Veterans Affairs home loans give active-duty military personnel, veterans, and their surviving spouses access to affordable mortgages. If interest rates have dropped or you want to borrow some of your home equity with a cash-out refinance, a VA loan refinance may meet your needs.
Here’s a closer look at refinancing a VA loan to help you understand your options and jump-start the process to refinance a VA loan.
- The VA’s interest rate reduction refinance loan helps borrowers save on interest or lower their monthly payment.
- A VA cash-out refinance lets you borrow some of your home equity as cash and repay it as part of your mortgage.
- It’s important to consider the long-term costs of refinancing a home loan, even when backed by a government program.
The requirements for getting a VA refinance loan are similar to those for getting a VA purchase loan.
First, you must prove your eligibility for the VA loan program with a valid certificate of eligibility, known as a COE. To get one, active military personnel must have served for at least 90 continuous days and have been honorably discharged. For veterans, depending on when you served, you must have at least 90 days, 181 days, or 24 months of active service. Surviving spouses of veterans, as well as qualifying members of the National Guard and reservists, also may get a COE.
With a streamlined refinance loan, you can use your previous certificate of eligibility. The lender often can look it up online through the VA.
Borrowers of VA loans also must pay closing costs, which typically are lower than for other loan types. There is no mortgage insurance, but borrowers must pay an upfront funding fee.
David A. Krebs, a mortgage broker based in Miami, requires for a VA loan a minimum credit score of 620, as well as evidence of income to support the mortgage payment on a refinance.
How soon can you refinance a VA loan?
You generally need to have a VA loan for at least six months, making your monthly payments as agreed, before you can refinance.
How many times can you refinance a VA loan?
There’s no limit on how often you can refinance VA loans. But take note of closing costs, as they can add up with multiple refinances. Also, you must qualify for the VA loan refinance every time, which can be time-consuming.
A VA streamline refinance — another name for an interest rate reduction refinance loan, or IRRRL — allows borrowers to refinance with fewer VA refinance requirements than a traditional mortgage or first-time VA loan. The VA generally requires no credit approval or appraisal for a streamline refinance.
Borrowers often choose this loan to lower their monthly payment, to reduce the total interest paid over the life of a loan, or to stabilize their monthly payment by switching from an adjustable-rate mortgage to a fixed-rate mortgage.
With a streamline refinance, you can borrow the balance of your current VA loan, plus the funding fee and up to 2 mortgage points.
The interest rate on the new loan must be lower than your current rate if you’re refinancing to a fixed-rate mortgage, and the monthly payment must be lower as well, unless you’re refinancing an ARM, shortening the loan term, or paying for energy-efficient improvements.
You may have to pay the VA funding fee of 0.5% of the loan amount. You also will have to pay closing costs, which are determined by your lender.
A streamline refinance does not allow you to take out cash.
You can’t refinance a conventional home loan or other mortgages with a VA streamline refinance — you must have an existing VA loan.
You also must certify that you currently live or have lived in the home securing the loan. This residency requirement is more flexible than the residency requirement for cash-out refinancing.
VA Streamline Refinance Requirements
|Certificate of eligibility||Required.|
|Residency requirement||Current or past.|
|Existing loan||VA loans only.|
|Minimum credit score||Set by lender.|
|Maximum debt-to-income ratio||41%, or higher with compensating factors.|
A cash-out refinance replaces your current loan with a new mortgage based on the current market value of your home. If you’ve been paying your mortgage for a while, or your home has increased in value, you will have built up some home equity. That means your new loan can be for more money than your current loan. After you pay off your original VA mortgage, you can keep the difference as cash and repay it as part of your new loan.
Homeowners usually choose a cash-out refinance when they need cash to pay off high-interest debts, cover education expenses or medical bills, or pay for home improvements that can help increase property value.
You don’t need to have a VA loan to get a VA cash-out refinance, though you will need to meet all the requirements. You can borrow up to the conforming loan limit in most parts of the U.S. without a down payment. You can borrow more if you make a down payment.
You will have to pay closing costs when refinancing a VA loan, which you should expect to be between 3% and 6% of the loan amount.
Closing costs include the VA funding fee, which for a cash-out refinance is 2.15% of the loan amount the first time you use it, and 3.3% for each refinance after that. You also have to pay for a VA appraisal, which costs between $425 and $875. You may buy up to 2 discount points, and the VA limits the origination fee to 1% of the loan amount.
Eligibility for a VA cash-out refinance
A VA cash-out refinance is only for a home you plan to live in or already live in. You can’t get a cash-out refinance with the VA for an investment property.
VA Cash-Out Refinance Requirements
|Certificate of eligibility||Required.|
|Existing loan||VA or non-VA loans.|
|Minimum credit score||Set by lender.|
|Maximum DTI Ratio||41%, or higher with compensating factors.|
Refinancing a Conventional Loan With a VA Loan
The only method of refinancing a conventional loan with a VA loan is the VA cash-out refinance. With this method, you can pay off your existing non-VA loan with the proceeds from a new VA refinance loan.
