What is VA Loan Refinance?

Refinancing your existing mortgage into a VA loan can be a great option if you’re an active-duty military member, a veteran, or an eligible spouse. The process to qualify for a VA loan refinance is generally straightforward, as long as you meet the military service requirements and lender criteria.

Here’s a comprehensive guide on VA loan refinancing: what it is and how it works.

What is VA loan refinancing?

A VA loan refinance is a home loan option backed by the Department of Veterans Affairs (VA) that allows you to replace your existing mortgage with a new one featuring different terms. Depending on the loan type you choose, you may benefit from a lower interest rate, an altered loan term, or the ability to convert your home equity into cash.

If you started with an adjustable-rate mortgage (ARM) and prefer more predictable monthly payments, you can also switch to a VA fixed-rate mortgage.

Types of VA loan refinancing

When considering refinancing with a VA loan, you have two main options:

• Interest Rate Reduction Refinance Loan (IRRRL): Also known as a VA streamline refinance, this option is designed for current VA loan holders who want to secure a lower interest rate or switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.
• VA Cash-Out Refinance: This option allows any mortgage holder to replace their existing home loan with a new one and access the home equity they have built up.

IRRRL vs. VA cash-out refinance

Who qualifies for a VA mortgage refinance?

VA loan refinancing is specifically designed for current and former U.S. military members. To qualify for VA refinance loans, you’ll need to meet the following criteria:

• Service: You must meet one of the following service requirements:
  • At least 90 days of active-duty military service during a recognized conflict,
  • Six years in the National Guard or Reserves, or
  • 181 consecutive days of active duty during peacetime.
  • Veterans must have an honorable discharge, though there are some exceptions. Surviving spouses of service members who died in the line of duty or due to a service-related disability may also qualify. A Certificate of Eligibility (COE) from the Department of Veterans Affairs or your lender is required to verify your military service.
• Income: You need to demonstrate sufficient income to repay the loan, with a typical debt-to-income (DTI) ratio capped at 41 percent.
• Credit Score: Although the VA does not set a minimum credit score requirement, most lenders prefer a score of at least 620. The IRRRL often does not require underwriting.
• Property Type: The property purchased with a VA loan must be your primary residence; it cannot be a second home or rental property.
• Timing: You should move into the new home within 60 days of closing. Extensions up to 12 months are possible under certain conditions, but moving in beyond 12 months is generally not acceptable to the VA.

How to refinance into a VA loan

Refinancing into a VA loan is straightforward, though the process varies slightly depending on the type of loan you choose:

Interest Rate Reduction Refinance Loan (IRRRL)

The Interest Rate Reduction Refinance Loan (IRRRL), also known as the VA streamline refinance, allows you to replace your current VA loan with a new VA loan at a lower interest rate. It’s a popular option for homeowners looking to switch from a VA adjustable-rate mortgage (ARM) to a fixed-rate mortgage.

Here are some key benefits:

• No Home Appraisal or Underwriting: Typically, an IRRRL does not require a home appraisal or additional underwriting.
• No Upfront Closing Costs: You are not required to pay closing costs upfront, and they can be rolled into the new loan. Some lenders may even cover these costs for you in exchange for a slightly higher interest rate.
• Lower Funding Fee: The funding fee for an IRRRL is lower compared to VA loans for new purchases or construction.

However, there are a few considerations:

• Interest Rate Requirement: The new interest rate must be lower than your current rate to use the IRRRL. If you are switching from a VA ARM to a fixed-rate loan, the new rate may be higher than your ARM rate.
• Loan Amount Limit: You can only refinance up to the amount of your existing mortgage. If you need additional funds, a VA cash-out refinance would be necessary.

VA cash-out refinance

A VA cash-out refinance loan allows homeowners to refinance their mortgages and withdraw some or all of their accumulated home equity. This loan option is available for both existing VA loans and conventional mortgages, with the VA guaranteeing loans up to 100 percent of the home’s value. As with other VA loans, you must meet military service requirements and obtain a Certificate of Eligibility (COE).

This type of loan can be advantageous if:

• You want to transition from a conventional mortgage to a VA-backed loan.
• You plan to make home improvements that will enhance your property’s value.
• You aim to pay off high-interest debt and save on interest payments.

When considering a VA cash-out refinance, it’s important to have a clear purpose for the funds and to be realistic about your spending habits. For example, if you plan to use the funds to pay off credit card debt, ensure you won’t accrue similar debt in the future.

As of April 2024, the funding fee for a first-time VA home loan is 2.15 percent. If you have previously used your VA loan benefit, the fee increases to 3.3 percent. Additionally, you will be responsible for closing costs.

Benefits of refinancing to a VA loan

Refinancing with a VA loan offers numerous benefits, making it a popular choice among eligible borrowers. Here are some key advantages:

• No Mortgage Insurance: VA loans do not require mortgage insurance, even if you make no down payment.
• No Down Payment: You can refinance without needing to make a down payment, though closing costs will still apply.
• Minimal Upfront Costs: VA loans generally have a funding fee that can be rolled into the closing costs. While this increases the total loan amount and interest over time, the fee may be waived for those with a service-related disability or the surviving spouse of a deceased veteran.
• Interest Savings: VA loan rates are often competitive, potentially saving you money compared to conventional loans.
• Easier Qualification: The VA’s flexible credit and income criteria make it easier to qualify, though cash-out refinance loans have stricter requirements.
• No Prepayment Penalties: You can pay off your VA loan early without incurring penalties.
• Stable Payments: If you prefer predictable monthly payments, you can switch from an adjustable-rate mortgage to a fixed-rate VA mortgage.

Should you refinance into a VA loan?

Whether refinancing into a VA loan is the best choice for you depends on your specific financial situation. VA loans offer several advantages, such as potentially lower interest rates and reduced closing costs compared to other refinancing options. Additionally, you won’t have to pay mortgage insurance, and in many cases, you might not need to make a down payment at all.

If you already have a VA loan, an Interest Rate Reduction Refinance Loan (IRRRL) might allow you to refinance without undergoing additional underwriting. If accessing your home equity is a priority, a VA cash-out refinance could enable you to withdraw up to 100 percent of your home’s appraised value.

However, be aware of associated costs, such as funding fees, and understand any limits that may apply. Evaluating these factors will help you determine if refinancing into a VA loan is financially advantageous for you.

To estimate your new monthly payments, consider using a VA loan calculator. While many banks, credit unions, and online lenders offer VA loans, it’s advisable to work with lenders who specialize in VA loans due to the complexity of the application process. Check our list of VA-approved lenders and consult with military friends or family for their experiences. Since lenders set rates and terms, make sure to compare offers before making your decision.