How to Refinance a VA Loan
VA loans have never been so popular, so it is not surprising that the number of VA loan refinances is increasing too. In 2020, the Department of Veterans Affairs supported a total of 818,394 refinancing loans. In the first half of 2021 alone, there were another 600,000.
With the low interest rates of recent years, borrowers are refinancing all types of home loans. But for active duty members of the armed forces and seasoned homeowners, it certainly helps that refinancing a VA loan can be much easier and requires less documentation than refinancing a traditional loan.
The VA does not serve as an actual lender. Instead, VA private lenders make the mortgages and handle the application process. The VA Home Loan Program guarantees a portion of the loan, which allows lenders to offer financing to borrowers with poor credit ratings without requiring a down payment.
It also means that VA lenders must offer something called “streamline refinancing”. So when you refinance a VA home loan to get a lower interest rate, you don’t have to go through an assessment process or submit any documents that the VA already has on file.
- VA loan refinancing options
- The streamlined refinancing
- Cash-out refinancing
- VA refinancing lending rates
- Who is Eligible for VA Loan Refinancing?
- VA loan refinancing costs
- How often can I refinance my VA loan?
- Tips on Refinancing a VA Loan
VA loan refinancing options
You have two options for refinancing your current mortgage:
The VA are streamlining refinancing
Lower Interest Rate Refinance Loans (VA IRRRL), also known as Streamline Refinance, are available to existing VA loan holders.
To qualify for an IRRRL, your new interest rate must be at least 0.5% lower than your current interest rate for a refinance from Fixed Rate Loans to Fixed Rate Loans. If you are refinancing a fixed-rate mortgage into a variable mortgage, the initial interest rate must be at least 2% lower.
In addition, very few documents are required for the application.
In contrast to conventional refinancing, you do not have to obtain a new appraisal, which saves time and money. There are also no subscription fees and no minimum credit or proof of income requirements. You have to go through the lender’s application process and take care of the closing costs, but you can add the latter to the loan if you can’t prepay them.
“It’s meant to be a simple, inexpensive, and hassle-free refinancing option that only exists to get veterans into lower VA mortgages or variable rate loans,” said Chris Birk, vice president of Mortgage Insight for lender Veteran’s United.
The VA cash-out refinancing
If you meet the requirements for military service, you can refinance any existing loan – VA, conventional, FHA – into a VA disbursement loan. There are two types of Withdrawal Loans – Type I and Type II. A Type I Withdrawal Refinance is a mortgage where you don’t borrow extra money, just switch to a new type of loan, while a Type II Withdrawal Refinance gives you extra money take up.
The benefit of cash out refinancing is that you can convert a higher interest loan into a lower interest loan. You can also use your home’s equity to get money back that you can use for repairs, emergency expenses, or other purposes.
With a disbursement loan, you can refinance up to 100% of the appraised value of your home.
Unlike an IRRRL, you must meet both the VA and lender requirements to qualify for a withdrawal. You also need to have your home appraised and go through the underwriting process.
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VA refinancing lending rates
In a typical year, you can expect the VA loan rates to be lower than the rates on a traditional loan. However, this year and the last were anything but typical.
Thanks to the COVID-19 pandemic, conventional lending rates have fallen to historically low levels. While interest rates have also decreased on VA loans, the decrease was not as significant as it was on traditional interest rates. Don’t be surprised if you don’t see a major decrease in your interest rate when you convert a traditional loan to a VA loan, until those rates have returned to a more “normal” range.
Who is Eligible for VA Loan Refinancing?
Another difference between VA refinancing and conventional refinancing is that the transaction must bring tangible benefits to the borrower, according to Birk. This means that your lender will have to offer you a lower interest rate or monthly mortgage payment than you currently have in order to qualify.
For an IRRRL refi you also need to meet the following:
- You already have a VA-covered loan
- You are using the IRRRL to refinance your existing VA loan. (That is, if you have a second mortgage, the pledgee must agree that the new VA loan is the first mortgage.)
