Section 6: VA Loan Refinancing
VA Loan Refinancing
The VA Home Loan program provides qualified homeowners with a simple way to take advantage of lower rates and decrease their monthly mortgage payment. Beyond that, military homeowners can get cash back on a VA refinance and use the proceeds for a variety of needs, from paying off debt or making home improvements and much more. Now the current economic climate makes a great time or many military homeowners to take advantage of the numerous benefits found in a VA refinance.
To get started, call, or start your VA Refinance quote online.
When Should you Refinance a Loan?
In general, you should refinance a VA loan if:
Your Home’s Value Has Gone Up
If you have built equity in your home either by the housing prices rising or paying down your loan it might be a good time to refinance. If you need to lower your interest rate, need cash to pay off debts, or do an additional project on your home then a refinance might be the best option for you.
10 steps to Refinance Your VA Loan
Most borrowers follow the following VA refinance steps:
1. Determine if you still need a VA loan.
The criteria for VA loans change each year FHFA sets the conforming loan limits. If your existing loan balance exceeds these limits, a VA refinance loan may be your only option.
2. Check your credit scores.
Many VA lenders set the minimum bar at 700 for a VA loan. That’s 80 points higher than the conventional minimum, so make sure you check your credit score before you apply for a VA refinance.
3. Make sure your debt-to-income (DTI) ratios are in line.
VA lenders measure your DTI ratio by dividing your total debt by your gross income, and 45% is the standard maximum. That’s significantly lower than the 50% ratio conforming lenders allow.
4. Shop for the best VA refinance rates.
Some lenders specialize in VA loans. Banks may even offer lower rates if you carry large deposit balances with them. Compare loan estimates with at least three to five lenders to make sure you’re getting the best deal.
5. Ask the lender when you can lock in your rate.
VA lenders may require a loan approval before locking in your rate. VA rates change daily, so make sure you know your lender’s lock policy to avoid any surprises in the terms of your rate later in the process.
6. Provide your paperwork promptly.
Because VA lenders don’t allow automated approvals, you’ll have to provide more financial paperwork. VA loans typically take longer to close than standard loans, because a human underwriter is involved in the decision making and is responsible for ensuring the loan meets VA investor standards.
7. Keep your cash liquid.
It’s not uncommon for a VA lender to require proof of six to 24 months’ worth of mortgage payment reserves in a liquid account, meaning it can be easily converted to cash.
8. Plan for a pricey appraisal.
If you’ve got a custom home or a lot of square footage, appraisers may charge more to find comparable homes, and for the extra legwork it will take to measure out and list all the amenities in your home.
9. Notify your escrow officer and loan officer of any trusts in advance.
Lenders want to make sure they can collect on a VA loan if you default, and they may require extra steps to approve any trust your property is held in. Escrow officers may also need a copy of the trust to properly prepare your closing documents.
10. Review your closing disclosure and close.
Like any refinance, you’ll receive a closing disclosure three business days before your closing. Review the paperwork and make sure the numbers are what you expected. If everything looks correct, your loan documents will be returned to the lender, your old VA loan balance will be paid off with the funds from your new VA loan.
VA Refinance Requirements
. At least 20% equity in your home
. A minimum 700 credit score
. Total debt that doesn’t exceed 45% of your income
. No major credit problems in your recent past, such as bankruptcies or foreclosures
. Full documentation of all sources of income including tax returns, paystubs, CPA letters and IRS validation of all filed tax forms
* Requirements may very program to program and lender to lender
How to Get the Best VA Refinance Rates
VA lenders typically set interest rates based on their own standards. Shopping for the best VA refinance rates could save you thousands or even hundreds of thousands of dollars over the life of the loan.
You’ll typically snag the best VA mortgage refinance rates if you:
Have a high credit score.
Although 700 is the minimum, VA lenders may reward higher-credit-score borrowers with lower rates and closing costs.
Don’t borrow the maximum.
VA lenders may offer a lower rate if you’ve built up substantial equity and just want to refinance to save on your monthly payment (and not tap equity).
Avoid niche VA loan programs.
Some VA lenders offer special programs to make VA refinance qualification easier, such as using bank statements instead of tax returns to prove income. These flexibilities usually require you to pay a premium in the form of a higher interest rate.
Two Great VA Loan Refinancing Options
Two main programs help VA borrowers refinance to a lower rate -- the VA Streamline Refinance, also known as the Interest Rate Reduction Refinance Loan (IRRRL), and the VA Cash-Out Refinance.
VA Streamline (IRRRL) Refinance
Often called a "Streamline" refinance, the Interest Rate Reduction Refinance Loan (IRRRL) option is great for existing VA Loan holders who are looking to realize significant savings and take advantage of lower interest rates.
Cash-Out Refinance
A "Cash-Out" refinance is an option for those with a VA or conventional loan looking to take advantage of their home's equity to access cash for home improvements, emergencies, pay off debt, or any other purpose.
Thinking about refinancing? Speak with an Orbit Home Loan specialist to discuss your options.
A Streamline Refinance allows veterans who currently have a VA Loan to refinance into a lower interest rate, reducing monthly mortgage costs. Streamline refinance loans feature little paperwork and often require little-to-no costs out of pocket. Borrowers can roll closing costs into their overall loan amount. Some homeowners can also secure a Streamline refinance without an appraisal.
The other popular option, known as the Cash-Out Refinance, allows borrowers to tap into their home's equity and use it as cash. This type of refinance is available to any qualified veteran homeowner, regardless of whether they have a FHA, USDA, or conventional loan.
Refinancing may result in higher finance charges over the life of the loan. It's wise to crunch the numbers. Estimate your potential savings using our VA refinance calculator for Streamline and Cash-Out Refinance. Now the current economic climate makes a great time for many military homeowners to take advantage of the numerous benefits found in a VA refinance.
VA Refinance Eligibility
Eligibility for a VA Refinance is similar to that of a home purchase VA Loan. Typically, you can qualify if you served on active duty for more than 90 consecutive days during wartime or more than 181 days of service during peacetime. For National Guard members and Reservists, the veteran must have served at least six years. Some surviving spouses of veterans who died while in service or from a service-connected disability may also be eligible. It is important to note that in order to receive a VA Streamline refinance, you must hold an existing VA Loan.
Once approved for a VA Loan, your journey does not stop there. Learn more about helpful tips and contract guidelines in our next section.