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How to refinance a VA mortgage loan

VA mortgage refinanceFortunately for veterans, VA mortgages can often be refinanced quickly, easily and inexpensively.

Also, because VA lenders are fully guaranteed against losses by the U.S. Department of Veterans Affairs, VA mortgage rates 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.

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 on the property and home is required. 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.

Get the latest VA mortgage rates

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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 might make sense 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. The Department of Veterans Affairs details the exact requirements. You can apply online, through your lender or through the mail.

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.

Getting 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.

Primary residence and second mortgage questions

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.

Calculator: Find the best way to pay your mortgage fees

What’s the best way to pay your closing costs and mortgage fees? Should you pay them out of pocket? Should you finance them into your loan amount? Should you trade those fees for a higher interest rate? There is no simple answer. Use our “FeePay BestWay” closing costs calculator to help you decide.

(Gina Pogol and Michele Lerner contributed to this article)

(Image: iStock)

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