Introduction
A VA loan refinance is an excellent option for those seeking to replace their current VA loan with a new one. If you need to access cash to tackle expensive home repairs, pay off high-interest debt, or pay for other big-ticket items, a VA-backed cash-out refinance or VA streamline refinance might be the right choice for you. It is a great way to access the equity in your home, lower rates, and cash-back during closing, all while waiving mortgage insurance.
A VA cash-out refinance replaces your existing loan with a new loan and is a great way for veterans to access cash quickly. This new loan comes with a bigger balance than your original loan. And, the difference or extra amount of loan will be given to you as cash-back during closing.
A VA streamline refinance, also referred to as a VA IRRRL (Interest Rate Reduction Refinance), allows you to lower your interest rate with little to no out-of-pocket costs. A streamline refinance is a great way to reduce or make your monthly payments more predictable.
How Does a VA Refinance Work?
A non-VA loan cash-out refinance only allows you to access up to 80% of the loan to value amount, which means you can't access all of your home's equity. On the other hand, a VA cash-out refinance makes it possible for you to access from 90-100% of your home's equity as cash-back during the closing.
Put that cash to work for you to pay off high-interest debt, home improvements, a child's college tuition, or other investments.
A VA cashout loan usually allows you to access a lower interest rate than conventional loans. In addition, VA loans typically offer veterans and active-duty members some of the lowest rates in the market because the Department of Veterans Affairs backs the loans. However, one thing to keep in mind is that cash-out rates might be higher than the rates on a non-cash-out loan rate.
You may want to choose a VA cash-out for the following reasons or benefits:
- Use the refinance to convert any kind of home loan, including conventional loans, into a VA mortgage
- Access lower rates with VA loans
- Get cash-back at closing
- Avoid paying monthly mortgage insurance
- Receive up to 100% of your home's equity in cash
- Pay off high-interest debt
- Fund home improvement projects
- Invest the money or use it to fund big-ticket purchases
When it comes to a VA Interest Rate Reduction Refinancing Loan (IRRRL), also referred to as a "VA to VA" loan, you should be eligible as long as you have an existing VA-backed home loan. Keep in mind that a VA streamline refinance will come with closing costs, so do the math first and calculate whether it's worth it. To check the numbers, just divide the closing costs by the amount you anticipate saving each month.
This may be the right option for you if you are looking to:
- Reduce your interest rate
- Transition from a conventional loan or ARM to a VA loan
- Shorten your loan term from 30 years to 15 years
- Avoid origination fees
- Avoid paying for monthly mortgage insurance
- Skip the appraisal
- Pay no money out of pocket
- Include all costs and fees in the new loan
While these loans are back by the government, you'll need to go through a private bank, credit union, or a mortgage company to obtain the funds. However, it's important to understand that you don't have to refinance with your original lender. As a result, you can shop around different VA-approved lenders to snag the best deal for you.
Who Qualifies for a VA Loan?
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When applying for a VA cash-out refinance, you will need to meet the following requirements to get the loan:
- Provide proof of military service history by getting a Certificate of Eligibility (COE)
- A decent credit score of around 580-620
- Low debt-to-income (DTI) ratio of 41% or lower
- Records that corroborate stable employment and income
- Enough home equity to make the refinance worthwhile
Your
Certificate of Eligibility (COE)
is typically simple for the loan officer to pull by searching your social security number. When requesting your COE, fill out a
Request for a Certificate of Eligibility
and mail it to the address provided on the form.
Instead of waiting the typical four to six weeks it typically takes to receive your COE by mail, you can also request it online, which has a much faster turnaround. Or log into the VA's portal to request your certificate. You can also order the COE through the VA-approved lender, which might be the easiest and fastest way to request and receive your certificate.
