How to Refinance a VA Loan
VA loans have never been more popular, so it’s no surprise that the number of VA loan refinances is surging as well. In 2020, the Department of Veterans Affairs backed a total of 818,394 refinance loans. In the first half of 2021 alone, it did another 600,000.
With the low interest rates of recent years, borrowers have been refinancing all-sorts of home loans. But for active duty members of the Armed Forces and veteran homeowners, it surely helps that refinancing a VA loan can be way easier and require less documentation than refinancing a conventional loan.
The VA doesn’t serve as an actual lender. Instead, private VA loan lenders originate 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 lower credit scores and without requiring a down payment.
It also means that VA lenders are required to offer what is sometimes called a “streamline refinance.” So, if you are refinancing a VA home loan in order to obtain a lower rate, you won’t need to go through an appraisal process or submit documentation that the VA already has on file.
- VA loan refinance options
- The streamline refinance
- Cash-out refinance
- VA refinance loan rates
- Who is eligible for a VA loan refinance?
- VA loan refinance costs
- How often can I refinance my VA loan?
- Tips for refinancing a VA loan
VA loan refinance options
You’ll have two options when it comes to refinancing your current mortgage:
The VA streamline refinance
Interest rate reduction refinance loans (VA IRRRL), also known as the streamline refinance, are available to existing VA loan holders.
In order to qualify for an IRRRL, your new interest rate must be at least .5% lower than your current rate, for a fixed-rate loan to fixed-rate loan refinance. If you are refinancing a fixed rate mortgage into an adjustable-rate mortgage, the starting rate must be at least 2% lower.
Beyond that, there is very little documentation required to apply.
Unlike with a conventional refinance, you aren’t required to get a new appraisal, which saves time and money. There are also no underwriting fees and no minimum credit score requirements or income documentation needed. You will need to go through the lender's application process and take care of closing costs, but you can roll the latter into the loan if you can’t pay them up front.
“It’s intended to be a simple, low cost, no-frills refinance option that solely exists to get veterans into lower rate VA mortgages or out of adjustable-rate loans,” says Chris Birk, vice president of mortgage insight at lender Veterans United Home Loans.
The VA cash-out refinance
If you meet the military service requirements, you can refinance any existing loan — VA, conventional, FHA — into a VA cash-out loan. There are two types of cash-out loans — Type I and Type II. A Type I cash-out refinance is a mortgage where you’re not taking out extra cash just switching to a new loan type, while a Type II cash-out refinance where you are taking out extra cash.
The advantage of a cash-out refinance is that you can convert a higher interest rate loan into a lower rate loan. You can also take advantage of your home's equity to get cash back you can use for repairs, emergency costs or any other use.
With a cash-out loan you can refinance up to 100% of the appraised value of your home.
Unlike an IRRRL, you will need to meet both VA and lender eligibility requirements to qualify for a cash-out. You’ll also need to have your home appraised and go through the underwriting process.
VA refinance loan rates
In a typical year, you can expect VA loan rates to be lower than the rate on a conventional loan. However, this year and last have been far from typical.
Thanks to the COVID-19 pandemic, conventional loan rates have dropped to historically low levels. While VA loans have also seen rates drop, the decrease hasn’t been as significant as with conventional rates. Don’t be surprised if you don’t see a larger reduction in your interest rate converting a conventional loan into a VA loan until those rates have gone back to a more ‘normal’ range.
Who is eligible for a VA loan refinance?
Another way that a VA refinance is different from conventional refinance, is that the transaction has to provide a tangible benefit for the borrower, according to Birk. This means that your lender must provide you with a lower interest rate or monthly mortgage payment than what you currently have in order to qualify.
For an IRRRL refi, you must also meet the following:
- Already have a VA-backed loan
- You are using the IRRRL to refinance your existing VA loan. (That means, if you have a second mortgage, the lien holder must agree that the new VA loan will be the first mortgage.)