- Confirm that you currently live in, or have previously lived in, the home that the loan covers
- Have the Certificate of Eligibility for your current VA loan
For cash-out refinancing, you must meet the following:
- Qualify for a VA Certificate of Entitlement based on your length of service
- Meet the financial requirements of both the VA and your chosen lender, including minimum standards of creditworthiness, required debt-to-income ratio, and any other requirements set by the lender.
- Live in the house you are refinancing
Each lender sets their own minimum credit score, but in general, VA loans can be obtained with a score of only 620. A general rule of thumb for DTI is 41% or less, although some lenders can get as high as 65%. .
As part of the loan approval process, VA lenders will consider something called repayment. “It’s a way of thinking about whether or not refinancing is a good idea,” says Birk.
Amortization essentially determines how long it takes a borrower to cover the cost of refinancing a loan, also known as the break-even point. The VA guidelines set the compensation period to 36 months or less.
VA loan refinancing costs
As with any type of mortgage loan, there are closing costs associated with a VA refinance loan. These are between 1% and 5% and include items such as valuation fees for refinancing, origination and other up-front costs, taxes and commissions.
In addition to the usual closing costs, you will also have to pay the VA financing fee. For IRRRL refinancing loans, the fee is 0.5% of the loan amount. For refinancing with payout, the fee is 2.3% of the loan amount if you are using the VA loan service for the first time, or 3.6% if you are subsequently using the service.
There are exceptions. If you have service disabilities, received the purple heart, are the spouse of a disabled veteran, or the surviving spouse of a veteran who died in service or for a service-related cause, you are eligible for funding.
How often can I refinance my VA loan?
There is no limit to how many times you can refinance your VA loan, using either the IRRRL or a withdrawal option. However, there is a minimum waiting time that you must meet before you can refinance.
You must wait at least 210 days from the date of the first payment on the loan you want to refinance and you must have made at least six consecutive monthly payments.
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Tips on Refinancing a VA Loan
1. Compare lenders
To find the best interest rate and loan terms when applying for a VA loan, check with multiple lenders to see which one offers the best overall deal. Submitting multiple applications for the same type of loan within a two to four week period will not affect your creditworthiness. The registration offices count them as a single hard credit pull rather than multiple pulls.
According to a study by mortgage broker Own Up, the difference in interest rates offered by different mortgage lenders to the same VA borrower can be up to 1.25%. If you take the time to speak to various loan officers to find the best interest rate, you can realize significant interest savings over the life of the loan.
2. Determine what type of refinancing loan is best for you
Decide what your refinancing goal is. Do you just want to reduce your interest rate and your monthly payment? Then go with the IRRRL. Do you have unexpected bills to pay and want to use your home equity? Then go for the cash out refinancing. Withdrawal is also your only option when refinancing into a VA loan from another type of mortgage.
3. Take into account the cost of the loan
As with any refinancing, you want to make sure that it is worth the cost. Converting an old loan to a new one comes with closure costs and fees that can make refinancing more expensive than you originally thought. You need to calculate how long it will take to amortize the cost of refinancing to make sure it makes good business sense. Because of the repayment, a VA lender may not be able to allow you to refinance if you don’t break even early enough.
To find the break-even point, take the cost of all fees, expenses, and closing costs and divide it by the amount you save on the new loan each month. Also, think about how long you want to stay at home. If you move before you reach your break-even point, refinancing may not make sense. They will not reimburse your expenses.
4. Gather all necessary documents
As with any other type of loan refinancing, your VA lender will need to provide certain documents. For the IRRRL, this means the COE that was used in your previous VA loan.
For a withdrawal refinance, the lender can request your W2, 2-year tax returns and copies of pay slips. Be sure to find out what other documents may be required and put them together before you apply.
More from money:
What is a VA Loan?
7 VA Loan Tips for Veterans, Service Members, and Military Spouses
VA loans do not require down payments. Should you do one anyway?