It’s no secret that the VA loan is a powerful homebuying tool. Being able to purchase a house without making a down payment at competitive interest rates is among the best benefits afforded to our veterans and active service members by the Department of Veterans Affairs (VA).
Refinancing with a VA Loan
In addition to providing the buying power of a VA loan to eligible veterans, the VA understands that circumstances change over time and that the VA loan you obtained years ago may no longer be what’s right for you. Enter the VA refinance.
VA refinance loans generally work in much the same way that a VA purchase loan does, which is to say VA refinance loans are obtained through a VA approved lender. The VA itself does not originate purchase or refinance loans, so just like when you bought your home, you are free to shop around for VA refinance rates.
Although you’ll start the VA refinance process similarly to when you bought your home, what happens next depends on which VA refinance loan you choose.
There are Two Types of VA Refinance Loans
The VA refinance process is not particularly complicated. However, the process varies depending on your circumstances. The variation stems from the two types of VA refinance loans available to VA homeowners.
The first VA refinance type is intended to lower your interest rate and/or monthly payment if your current home mortgage is a VA loan. The VA Interest Rate Reduction Refinance Loan (IRRRL) is a streamlined refinance.
If you already know this is the direction you want to go, our VA IRRRL calculator might be useful.
All other VA refinance loans are considered cash-out refinances, whether you get cash back or not. Basically, if you aren’t just improving the terms of an existing VA loan, your VA refinance will be considered a cash-out refinance.
Which type of VA refinance should I apply for?
When making decisions, most of us are afraid of making the wrong one. Fortunately, when determining which VA refinance is right for you, your lender will point you in the right direction. Although, if you ask yourself the following questions beforehand, you’ll easily be able to know what to ask for.
Is your current mortgage a VA loan?
- NO - Your new loan will be a cash-out refinance.
- YES - Do you want any cash back or money to consolidate other debt, including a second mortgage or home equity line of credit?
- NO – Your new loan will be an IRRRL.
- YES – Your new loan will be a cash-out refinance.
If you’re not sure or change your mind after you speak to your lender, that’s okay.
VA Refinance Loans
VA Cash-out Refinance
Since all VA refinance loans that do not specifically meet the criteria of an IRRRL are cash-out, let’s tackle those first.
In what scenarios will cash-out apply?
- Non-VA loan refinanced to a VA loan
Even if you are not taking cash-out and are only lowering your rate and payment, which meet the IRRRL requirements, but your current loan is NOT a VA loan, your new VA loan will be considered a regular cash-out VA refinance.
- Refinance current VA loan and include a 2nd mortgage or home equity line of credit (HELOC)
Even though you may technically not be receiving any cash back and are simply rolling multiple mortgages into one, VA considers this a VA cash-out refinance because you are using additional VA entitlement to cover the larger loan amount.
- Refinance current VA loan and receive more than $500 cash back at closing
Obviously, a refinance that provides the homeowner with cash back at closing is a cash-out refinance. Even if you are paying off debt directly by the lender, that is considered cash back to you, and your new loan is a cash-out refinance.
VA cash-out refinance loans are typically fully underwritten mortgages. This is basically a new loan for which you must qualify. This means the lender will do a full credit report, verify your income and ability to repay, and have a full VA appraisal performed. Assuming you meet the lender qualifications, VA permits cash-out up to 100% of the appraised value after paying off your current mortgage.
*You must have a mortgage to do a VA cash-out refinance. If your home is paid off, you may have to look at refinancing with a traditional mortgage.
VA Interest Rate Reduction Refinance Loan (IRRRL)
Unlike cash-out refinances, IRRRLs typically do not require a full underwrite. As long as you have made your payments on time, IRRRLs assume you will continue doing so given the more favorable terms you are about to enjoy. Keep in mind some lenders may require a minimum credit score.
Most lenders will complete your IRRRL refinance without doing a full credit and income analysis and will not require a new appraisal. Obtaining an IRRRL is often the easiest refinance most homeowners will ever encounter.
It’s important to understand VA requires the homeowner to receive a net tangible benefit when refinancing with an IRRRL. Sometimes it is not worth it to refinance, even if your new loan will have a lower rate. For example, if the cost of refinancing outweighs the payment/interest savings, your IRRRL may not be approved. This is of course a good thing. It’s easy to think you are getting a good deal if you only look at the interest rate.
There are two types of VA refinance loans.
If you are only trying to lower your interest rate and monthly payment and you already have a VA loan, you will more than likely pursue a VA IRRRL.
If your mortgage now is not a VA loan or you want cash back from the equity in your home, you’ll be applying for a VA cash-out refinance.
VA refinance loans come with the same benefits as their purchase counterparts, including borrowing up to 100% of your homes VA appraised value.