- Certify that you are currently living in the home the loan covers or have lived there in the past
- Have the Certificate of Eligibility from your current VA loan
For a cash-out refinance, you must meet the following:
- Qualify for a VA Certificate of Eligibility based on your service time
- Meet both the VA’s and your chosen lender’s financial requirements, including minimum credit score standards, required debt-to-income ratio, plus any other requirements set by the lender.
- Live in the home you’re refinancing
Each lender will set its own minimum credit score requirement, but in general VA loans can be obtained with a score as low as 620. A general rule of thumb for DTI is 41% or less, although some lenders may go as high as 65%.
As part of the loan approval process, VA lenders will take something called recoupment into consideration. “It’s a way to think about whether or not getting a refinance is a good idea or not,” says Birk.
Recoupment is basically determining how long it will take a borrower to recover the costs of refinancing a loan, also known as the break-even point. VA guidelines set the recoupment period as 36 months or less.
VA loan refinance costs
As with any type of mortgage loan, a VA refinance loan will have closing costs associated with it. These range between 1% and 5% and include items like appraisal fees for cash-out refinances , origination and other upfront costs, taxes and commissions.
In addition to standard closing costs, you’ll also have to pay the VA funding fee. For IRRRL refinance loans, the fee is 0.5% of the loan amount. For cash-out refinances, the fee is 2.3% of the loan amount if it’s the first time you use the VA loan benefit, or 3.6% if it’s a subsequent use of the benefit.
There are exceptions. If you have service-related disabilities, were awarded the purple heart, are the spouse of a veteran who was disabled or are the surviving spouse of a veteran who died while in service or from a service-related cause, you are exempt from paying the funding fee.
How often can I refinance my VA loan?
There is no limit to how many times you can refinance your VA loan, either with the IRRRL or a cash-out option. However, there is a minimum waiting period you need to observe before you can refinance.
You must wait at least 210 days from the date of the first payment you made on the loan you want to refinance, and you must have made at least six consecutive monthly payments.
Tips for refinancing a VA loan
1. Compare lenders
To find the best rate and loan terms when you apply for a VA loan, contact multiple lenders to see which one offers the best overall deal. Submitting multiple applications for the same loan type within a two-to-four-week period won’t affect your credit score. The reporting bureaus will count them as a single hard credit pull rather than multiple pulls.
The difference in rates offered to the same VA borrower by different mortgage lenders can be as high as 1.25%, according to a study by mortgage brokerage Own Up. Taking the time to talk to different loan officers in order to find the best rate can result in a significant savings in interest over the life of the loan.
2. Determine what type of refinance loan is best for you
Decide what your refinancing goal is. Do you just want to reduce your interest rate and monthly payment? Then go with the IRRRL. Do you need to pay some unexpected bills and want to use your home equity? Then go for the cash-out refinance. A cash-out is also your only option if you are refinancing into a VA loan from a different type of mortgage.
3. Consider the cost of the loan
As with any refinance you want to make sure it’s worth the cost. Converting an old loan into a new one involves closing costs and fees that can make the refinance more expensive than you originally thought. You must calculate how long it will take you to break even on the cost of refinancing to make sure it makes financial sense. Because of recoupment, a VA lender might not allow you to refinance if you won’t break even soon enough.
To calculate the breakeven point, take the cost of all fees, expenses and closing cost and divide it by the amount you’ll save each month with the new loan. Also consider how long you plan to stay in the home. If you will be moving before you reach your breakeven point, it may not make sense to refinance. You won’t recover your costs.
4. Gather any required documentation
As with any other type of loan refinance, your VA lender will need you to present certain documents. For the IRRRL, that means the COE used in your previous VA loan.
For a cash-out refinance, the lender may ask for your W2’s, 2 years’ worth of tax returns, and copies of pay stubs. Be sure to ask what other documentation may be required and get it together before applying.
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