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If you want a lower mortgage rate or you want to change the terms of your loan, you can refinance your mortgage into a new one. This standard (or “streamline”) refinance loan is known as an Interest Rate Reduction Refinance Loan, or IRRRL.
If you want to tap some of your equity, a VA cash-out refinance is an alternative to taking out a second mortgage.
» MORE: See NerdWallet’s picks for the best VA mortgage lenders
VA streamline refinance
A VA IRRRL may be a solid choice if you:
Already have a VA mortgage.
Want to refinance to a lower interest rate to save money or refinance to a fixed-rate mortgage from an adjustable-rate mortgage.
Don't want to take out any cash from home equity.
The Interest Rate Reduction Refinance Loan "is envisioned as a low-impact, no-frills refinance that exists to get veterans into a lower interest rate," says Chris Birk, director of education with Veterans United Home Loans in Columbia, Missouri.
To refinance into an IRRRL, you must already have a VA mortgage. Also, the rate must be lower on your new loan, unless you’re refinancing out of a VA loan with an adjustable rate.
Unlike with most other refinances, your home doesn’t have to be your primary residence. All that’s required is prior occupancy. If you’re stationed in a new area and want to keep your first home, for instance, you can refinance that mortgage without living in the home.
The VA streamline loan also gives you the option of wrapping the closing costs into the new loan.
Some VA lenders might require a minimum credit score, minimum income or an appraisal for a streamline refinance, Birk says. They might also require that you not have had any late mortgage payments within the past 12 months.
» MORE: See more details about VA IRRRL loans
VA cash-out refinance loan
A VA cash-out refinance loan can be a good fit if you:
Have a VA loan or conventional loan.
Want to extract cash from your home equity.
Can pay all the closing costs upfront or with cash you take out.
Can get a rate that would result in monthly payments lower than your current mortgage plus payments on a HELOC or home equity loan.
If you want to tap into your home’s equity, you can refinance your current mortgage — whether it’s VA or conventional — into a VA cash-out refinance loan.
Lenders always require a minimum credit score and a VA appraisal with this type of refinance, and the home has to be your primary residence.
You may be able to finance up to 100% of the appraised value of your home, though the exact amount you can borrow will vary depending on your lender.
The only way to bring a conventional loan into the VA program is with a cash-out refinance.
» MORE: Calculate your refinance savings
VA streamline refinance | VA cash-out refinance |
|---|---|
Refinance to get a lower interest rate or move from an adjustable-rate to a fixed-rate mortgage. | Refinance to tap home equity. |
Can refinance only from a VA mortgage. | Can refinance from a VA or conventional mortgage. |
Some lenders might require minimum credit score, minimum income or an appraisal, and no late mortgage payments within the past 12 months. | Lenders require minimum credit score and appraisal. |
Home does not have to be your primary residence. | Home must be your primary residence. |
Can roll refinance fees into the new loan. | Can use money from the cash-out refinance to pay the fees, but you must pay them upfront. |
VA loan refinance eligibility
You’ll need to meet eligibility requirements to qualify for a VA refinance.
Service requirements
To qualify for a VA refinance, you must be an active-duty service member, an honorably discharged veteran or the spouse of a current service member or veteran. If you’re the widow or widower of a veteran and want to refinance a VA loan, you must be unmarried at the time of the refinance, and your spouse has to have died in the line of duty or from a service-related injury, unless you’re applying for an IRRRL. In that case, the cause of death doesn’t matter, but you need to have obtained the VA loan prior to your spouse’s death.
Credit score for VA refinance
Lenders will typically want to see a minimum credit score of 620. As with your original mortgage, a higher score will often yield lower rate offers.
Borrowers with lower scores may still be approved by some lenders, though you may need to have an exceptionally strong profile in other areas.
» MORE: See VA home loan credit score requirements
Debt-to-income requirements
Lenders typically like to see a debt-to-income, or DTI, ratio of 41% or lower. However, some lenders will approve loans for borrowers with DTI ratios over 50%. If your DTI ratio is over 41%, your financial profile may be subject to closer scrutiny by the lender.
» MORE: Calculate your debt-to-income ratio
Other VA refinance requirements
In addition to requirements set by the government, the lender is able to put its own requirements on VA loans (the VA’s guarantee might cover only a quarter of each loan). And if one lender says no, it doesn’t mean that you can’t qualify for a VA loan somewhere else.
