What to Know About VA Home Loan Refinancing
There are important things to know about refinancing a home loan using a VA mortgage. The first thing to know is that not all VA loan options can be used to refinance a non-VA loan but there are options for those who do want to refinance a non-VA mortgage.
Not all refinance loans feature cash back to the borrower at closing time, and while some refi options allow you to refinance a delinquent loan, you won’t be permitted to skip a mortgage payment during the refinance.
VA Refinance Options
All VA refinance loan rules are found in the VA Lender’s Handbook, VA Pamphlet 26-7. There are VA Interest Rate Reduction Refinance Loans (see below), VA Cash-Out Refinance loans, and “Other refinance loans” as described in the Handbook.
VA Interest Rate Reduction Refinance Loans (VA IRRRL)
A VA IRRRL, also known as a VA Streamline Refinance, is described in VA Pamphlet 2y6-7 as, “…a loan made to refinance an existing VA-guaranteed loan, generally at a lower interest rate than the existing VA loan, and with lower principal and interest payments than the existing VA loan.”
VA IRRRLs are unique; they have no VA-required credit check or appraisal. You may find a lender is willing to underwrite these loans without one or both. But if you add too much to the loan amount and raise your monthly mortgage payment by too much, the lender may choose to require a credit check after all. Discuss this option with your loan officer to know what the conditions are in such cases.
VA IRRRLs can’t be used to refinance a conventional loan, an FHA mortgage, or any other non-VA home loan. You cannot get cash back at closing time except in the form of a refund, and the borrower will pay closing costs on the loan.
VA IRRRLs are typically required to provide a tangible benefit to the borrower in the form of a lower monthly payment, or a lower interest rate. The interest rate on these loans IS permitted to be higher than the current mortgage if the borrower is refinancing out of an adjustable-rate mortgage into a fixed-rate loan.
This is because typically the fixed interest rate will be a bit higher than an introductory rate or one that has had few rate adjustments in the meantime.
VA Cash-Out Refinancing
VA Cash-Out Refinancing is a VA-guaranteed loan that can refinance any loan on the home. What should you know about VA Cash-Out Refi options? They can be used to refinance a current or delinquent home loan, meaning you can catch up on any missed payments and get a fresh start with a new mortgage.
VA Cash-Out options are unique compared to FHA Cash-Out Refinancing (another government-backed refinance loan option) because VA cash-out transactions can be approved for up to 100% of the appraised value of the home. The FHA equivalent restricts cash out to 80% of the value.
What else should you know about VA Cash-Out refinance loans? They cannot be used to skip a mortgage payment. Your loan must be brought current by the new mortgage and all payments must be made. No government-backed mortgage loan program allows you to skip payments when refinancing.
VA Funding Fee Required
You will be responsible for paying a VA loan funding fee for a Cash-Out loan, and you have the option of financing the VA loan funding fee in full if you don’t mind the extra amount added to the mortgage. Remember the issues mentioned above related to adding too much to the loan amount?
Financing the funding fee may not be enough to warrant a credit check for a VA IRRRL, but if you finance the funding fee AND apply for a VA Energy Efficient Mortgage (VA EEM) package that adds extra loan funds for approved upgrades? A credit check may be in your future depending on circumstances. Discuss this with your loan officer to learn what the current requirements may be.
Refinancing With A VA Energy Efficient Mortgage Package (VA EEM)
A VA Energy Efficient Mortgage is not a separate home loan program, but rather an add-on to a VA purchase or refinance loan that adds extra loan money (above and beyond the approved loan amount for the appraised value of the home) for approved energy-saving upgrades.
A VA EEM can be a big help if you are buying an older home that needs some improvements. It can also potentially raise your monthly mortgage payment, especially if you add other items to the loan amount. For example, are you thinking about financing the VA loan funding fee? As mentioned above that could change the equation for your monthly payments.
VA EEMs are available for most VA loan transactions, you can get one when you purchase a new home or refinance a home, and you can even apply for one in conjunction with a construction loan to build a house on your own land. Doing so in those cases frees up more money for the other features of the construction project, but you will need to use an energy consultant to help plan and purchase the extra features you’ll include with EEM funds.
EEM funds cannot be used without restrictions. You won’t be able to get a check from your loan officer to use however you see fit. The lender may require you to use escrow to make your payments for labor and materials, and borrowers must stick to the approved project they and the lender agree upon. If you need unrestricted cash back at closing time, you will need to apply for a VA Cash-Out Refinance loan. Some projects are not possible with an EEM loan but your lender will have a list of approved uses for these loan funds.
Other Refinancing Loans
There is a section of VA Pamphlet 26-7 titled, Other Refinancing Loans. This is a very short portion of the rulebook and lists the following as other VA refi options to consider:
- Refinancing construction loans
- Refinancing installment land sale contracts
- Refinances of loans assumed by veterans “at interest rates higher than that for the proposed refinance.”
There are very few additional details in this particular section of the VA rules, but VA refinance loans for these purposes “may not exceed the lesser of: the VA reasonable value plus the VA funding fee, or the sum of the outstanding balance of the loan to be refinanced plus allowable closing costs (including the funding fee) and discounts.”
The last line in the rulebook about these refi loans says that a VA Energy Efficient Mortgage package (see above) can be added to these refinance loans, too.
Talk to a participating VA loan officer about these additional options. Some may not apply unless you are building a home using a VA Construction Loan, and your options may be determined in part by state law, lender standards, and other variables. Don’t assume any VA loan product is unavailable to you without discussing your plans with a lender. You may have options to buy or refinance you didn’t realize you had.
About the author
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.