Can you refinance a VA home loan?
Refinancing your VA Home Loan
If you have a VA loan, can you refinance it? The answer is a resounding yes. There are several reasons why a borrower might want to refinance their VA loan, including trying to get a lower interest rate, increasing or decreasing the term of their mortgage, and tapping the equity in their home in order to get some cash. And to accomplish those goals, there are a few different refinancing methods such as:
One of the most popular methods to refinance a VA loan is called VA streamline refinancing. This is also known as an IRRRL (interest rate reduction refinance loan). The VA streamline is a refinance loan. The main benefit of this program is getting an interest rate reduction, which can free up monthly cash flow. The VA streamline allows a qualified borrower to refinance their mortgage to a lower interest rate at less cost. Refinancing can make it a little easier to pay life’s expenses.
This kind of refinancing also comes with other benefits. These include allowing borrowers to roll all costs and fees into the loan. This reduces or eliminates the need to have cash on hand for closing costs. There’s also no home appraisal required, so borrowers don’t have to worry about paying for that.
One of its benefits is that it requires less paperwork than other VA loans. For example, the VA streamline doesn’t require income documentation. In other words, to apply for this type of refinance, you won’t need to provide copies of paycheck stubs, W2 forms, or tax returns. For a VA streamline, no verification of employment is needed at all.
Qualifying for VA Streamline Refinancing
A credit report is not required by the VA. However, the lender will verify there were no late payments. The borrower cannot have had more than one late payment. Specifically, there cannot be more than one payment more than 30 days past due over the previous 12 months. A lender might override this feature and require a minimum credit score. However, VA guidelines only mention examining the VA mortgage history for the previous year.
VA streamline loans don’t require a new appraisal. They usually only ask for a completed loan application with minimum documentation. There are other requirements for VA loan eligibility in addition to not having more than one late payment. The refinance must:
Result in lower payments for the borrower
Be a VA-to-VA refinance; a VA streamline won't refinance an existing conventional or FHA loan.
Not provide cash-out to the borrower
To qualify for a VA streamline refinance, the borrower needs to be approved for a new VA loan. The new loan should have a lower interest rate than their current one. Another slightly less popular (but really smart) method that can save borrowers money is to shorten the term of your loan. Transforming a 30-year fixed-rate mortgage to a 15-year fixed-rate mortgage could save considerable money over time. However, doing this might lead to higher payments in the short term.
Is your refinancing goal not just to free up a little money, but to seriously tap into your home’s equity? You might want to consider a VA cash-out refinance. A VA cash-out refinance is a mortgage that replaces an existing loan with a VA loan. It pulls equity out of the property in the form of cash. Unlike a VA streamline, a cash-out loan is fully documented.
How much cash will the borrower receive? That’s determined by reviewing the current appraised value of the property. Most VA lenders allow cash-out loan amounts up to 90 percent of the appraised value. (This can be up to 80 percent in Texas.)
A VA refinance is a brand new loan, not just an adjustment of a current one. Since it’s fully documented, you’ll need:
A brand new loan application
A new title report
Additional paperwork, depending upon refinance type
If you’re a VA-eligible borrower, you don’t need to have a VA home loan. For example, imagine you are a VA-eligible borrower with an FHA loan. You could potentially use a VA cash-out refinance to take advantage of the VA’s particularly low-interest rates.
For example, a borrower has a loan amount of $100,000 and wants to refinance to get a lower rate. The appraised value is reported at $150,000, allowing for a maximum cash-out loan of 90 percent of $150,000, or $135,000. The amount of cash available to the borrower is the difference between $135,000 and $100,000. This does not include closing costs associated with the VA loan.
Unlike traditional home equity loans or HELOCs, the VA permits a loan-to-value ratio (LTV) of 100%. This means you can take all the equity out of your home at once. This can give you a lot more flexibility if you need to pay for major expenses. However, it’s usually a good idea to keep some equity in your home. Therefore, you might not want to take advantage of the full amount. You’ll probably only want a VA cash-out refinance if you plan to stay in the home for the next few years. You’ll also be best off doing this when interest rates are relatively low, so you’ll save money.
Can You Refinance a VA Loan to a Conventional Loan?
If you have a VA loan on your current home, you can refinance it into a conventional loan. However, doing so might only make sense in a few, very particular situations. Conventional loans typically have higher interest rates and charge monthly private mortgage insurance (PMI) premiums. Therefore, you probably wouldn’t want to refinance your VA loan just to save money on your mortgage payments.
There are several reasons why a borrower might want to refinance their VA loan. These include:
Trying to get a lower interest rate
Increasing or decreasing the term of their mortgage
Tapping the equity in their home in order to get some cash.
When a VA to Conventional Loan Refinance Makes Financial Sense
Here’s the most popular reason for a VA to conventional loan refinance. Borrowers want to use their VA credit to buy a rental home that can increase their monthly income. VA eligible borrowers typically have one credit to get a VA home loan. You can use this credit many times, but you can’t use it more than once at the same time. By freeing up VA credit, homeowners may be able to purchase another home, gaining more financial freedom.