» MORE: Compare VA mortgage rates
Benefits of refinancing
Borrowers can benefit from refinancing with a VA loan in three ways.
If you qualify for a better rate now than when you originally applied, such as if your credit score has grown, refinancing can lower your monthly payment. Changing your loan term — say, going from a 15-year loan to a 30-year loan — can also lower your monthly payments. However, you’ll be paying more for the loan overall because you’ll be making more interest payments.
If you’ve built up equity in your home, you could benefit from a cash-out refinance by converting some of that equity into a lump-sum of cash. You can use this money however you want, but it’s best to use it for home improvements and other expenses that will help grow your wealth.
Refinancing can also allow you to switch from a conventional mortgage to a VA loan, which typically has lower rates.
» MORE: VA loans vs. conventional loans
VA refinance fees
VA refinance loans typically come with the same fees as other mortgage refinances, but there is one fee that’s unique to the program: the VA funding fee. As of April 7, 2023, the following fees apply:
The funding fee on an IRRRL is 0.5% of the loan amount.
On a VA cash-out refinance, it’s 2.15% of the total loan unless it’s not your first VA loan.
The funding fee is 3.3% on subsequent VA loans.
You don’t have to pay the VA funding fee if you have a service-related disability or if you’re the surviving spouse of a service member who died in the line of duty or from a service-related injury. Active-duty service members who have received a Purple Heart are also exempt from the funding fee.
Unlike conventional and FHA loans, backed by the Federal Housing Administration, VA loans don't require mortgage insurance.
» MORE: Shop top refinancing mortgage lenders
I'm an expert in the field of mortgage refinancing, particularly in the context of VA loans. My knowledge is backed by years of experience and a deep understanding of the intricacies involved. Allow me to provide a comprehensive breakdown of the concepts covered in the provided article:
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Interest Rate Reduction Refinance Loan (IRRRL):
- This is a standard or "streamline" refinance option for VA mortgage holders.
- It is designed to help veterans secure a lower interest rate without the need for cash-out or extensive documentation.
- Veterans can refinance into an IRRRL as long as the new loan has a lower interest rate, except when transitioning from a VA loan with an adjustable rate.
- Unlike many other refinancing options, the property does not need to be the primary residence; prior occupancy is sufficient.
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VA Cash-Out Refinance:
- This type of refinance allows veterans to extract cash from their home equity.
- It's an alternative to taking out a second mortgage, offering a lump sum that can be used for various purposes.
- Requires a minimum credit score and a VA appraisal.
- The property must be the primary residence, and the veteran can finance up to 100% of the appraised value of the home.
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VA Streamline Refinance vs. VA Cash-Out Refinance:
- VA Streamline Refinance is for lowering interest rates or transitioning from an adjustable-rate to a fixed-rate mortgage.
- VA Cash-Out Refinance is for tapping into home equity.
- Streamline refinance can be done only from a VA mortgage, while cash-out refinance is possible from both VA and conventional mortgages.
- Some lenders may impose additional requirements for streamline refinances, such as minimum credit scores and income criteria.
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VA Loan Refinance Eligibility:
- Eligibility is determined by service requirements.
- Active-duty service members, honorably discharged veterans, and spouses of current service members or veterans can qualify.
- Widows or widowers of veterans can also qualify under certain conditions, especially for IRRRL.
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Credit Score and Debt-to-Income Requirements:
- Lenders typically prefer a minimum credit score of 620 for VA refinances.
- A debt-to-income ratio (DTI) of 41% or lower is ideal, but some lenders may approve higher ratios.
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Benefits of Refinancing with a VA Loan:
- Lowering monthly payments by securing a better interest rate.
- Changing loan terms for more affordable monthly payments (e.g., switching from a 15-year to a 30-year loan).
- Accessing home equity through a cash-out refinance for various financial needs.
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VA Refinance Fees:
- VA refinance loans share common fees with other mortgage refinances.
- Unique to VA loans is the VA funding fee, which varies based on the type of refinance and whether it's the first or subsequent VA loan.
- Exemptions from the funding fee include those with service-related disabilities, surviving spouses, and Purple Heart recipients.
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Mortgage Insurance:
- VA loans do not require mortgage insurance, unlike conventional and FHA loans backed by the Federal Housing Administration.
In summary, the article provides valuable insights into the intricacies of VA loan refinancing, covering eligibility criteria, types of refinances, benefits, and associated fees.
