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How to Refinance a VA Loan
By Joan Pabón MONEY RESEARCH COLLECTIVE
Refinancing a VA loan can be easier than refinancing a conventional mortgage, as it generally requires less documentation. Additionally, depending on the refinancing loan you choose, a home appraisal may not be required.
The following article covers the basics of refinancing a VA loan, including the different types of loans available, qualification requirements and potential benefits.
Table of contents
- What does it mean to refinance a VA loan?
- How can you refinance a VA loan?
- How to refinance a VA loan
- VA Streamline vs. Cash-out refinance loans
- How to refinance a VA loan FAQ
- Summary of our guide to refinancing a VA loan
What does it mean to refinance a VA loan?
Refinancing a loan — whether a VA loan, a conventional loan or another type of mortgage — entails taking out a new loan to pay off an outstanding loan. This can be done for different reasons, but some of the most common include obtaining a lower interest rate, modifying the terms of the original loan or pulling cash out from the equity accrued in the home.
Refinance options for VA loans are cash-out refinance loans and interest rate reduction refinance loans (IRRRL). The most popular of the two is the cash-out refinance loan. Depending on your needs you may opt for one or the other, but the specific qualification requirements for each may vary slightly.
Can you refinance a VA loan?
You can refinance a VA loan if you want to reduce your interest rate or switch from a variable to a fixed interest rate to make your monthly mortgage payments more predictable. Another common reason to refinance is to pull cash out from your home equity in order to complete home renovations and cover other expenses.
VA refinance loans are available to active duty service members, veterans and qualifying military spouses. And just as with the VA loan application, you will need a certificate of eligibility (COE) to qualify for refinancing. In addition to the COE, you will also have to meet your lender’s credit and income requirements.
How to refinance a VA loan
You will need to meet your lender’s credit and income requirements to refinance a VA loan. While these may vary from lender to lender, you can generally qualify for refinancing with a minimum FICO score of 620. Your income and overall debt will also be considered. Most VA loan lenders will accept a debt-to-income ratio of 41% or lower. This means that your total monthly obligations, including mortgage payments, cannot exceed 41% of your gross income. Nevertheless, some VA lenders will accept higher DTI ratios.
Besides complying with lender requirements, veterans and servicemembers looking to refinance their VA loan must also obtain a recoupment certification. Recoupment refers to the length of time the VA loan borrower will take to recoup the costs associated with refinancing, including closing costs and other fees. The recoupment period must not exceed 36 months, and this applies to both IRRL and cash-out refinance loans.
Let’s review refinancing options in more detail and break down the specific requirements for each.
VA Streamline Refinance Loans (IRRRLs)
IRRRLs, also called streamline refinance loans, are ideal for borrowers who want to adjust their original loan terms to obtain a lower or more predictable monthly mortgage payment. For example, borrowers can refinance from a variable to a fixed rate or shorten their loan term to pay off their mortgage sooner. (Note, however, that while refinancing to a shorter loan term can save you money, it will result in higher monthly payments.) Another reason to opt for an IRRRL is to obtain a lower interest rate and save money over the life of the loan.
To qualify for an IRRRL, the interest rate you receive for it must be lower than that of your original loan. Those refinancing from a fixed-rate loan to a fixed-rate loan must be able to reduce their rate by at least 0.5%. Those refinancing from a fixed-rate loan to an adjustable-rate mortgage must be able to reduce their rate by at least 2%.
Some of the benefits of a streamline refinance over a cash-out refinance is that the former generally does not require a new appraisal or income documentation. Additionally, there are no minimum credit score requirements or underwriting fees. Borrowers need only worry about closing costs, which can be rolled into the loan amount.
VA IRRRL rates
At the start of the COVID-19 pandemic in the U.S., interest rates dropped to historic lows. While average rates have since increased, IRRRL rates are still slightly lower than rates on conventional loans.
- Require less documentation than a cash-out refinance
- Closing is faster and more affordable
- Refinance to a lower rate or switch from a variable to a fixed rate
- Generally don't require a home appraisal
- Only VA home loans are eligible
- To qualify, your new rate must be lower
- You cannot take cash out from your home equity
Requirements
To qualify for a streamline refinance, your must:
- Be refinancing a VA home loan
- Be up to date with payments on your current mortgage
- Be refinancing to a lower rate than that of your original mortgage
- Not be taking cash out from the new loan amount
- Certify that you currently reside or used to reside in the home you used purchased with the VA loan
How to apply?
Applying for a VA streamline refinance can be simpler than applying for a VA purchase loan, but there are certain steps you still need to take. Shop for rates from different VA-approved lenders and compare closing costs and any applicable fees to make sure you’re getting the best possible deal.
Once you’ve selected a lender, provide them with your COE. It can be the same one you used when you first applied for your current VA home loan. If you don’t have your COE, ask whether your lender can procure it for you through the VA Home Loan portal. Some borrowers may have to pay the VA funding fee in addition to closing costs.
VA cash-out refinance loans
There are two types of VA cash-out refinance loans: Type I and Type II. Type I cash-out refinance loans are rare, according to industry experts. They allow borrowers to refinance to a loan amount equal to or lower than the original loan amount, even after factoring in the VA funding fee.
The most common VA cash-out refinance type is Type II, which allows borrowers to take cash out from their home equity by replacing the original loan amount with a larger loan. The borrower then receives the difference in cash and can use the funds for any purpose, from making home improvements and renovations to paying off high-interest debt.
With a cash-out refinance — regardless of type — you can refinance any mortgage, whether VA, conventional or FHA loan. And besides pulling cash out of your home equity, you can also refinance to a lower rate.
Another potential benefit of cash-out refi loans is that you could refinance 100% of the value of your home. Not all lenders offer this option, however, and those that do will likely charge higher rates to detract borrowers from taking on that much risk. Credit and income requirements may also be stricter for those looking to tap into all of their equity.