“To refinance a conventional loan with a VA loan, the borrower must qualify for VA loan benefits and have sufficient income, and the property needs to be the borrower’s primary residence,” Krebs says. “The process involves obtaining a VA appraisal and going through the VA loan underwriting process.”
While the cash-out refinance program is the only way to refinance a non-VA loan with a VA loan, you can keep the loan balance low by taking out a minimal amount of cash at closing. You also can use the cash you take out to pay down your loan balance, and reduce your overall interest costs.
Here are the general steps if you’re ready for a VA loan refinance. Pay close attention to VA loan refinance requirements to ensure the best result.
- Assess your financial situation. Examine your finances. Check your income and credit score, and calculate your DTI ratio. Remember, even though VA loans are more lenient than traditional mortgages, you’re more likely to get a loan if you have a higher credit score and lower DTI ratio.
- Identify your goals. Understand what you want to achieve with the refinance. Are you looking to lower your monthly payment, shorten the term of your loan, or take out cash for home improvements or debt consolidation?
- Review your current mortgage. Check the terms of your current mortgage. Look at your interest rate, your monthly payment, and the remaining term of the loan. This gives you a baseline for comparing new loan offers.
- Choose your VA refinance loan. Based on your existing loan and needs, you can choose an IRRRL or a cash-out refinance.
- Shop around for lenders and rates. Reach out to multiple VA-approved lenders and compare mortgage offers. Each lender may offer slightly different terms, so shopping around is essential for getting the best deal.
- Apply for the refinance. Once you’ve chosen a lender, you must complete a loan application. The lender will provide you with a list of required documents, which typically includes your certificate of eligibility, proof of income, bank statements, and a list of your debts and assets.
- Home appraisal. If you choose a VA cash-out refinance, the lender will arrange an appraisal to determine the current value of your home. You don’t need an appraisal for a streamline refinance.
- Underwriting and approval. The lender will review your application and supporting documents. The underwriter will approve your loan if you meet the lender and VA refinance requirements. In some cases, the underwriter may ask for additional information or documentation to support your application.
- Closing. The last step is closing the loan. You’ll review and sign the loan documents. Depending on the refinance type, you also might need to pay closing costs, though these can be rolled into the loan as a no-closing-cost refinance rather than paid out of pocket.
If you’re on the fence about whether to refinance with a VA mortgage refinancing program, consider the pros and cons.
“A borrower might refinance a VA loan to take advantage of lower interest rates, shorten the loan term, or switch from an adjustable rate to a fixed-rate loan, thereby improving their financial stability,” Krebs says.
VA Loan Refinancing Benefits: IRRRL vs. Cash-Out Refinance
|Lowers your interest rate, potentially saving you money in the long run.||Get cash at closing.|
|Offers a streamlined process with less paperwork and fewer requirements.||Potentially lowers your interest rate.|
|Includes an option to roll closing costs into the loan to reduce out-of-pocket expenses.||More flexible on previous loan requirements than an IRRRL.|
|Allows you to switch to a fixed-rate loan from an ARM.||Use cash for closing costs, debt consolidation, or anything else.|
FAQ: Refinancing Your VA Loan
Here are answers to common questions about getting a VA refinance loan.
You’ll need a certificate of eligibility for any VA loan. You can get one if you’re an honorably or medically discharged veteran, active service member, current or former National Guard member, current or former activated Reserve member, or surviving spouse of an eligible military member or veteran. Additional requirements, such as minimum terms of service, may be needed depending on your military experience.
VA loans are generally easier to qualify for than conventional mortgages, thanks to backing from the federal government. However, they still have minimum credit requirements set by the lender. The VA itself has no minimum credit score requirements, but it does require lenders to thoroughly review applicants’ credit history. Refinancing with bad credit can be easier if you can offset it with strength in other parts of your application.
The VA sets no limit on how much you can borrow with a VA loan or refinance. However, lenders may impose their own limits based on your credit history, income, assets, and other factors. If you’ve used your VA loan benefit, you may be limited to borrowing the county loan limit for the home you’re buying.
Closing costs for a VA cash-out refinance loan typically range from 3% to 6% of the loan amount, including the VA funding fee. It’s usually less for a streamline refinance.
Refinancing a VA loan offers significant benefits for veterans and active-duty service members, including lower interest rates and access to home equity. It’s important to meet the eligibility requirements, understand your financial goals, and shop around for the best terms.
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- VA Loan Guide: Requirements and How To Apply
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- Reasons Not To Refinance Your Home
- Are Refinancing Costs Tax Deductible?
- ‘Hidden’ Costs of Refinancing Your Mortgage
- Refinance or Sell Your Home: Which Is Best for You?
- Personal Loan vs. Cash-Out Refinance for Home Improvements