Can You Have A Second Mortgage With A VA Loan?

Want to refinance your VA loan and take advantage of a lower interest rate environment, but don’t want to lose your home equity line of credit (HELOC) or other secondary financing? You have options when you refinance with Department of Veterans Affairs (VA) home loans.

If you’re a veteran, an eligible service member or a surviving spouse who qualifies for a VA loan, you may be able to refinance your primary mortgage without having to jump through hoops to pay off any subordinate financing you have on your house. Want to refinance your VA loan and take advantage of low interest rates, but you're worried you'll have to pay off any secondary financing, like a HELOC or home equity loan, to do it?

Let’s take a look at how you can refinance a VA mortgage without affecting your VA loan entitlement or second mortgage.

How To Refinance A VA Loan And Keep A Second Mortgage

Military service comes with several advantages when it comes to purchasing or refinancing a home. Less stringent rules around credit scores and the ability to qualify for lower interest rates are just some of the benefits of VA loans. Let’s take a look at the options for keeping your second mortgage while refinancing to a VA loan.

Refinancing a VA loan may be a good option if you’re looking to lower your monthly payments, take advantage of lower interest rates or use some of your home equity to cover various expenses. Refinancing a conventional mortgage to a VA loan can be an advantage if the mortgage rate on your original loan was high because the VA offers lower interest rates on their loans.

The VA Streamline refinance, also called the Interest Rate Reduction Refinance Loan (IRRRL), is an option for homeowners who have an existing VA home loan and are looking to lower their interest rate.

A VA cash-out refinance is also available to veteran homeowners who want to withdraw cash from their home’s equity. The money can be used for emergency expenses, home improvements, bills and so on.

Keep in mind that you’ll need to go through a VA lender to apply for any of these loans. VA mortgage lenders will be familiar with the type of VA loan best suited to your particular situation, and they’ll be able to tell you the number of times you can use a VA loan. So talk to your mortgage lender to see which option you qualify for.

Requirements For Keeping A Second Mortgage With A VA Loan

Borrowers can opt to refinance their VA home loan and keep their secondary mortgage. The Department of Veterans Affairs has requirements for doing so, including the following:

• The mortgage lender must submit documentation explaining the source, loan amount and repayment terms of the secondary mortgage while also disclosing the borrower’s and co-borrower’s agreement to these terms.
• The new VA-backed loan becomes the primary mortgage and the second mortgage is subordinated to the VA-backed loan.
• Money from the second mortgage may be used to cover closing costs and other expenses, but it can’t be used to cover a down payment required by the VA.
• The interest rate on the second mortgage can’t exceed industry standards for second mortgages, but it can exceed the rate of the VA-backed home loan.

For additional terms and conditions related to secondary borrowing, please visit the VA’s website.

You can help streamline this process by having your paperwork from your original mortgage and any secondary financing on hand as well as military-specific documents, like your Certificate of Eligibility (COE).

Benefits Of Getting A Second Mortgage With A VA Loan

Quicken Loans^® VA Product Manager Geno Yoscovits discussed how taking out a second mortgage while refinancing a VA home loan is a real win for clients.

“Clients sometimes have legitimate reasons for wanting to keep secondary financing in place during a refinance,” he says. “They often get favorable terms on a home equity line that they can use for a variety of purposes. VA loans remove the requirement to pay off a secondary lien.”

Employment Benefits

Whether you’re a service member or not, any homeowner can benefit from keeping certain types of secondary financing. For example, many cities offer home buying assistance to encourage buyers to live in specific places. And some employers offer home buying assistance as an employee perk. Many of these programs are structured to let home buyers take advantage of forgivable loans.

Let’s say you accept a new job that offers $15,000 toward a down payment on the purchase of your new house if you stay with the company for 4 years, and you receive the assistance as a forgivable loan you don’t have to pay back unless you leave the company before the 4 years are up. Just remember that any down payment you make with subordinate financing can’t be based on it being required by the VA.

Lower Interest Rates

Now imagine you’re trying to refinance your house to take advantage of lower interest rates. Many loan options would require you to pay off the forgivable loan that’s a lien on your house before you can refinance your primary loan. On VA loans, you can keep that secondary financing in place.

This means you can still take advantage of lower interest rates from a VA mortgage without losing the benefits from your forgivable loan.

Home Equity Perks

If you have secondary financing solely for the purpose of utilizing your equity, it’s worth noting that with a VA mortgage, you can get a primary mortgage up to the total value of your home. This could help you get a lower rate than you otherwise might with a second mortgage, such as a home equity loan or HELOC.

Not having to pay off secondary liens during a mortgage refinance represents the removal of a significant financial barrier to refinancing for clients, but it’s just one of several great things about the VA loan program.

The Bottom Line

The VA makes it possible for eligible veterans and service members to refinance their VA loans without also having to pay off their second mortgage. Ready to get started? Take the next step and apply for your mortgage refinance. You can also give us a call at (888) 452-0335.