To get a cash-out refinance loan, you must meet the eligibility requirements set forth by your lender and the VA, including minimum military service requirements. Your home will also need to be appraised.
VA cash-out refinance rates
Since VA cash-out refinance loans are backed by the U.S. Department of Veterans Affairs, they typically feature lower interest rates than conventional cash-out refinance loans. Nevertheless, rates are higher now than they were at the start of the COVID pandemic in 2020.
Buyers should weigh their options carefully, as higher rates — coupled with the higher closing costs involved in a cash-out refinance — could make this option inaccessible to some borrowers.
- Refinance any type of loan, not just VA loans
- Tap into your home equity and refinance to a lower rate
- The cash you access can be used for any purpose, including home improvements
- Higher interest rates and closing costs than IRRRL
- More scrutiny on the part of lenders
- VA funding fee may be higher; up to 3.6% of the loan value
- The closing process is lengthier
- Tapping into your home equity could leave you underwater on your mortgage
Requirements
To obtain a cash-out refinance loan, you will need to:
- Qualify for a COE
- Meet the VA’s eligibility criteria as well as your lender’s requirements; these will include having a minimum credit score and a maximum debt-to-income ratio
- Live in the property you’re looking to refinance
How to apply?
The application process for a cash-out refinance loan takes longer than that for a streamline refinance loan. And since these loans pose a higher risk to lenders, there is generally more scrutiny around credit scores and income. Interest rates and closing costs on cash-out refinance loans are also higher.
Borrowers can expect to pay between 2% and 5% upon closing along with a potentially higher VA funding fee (of up to 3.6% of the loan value). As with an IRRRL, you can roll your closing costs into the loan and cover them over time. The catch is that if you choose to borrow 100% of the value of your home, closing costs will be deducted from the cash pulled out of your home equity.
VA streamline vs. VA cash-out refinance
If you are looking to refinance into a lower interest rate or switch from a variable interest rate to a fixed one, a VA streamline refinance can be a great option. It features lower interest rates than VA cash-out refi loans and lower closing costs. And since this option requires less documentation, closing on your loan will be that much quicker. The main drawback of IRRRL is that your current mortgage must be a VA loan.
Cash-out refinance loans, on the other hand, allow borrowers to pull money out of their home equity as well as get a lower interest rate. You can also refinance any type of mortgage loan and for up to 100% of your home value. The main drawbacks of cash-out refinance loans are that interest rates and closing costs tend to be higher than those on streamline refinance loans, and the closing process will be lengthier as it will entail greater scrutiny.
When is VA cash-out refinance a better option?
A cash-out refinance could be a better option for those who want to pull money out of their home equity to cover home renovations (which will put equity back into the property) or need funds to consolidate high-interest debt.
Cash-out refinance Type I loans may also be an option for homeowners who have received a windfall and want to refinance to a lower loan amount or who want to refinance their non-VA loan into a VA loan but don’t want to touch their home equity and do not meet the interest rate reduction requirements (.5% to 2%).
When is VA streamline refinance a better option?
VA streamline refinance is a popular option among borrowers who want to take advantage of lower rates to save on interest payments. It could also be an option for those who want to refinance from a variable interest rate to a fixed interest rate, in order to have more predictable monthly payments and be able to budget for other goals. These types of refinance loans have lower closing costs, and eligibility requirements may also be less stringent.
How to refinance a VA loan FAQs
How long does it take to get a VA loan?
Different sources propose different timelines, but closing on a mortgage (regardless of type) can take between 40 to 50 days. Factors that could affect the closing timeline include the condition of the property and whether it needs repairs, the length of the appraisal process, how long it takes you to submit the required documentation, and even how soon the seller is willing to move out.
Can you refinance a VA loan to a conventional one?
Yes, you can refinance a VA loan into a conventional loan. Some homeowners may choose to do this in order to get out of the VA home occupancy requirement, rent out their home and use their VA benefit again to purchase another residence. If this is what you have in mind, consider that the VA may limit the loan amount for the purchase of the new home. To restore your full entitlement and borrow without limits, you would have to pay off your VA home loan in full.
How often can you refinance a VA loan?
There is no limit to the number of times you can refinance your VA loan. Remember that refinancing could extend the loan term and entail paying closing costs, so it may not make financial sense for everyone.
When can you refinance a VA loan?
If you currently have a VA-backed loan that closed on or after July 26, 2019, you must wait a period of at least 210 days after your first monthly mortgage payment to request an IRRRL. You must also have made six consecutive monthly payments on your current VA loan.
Summary of our guide to refinancing a VA loan
VA loans are available to eligible military members; categories include veterans, National Guard and reserve members, and surviving spouses. These loans generally feature low rates and have no down payment or private mortgage insurance requirements. But while you might have snagged a pretty low rate when you took out your existing VA loan (or another mortgage loan), factors that include your own personal financial situation may be prompting you to consider refinancing.
There are different VA loan refinance options, and the best one for you will depend on whether you want to pull cash out of your home equity, get a lower interest rate or switch from a variable rate to a fixed one (or vice versa). While applying for a refinance loan is similar to applying for a VA home loan, there are some key differences. And specific requirements may vary depending on the type of refinance loan.
If you are thinking about refinancing your mortgage, calculate how long it will take you to recoup the money you will spend on closing costs and fees. This is called the break-even point. A decision on whether or not to refinance should partly be based on how long it will take you to reach that point.
Joan is a professional translator, writer and editor with a special interest in personal finance and insurance topics. She has been a contributing author and independent researcher at ConsumersAdvocate.org since 2017 and an editor at Money since 2019. Her work has been featured in MSN Money and Apple News.