VA Loan Refinance: What You Need To Know
The VA loan is one of the most popular loan programs in the U.S., providing qualified military homeowners with lower rates and an easy way to change the terms of their mortgage. A VA loan is particularly appealing to eligible veterans, active-duty military service members and surviving spouses because of its exclusive benefits, which include allowing buyers to purchase a home with no down payment or refinance up to 120% of the value of their home.
However, those who qualify often have questions about the rules and requirements, such as if and when you can refinance a VA loan. Let’s break down the refinancing options for VA loans and explore what each has to offer.
Can You Refinance Your Home With A VA Loan?
Yes! You have several options for a VA home loan refinance. Later, we’ll take a look at each of these loan types, the kind of borrower each option is best suited for, and each option’s benefits. For right now, though, we’ll tackle some common questions.
How Soon Can You Refinance A VA Loan?
To refinance with a VA home loan, you’ll have to meet the required waiting period of 212 days or 6 payments’ worth of time – whichever period is longer. You can expect this required waiting period regardless of which VA refinancing option you choose.
Benefits Of A VA Loan Refinance
For qualified borrowers with strong credit history and an anticipated long-term stay at their home, refinancing a VA loan can make a lot of sense. But why exactly should you refinance with a VA loan? Here are some of the benefits:
- Lower-than-average interest rates compared to most other loan types: Because VA loans are specifically for military personnel, interest rates are reduced.
- Potential for a lower monthly payment: A lower interest rate could mean a lower mortgage payment.
- No monthly mortgage insurance premium: FHA loans and conventional loans with less than a 20% down payment both require mortgage insurance.
- The ability to take cash out up to 100% of your home’s value: This can help you better accomplish a home renovation or meet your financial goals.
- The ability to refinance up to 120% of your home’s value: A VA loan is one of the few loan products that can offer this benefit.
- Relaxed credit guidelines: The VA has no set minimum credit requirement, which can make refinancing easier for VA loans. But remember, lenders can set their own credit score requirements. Rocket Mortgage® requires a minimum credit score of 580.
- No prepayment penalties: You won’t face a penalty for paying off your loan early.
- Foreclosure assistance: Homeowners who end up in default can work with the VA for assistance in finding alternatives to foreclosure.
- The ability to roll the funding fee into the refi amount: There’s no funding fee for disabled veterans, eligible surviving spouses and active-duty Purple Heart recipients.
VA Refinance Options
With a VA loan refinance, you’ll have two options to choose from. You can reduce the interest rate on your loan with an interest rate reduction refinancing loan (IRRRL) or get cash-out financing. We’ll also touch on when you may be better off refinancing to a different type of loan.
Let’s dive deeper into these three types of mortgage refinance possibilities so you can find the one that best suits you and your financial needs:
VA Streamline Refinance (IRRRL)
The VA Streamline refinance (IRRRL) – also known as an interest rate reduction refinance loan – is available for homeowners who have a VA loan and want to lower their interest rate. This type of refinance typically allows for little or no out-of-pocket costs, a faster closing and less documentation than the average home loan.
While the VA doesn’t have specific occupancy requirements for this type of loan, lenders set their own policies.
Other benefits of an IRRRL:
- It’s possible to refinance up to 120% of your home’s value.
- You’ll pay a reduced funding fee.
- Entitlement requirements don’t apply.
- An appraisal may not be needed.
- A Certificate of Eligibility (and other documentation) isn’t required.
- You may be able to lower your interest rate.
- You may be able to stabilize your monthly payments if switching from an adjustable or variable loan to a fixed-rate mortgage.
IRRRL Program Requirements
If all of the following statements are true for you, you may qualify for an IRRRL:
- I already have a VA-backed home loan.
- I am using the IRRRL to refinance my existing VA-backed home loan.
- I can certify that I currently live in or used to live in the home secured by the loan.
Additionally, if you have a second mortgage on your home, the holder must agree to make your new VA-backed loan the primary mortgage.
VA Cash-Out Refinance
A VA cash-out refinance is a great option for many veterans, active-duty service members, and surviving spouses looking to refinance their mortgage. It not only lets current VA loan homeowners take cash out of their home’s equity for a variety of reasons – to cover liens, bills or emergency expenses, or to pay for home renovations, etc. – but it enables qualified homeowners to refinance other types of loans into a VA loan.
It’s also the only cash-out loan that allows you to utilize 100% of your equity. Other cash-out options generally require you to leave at least 20% equity in the home after the refinance. A VA cash-out refinance should allow you more financial flexibility.
While it may sound like a home equity loan, a VA cash-out refinance is different. Instead of adding to your current loan, a VA cash-out refinance replaces your current loan – usually with better terms than other loan types.
Cash-Out Refinance Requirements
Minimum requirements for a VA cash-out refinance loan include:
- Obtaining a VA-backed home loan Certificate of Eligibility
- Meeting the VA’s – and the lender’s – standards for credit and income, plus any other requirements
- Living in the home being refinanced with the loan
A cash-out refi is a smart option for borrowers who may need funds to pay for school, cover debts, make home improvements or take care of unexpected expenses.
Refinance VA Loan To Conventional or FHA Loan
Depending on your situation, it may make sense to switch from your VA loan to a conventional loan. Here are a few instances when it may be financially wiser to move to a different type of loan:
- You want a rental property: If you’re interested in owning a primary and secondary residence, you typically aren’t allowed to take out multiple VA loans to fund both properties. It’s not uncommon for qualified VA loan borrowers to therefore move from one home to another, use the VA loan to finance their newer primary residence and switch the property they intend on renting out to a conventional loan. This can be a smart way to generate a passive income while making the most of your VA benefits.
- You have stellar credit and want better terms: Although VA loans are renowned for their attractive interest rates, if you already have excellent credit and are eligible for a conventional loan, you may be able to refinance into terms that are better than those of a VA loan.
- You don’t qualify for an IRRRL: The VA’s IRRRL loan is a strong contender for many qualified VA borrowers, but for those who don’t qualify, refinancing into a conventional or FHA loan may be the best way to get lower interest rates.
Conventional Loan Requirements
Although conventional loans are harder to qualify for than other loan options, it’s possible to meet their requirements if you have:
- A down payment of at least 3% (If you have a down payment lower than 20%, private mortgage insurance (PMI) is required and added to your monthly payment.)
- A minimum credit score of 620
- A debt-to-income ratio (DTI) lower than 50%
- A loan within the limits set by Fannie Mae and Freddie Mac (In 2023, the limit for one-unit properties is $726,200, with exceptions in high-cost areas like Alaska and Hawaii.)
The Bottom Line
While VA loans might seem a little confusing at first, the refi process doesn’t have to feel overwhelming as you gain a deeper understanding of the VA refinance options available to you. Most important is choosing the option that fits and benefits you most.
Ready to refinance your VA loan today? Get started and speak with one of our Home Loan Experts!