How to Use a VA Loan for Rental Property
There’s one big problem when it comes to using a VA loan to buy a rental or investment property. You can’t technically do it since VA loans are only available for primary residences. In spite of this rule, homeowners can refinance the VA loan on their current home into a conventional loan. This frees up their VA credit.
The homeowner can lease the home for income. Then, they can buy a new home with a VA loan to be the primary residence. This method requires you to give up living in your current home. This may or may not be acceptable (depending on how much you like it). However, it might be a smart financial solution for many. Also, remember that PMI premiums mentioned earlier will make the mortgage on your first home (now the rental home) more expensive. That could easily reduce your profits.
Remember, VA loans are available for homes with up to 4 living units. Are you looking for rental income? It might make sense to choose an affordable duplex or triplex as a new primary residence. Or, you can skip the entire refinancing process. It might make more sense to sell your old home to free up your VA credit. After that house is sold, then purchase a multiplex with your new VA loan.
Conventional to VA Refinance
A VA streamline refinance is only for VA-to-VA transactions. But a VA loan can refinance other existing loan types. These include FHA and conventional mortgages. It’s uncommon; however, refinancing from a conventional to a VA loan can be beneficial when property values are a concern.
Traditional loans allow refinancing up to 90 percent of the current value of the property. Let’s say your existing mortgage balance is $200,000. The appraisal must be at least $222,222 before you can get a conventional refinance. If your home’s value is closer to $200,000, you won’t be able to refinance your conventional loan with another conventional loan. But you may be able to refinance into a VA loan as an alternative.
A standard VA refinance allows the loan amount to be up to 100 percent of the value of the home. In the above example, the property appraised at $205,000. Therefore, the loan can be refinanced from a conventional mortgage to a VA loan. Check to see if the interest rate is low on the VA loan compared to other options. If so, refinancing into a new VA mortgage can be the right choice.
Non-VA Refinance Types
If you’re eligible for a VA loan, it’s usually the cheapest and easiest option. However, there are reasons those looking to refinance might choose another loan type. Here are the most popular non-VA choices.
Conventional mortgages are approved using guidelines established by Fannie Mae and Freddie Mac. Almost every lender offers these mortgage loans. Guidelines from lender to lender are mostly the same, with very few differences.
Mortgage rates on conventional loans are very competitive. This is because lenders compete using the same programs. The ideal conventional refinance occurs when the homeowner has at least 20 percent equity in the home. In this case, no mortgage insurance is required. Conventional refinance loans are always “fully documented.” This means the borrowers must qualify with paycheck stubs, appraisal, and income tax return documentation. There are usually additional standard requirements.
A VA refinance requires an upfront funding fee. The funding fee usually ranges from 0.50% to 3.3%. The actual figure depends on refinance type. On the other hand, conventional loans don’t require an upfront fee. Eliminating these fees could save a veteran and their family if they have enough home equity for a conventional refinance.
Some home loans like VA, FHA, and USDA loans are only available to purchase a home the borrower lives in as their primary residence. But a conventional loan can also be used to finance an investment property. In other words, a traditional mortgage can be used to finance a primary residence or a rental property.
The FHA refinance also has a streamline program, which is similar to the VA program. An FHA refinance requires no credit score, no appraisal, and no income or employment verification. The FHA streamline is available for FHA-to-FHA transactions, so, you must currently have an FHA loan. If your mortgage is a VA loan, your best option is the VA streamline. Here are some requirements of an FHA refinance:
An FHA refinance can also be used to finance a property the borrower previously lived in but has now rented out.
The new loan rate and mortgage insurance must drop, so the refinance benefits the borrower.
The borrower can have no payments within the previous 3 months that were more than 30 days past the due date.
FHA loans require a monthly and upfront mortgage insurance premium.
The USDA refinance is for properties located in rural or semi-rural areas. For those taking out this kind of loan, a borrower must not exceed specific income guidelines. The USDA refinance is a standard refinance. It requires a fully documented loan including appraisal, credit check, and income verification—among others.
The USDA streamline is only for a 30-year fixed rate. The interest rate must be at least 1% lower than the existing one. For a USDA refinance, it must be a USDA-to-USDA transaction. No cash out is allowed.
Which Refinance is Best?
It’s all about equity in the home. VA, FHA, and USDA loans all have some kind of mortgage insurance or funding fees. This increases the total of the loan amount as well as the monthly payments. For those who don’t have at least a 20 percent equity position in the property, refinancing into a conventional mortgage is the better choice.
But what about those with loan-to-value issues? Those who don’t have at least 20 percent equity in the transaction? These borrowers would want to consider a streamline. Be aware, though! The lender may require additional information on top of other guidelines. These are called overlays. Many lenders will ask for an appraisal for a streamline, for example.