For many veterans, a mortgage guaranteed by the U.S. Department of Veterans Affairs (VA) is the best way to finance a home of their dreams. Like most mortgages, though, these are offered at market-based interest rates, and falling rates provide an opportunity to refinance.
Fortunately for veterans, VA mortgages generally can be refinanced quickly, easily and inexpensively. Since VA lenders are fully guaranteed against loss, VA mortgage rates are very akin to FHA mortgage rates in that mortgage rates currently sit about a quarter-percentage point lower than conventional mortgages.
The most common type of VA refinance is known as the VA "streamline refinance," or the Interest Rate Reduction Refinancing Loan (IRRRL). This is a VA-to-VA refinance.
If you have a VA loan, you could refinance into a significantly lower interest rate, or trade an adjustable-rate mortgage (ARM) for a fixed-rate home loan regardless of your income, credit or home's value.
How do I get approved for a VA refinance?
You do not have to refinance with your current VA mortgage lender; in fact, you are encouraged to shop around to compare rates and fees from several lenders to find the best deal. Since the government does not set VA mortgage rates, different lenders will have different interest rates and terms.
The only required fee is the VA’s funding fee. Mortgage lenders may charge other fees, but all other fees besides the funding fee are imposed at the lender's discretion.
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You can refinance your VA loan to a new VA loan with no added fees, even if your home is no longer your primary residence; you just need to certify that you used to occupy the home as your primary residence.
If you have a second mortgage, you need to get the second mortgage re-subordinated to the new loan. Your second lien lender will need to agree to do so, and may require a fee, but the escrow company or your new lender should be able to make these arrangements for you.
The benefits of a VA refinance
No. 1: No cash at closing
You are not required to bring in cash to close your VA refinance. Instead, you can finance the closing costs into your loan amount. Your maximum loan amount is calculated by taking the existing VA loan balance, plus the following:
- Allowable fees and charges, including a maximum of 2 discount points
- The cost of allowable energy-efficient improvements (up to $6,000). Improvements must have been completed within 90 days preceding the funding of the loan for you to be reimbursed for them.
- The funding fee (1.5 percent)
No. 2: Easy credit requirements
As long as you are current on your VA mortgage, you are not required to have good credit to get your IRRRL approved. There is no credit underwriting performed unless your payment will increase by 20 percent or more or you are more than 30 days behind on your current home loan.
However, if your credit has been affected by an active Chapter 13 bankruptcy, your new refinance may have to be approved by the bankruptcy trustee or judge.
No. 3: No appraisal or job required
In most cases, no appraisal is required, according to Dan Green, a mortgage broker in Cincinnatti and the author of themortgagereports.com. The no-appraisal requirement is a boon to those whose homes have lost value and who would otherwise not qualify for a traditional mortgage refinance. You don't need to document your income. In fact, you don't even need a job or a new certificate of eligibility either.
Refinancing your VA loan is so easy because the VA guarantees your loan. Allowing you to refinance -- even if your credit rating has tanked, your mortgage is underwater or you are unemployed -- can only make it easier for you to make your mortgage payments and perhaps lessen your chances of ending up in default.
VA cash-out refinance
Another type of VA refinance is the VA cash-out refinance. With this type of loan, you can refinance a VA loan while also taking cash from the home’s value. (You aren't allowed to take cash out with an IRRRL.)
With this type of loan, borrowers may be able to refinance up to 100 percent of their loan's value. Money from a cash-out refinance can be used to fund home renovations, college or paying off debt.
It is important to note that with a VA cash-out refinance, all borrowers must undergo a credit check and full underwriting. This differs from the IRRRL refinance, which does not have those requirements.
Going from a conventional loan to a VA loan
If you are eligible for a VA home loan but have a conventional mortgage, it may be to your advantage to refinance to a VA mortgage if you qualify. You will need to prove that you are eligible to receive a VA loan by presenting a certificate of eligibility.
Protections for military homeowners
If you happen to run into financial trouble once you have your VA loan, the Consumer Financial Protection Bureau (CFPB) has issued a host of new protections for military mortgage borrowers that took effect in January 2014. These changes are designed to better protect service members and military families in need of mortgage help:
- Comprehensive help: In years past, service members sometimes applied multiple times for mortgage help, sending in the same information and documents time and again. Now one submission should be enough. Servicers have to exhaust all potential mortgage-relief options once an application is received.
- Clear communication: Servicers and lenders no longer can shuffle military members from person to person. Servicers must now assign a representative to work with the individual homeowner and keep close tabs on all documents and related paperwork.
For military homeowners who are underwater and looking for assistance, a permanent change of station (PCS) triggers automatic eligibility for a short sale. Military members with VA mortgages can also pursue the VA's short sale program.
Given the streamlined process, all veterans should consider a mortgage refinance with the VA to help make their home loan more affordable.
(Gina Pogol and Michele Lerner contributed to this article)
Tim Manni is the Managing Editor of HSH.com and the author of the site's daily blog, which concentrates on the latest developments in the mortgage and housing markets.