The Certificate of Eligibility (COE) depends on your military service history, which should include one or more of the following:
- 90 days served in wartime
- 90 days and proof of ongoing active duty
- 6 years of service in the National Guard of Reservers
- Are the surviving spouse of a veteran
- 2 years of service if you've enlisted post-Vietnam era
- 181 days served during peacetime
If you do not fit any of the qualifications listed above, we advise that you have a VA-approved lender look over your experience to determine your eligibility. Once you've chosen a VA-approved lender and requested your COE or have been determined as eligible, you will need to take the following steps for the VA cash-out refinance process:
- Complete your loan application which will include submitting bank statements, pay stubs, and W2s
- A home appraisal will be ordered by the lender, which will determine your equity and as well as the loan amount
- Underwriting will take place as the lender verifies all of your financial documents
- When closing on the loan, you will sign loan documents as well as pay the closing costs
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- Must be a VA to VA refinance
- No need for a new Certificate of Eligibility (COE)
- Proof that you previously occupied the house, even if it is now an investment or rental property
- The new loan interest rate must be lower than the rate of the original loan
- The exception to the above requirement is when refinancing from an ARM to a fixed rate. In that case, the new interest rate may not be lower than the original rate, so you will need to refinance to a higher interest rate.
- Must pay the VA funding fee
- Must provide proof that about seven months have passed since your first payment on the original VA loan
- Must have made at least six payments on the original VA loan
The Pros and Cons of a VA Loan Refinance
Refinancing to an Interest Rate Reduction Refinance Loan (IRRRL) is a viable option for many with an existing VA loan. Especially since VA loans typically come with lower interest rates than conventional loans.
Significant benefits of an IRRRL include not having to pay for private mortgage insurance. Additionally, you won't have to provide additional paperwork or documentation if you've already been approved for a VA loan in the past, making the application process easier. An essential factor to consider regarding an IRRRL is that you can't access your home's equity as cash with this kind of refinance.
Be aware that while not typical, it is possible for your interest rate to go up when refinancing from an adjustable-rate mortgage to an IRRRL. Additionally, closing costs may add additional expenses you weren't anticipating, so be sure to factor this into your calculations.
With a VA cash-out, you have quite a few options to choose from. You can refinance a conventional, an FHA, or VA loan into a VA-backed cash-out. Even if your original loan wasn't a VA loan, you have the opportunity to turn it into one if you meet the eligibility requirements.
Qualified veterans can take advantage of no down payment or mortgage insurance, no prepayment penalties, and shared or absorbed closing costs with the seller. In addition, the ability to refinance up to 100% of your home's value is in stark contrast to how much of your home's equity you can borrow with a conventional loan. Accessing that much more in cash can help you tackle home renovations, pay off high-interest debt, or pay for a child's college tuition is part of what makes a VA cash-out so appealing.
Potential risks associated with a VA cash-out could include:
- Your mortgage rate increasing
- Paying a funding fee of around almost 4% of your loan
- Appraisal fees sometimes exceed the appraisal fees for conventional loans
You also must prove that the home you're refinancing is your primary residence, so this refinancing cannot be used on investment or rental properties. Finally, keep in mind that if you know you are likely to get relocated or asked to move by the military, a refinance may not make the most sense.
FAQ's
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VA loans typically have lower interest rates than conventional loans because the VA backs a portion of every loan. You won't have to put a down payment on a VA loan, while conventional loans require a minimum down payment of 3% or higher. In addition, you don't have to pay for mortgage insurance with a VA, while you will be required to pay for mortgage insurance if your down payment is under 20%. Additionally, the VA doesn't have a set credit score minimum requirement, but conventional loans tend to set the minimum at 620.
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You will need to have had your original VA loan for at least six months worth of mortgage payments to be eligible for a refinance.
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You have the option to turn your VA loan into a conventional loan. This is an excellent decision to make if you are interested in purchasing rental or investment property since you can't use a VA loan for that purpose.
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A VA loan offers many benefits. Especially for those with a decent credit history, steady income, and a low debt-to-income ratio. Another excellent reason for refinancing a VA loan is when you can lower your monthly payment amount or lower your interest rate by at least a percentage point.
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It is common for borrowers to access 90-100% of the loan-to-value ratio or the home's equity with a VA cash-out refinance.
