financial institution to get a VA refinance loan.
VA Cash-Out Refinancing is available for current loans as well as for those trying to catch up on delinquent mortgages, and you can refinance any home loan using VA cash out as long as the VA refinance loan is the “first lien”.
VA Cash-Out Refinancing loans require both a new credit check and a new appraisal. You will not be permitted to use an old appraisal to qualify for this type of loan no matter how recent. A new VA case number for a cash-out loan will require a new appraisal to ensure the current fair market value of the property is known.
VA Cash-Out Refinancing Versus Non-VA Refi Options
One important difference between VA Cash-Out and some non-VA cash-out options? VA loan rules found in VA Pamphlet 26-7, the VA Lender’s Handbook, state that you can apply for a VA Cash-Out Refinance loan for 100% of the home’s appraised value.
Compare that to FHA mortgages which have a cash-out refinance option limited to a loan-to-value ratio of 80% rather than the VA’s 100%.
The VA official site says borrowers who need to refinance a Fannie Mae or Freddie Mac conforming loan using a VA Cash-Out Refinance can do so up to the Fannie/Freddie loan limits for that area without a downpayment. If you need to refinance a conforming loan above the limit, you are generally required to make a downpayment.
VA Interest Rate Reduction Refinance Loans (VA IRRRLs)
The VA IRRRL program is a different kind of refinance loan option altogether. No cash back to the borrower is allowed with these refinance loans, except when a refund is due for items paid for in cash, for example, but later financed into the mortgage amount.
A VA IRRRL is designed to provide a specific benefit to the borrower such as a lower monthly mortgage payment. It also has no VA-required appraisal or credit check, which is a big plus for borrowers who might be struggling to get back on track with their mortgage payments. Other benefits could include a lower interest rate, or the ability to get out of an adjustable-rate mortgage into a fixed-rate loan instead.
In such cases, the interest rate on the VA IRRRL might actually be a bit higher than on the adjustable-rate mortgage depending on when the borrower refinances the loan. The benefit to the borrower in this instance is the predictable payments of the fixed-rate loan.
VA IRRRLs, like most other VA mortgages, can add a VA Energy Efficient Mortgage package to the loan. This allows extra loan funds to be included in the refinance loan for the express purpose of adding upgrades to the home that are approved by the lender.
However, add-ons to the loan may increase the amount of your monthly mortgage payments. You will need to work with the lender to determine how high your payments might go if you include a VA EEM, closing costs, or other approved add-ons to the mortgage.
VA loan rules say the no-credit-check option may not apply if your add-ons to the loan increase the monthly payments too much.
The caveat for the VA IRRRL option? It is only approved for existing VA mortgages. You cannot refinance a non-VA loan with a VA Interest Rate Reduction Refinance Loan. When applying for a VA IRRRL you must certify that you use or have used the home to be refinanced as your primary residence.
What To Remember About VA Refinancing Loans
You must be eligible for the VA loan program overall in order to apply for VA refinancing. Eligibility for the VA loan program is not the same as loan approval and all applicants are required to credit-qualify for the home loan.
VA mortgages typically feature lower interest rates than some conventional loans, but not all. Some conforming loans such as the Conventional 97 offer a 3% down payment and may feature interest rates that compete with a VA loan but the lack of a mortgage insurance requirement for VA loans makes the VA refi option a lot more competitive depending on the borrower’s other financial qualifications.
In typical cases, the Department of Veterans Affairs does not lend the money for your refinance loan. You must shop for a lender offering the best terms and rates for your refi. No two lenders may offer the same perks or rates–be sure to shop around as aggressively for your lender as you would for an automobile.
>> Interested in a no PMI, zero down payment possible home loan? For a no-obligation, free consultation regarding your VA Loan eligibility, please go here.
RELATED:
- VA Loan Basics
- VA Loan: Can You Borrow More Than Your House is Worth?
- Military Families: Should We Buy a Home?
- Buying a Home Remotely for Military and Veterans
- VA Loan Eligibility Expanded for National Guard
About the author
Editor-in-Chief Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter/editor for Air Force Television News and the Pentagon Channel. His freelance work includes contract work for Motorola, VALoans.com, and Credit Karma. He is co-founder of Dim Art House in Springfield, Illinois, and spends his non-writing time as an abstract painter, independent publisher, and occasional filmmaker.
