VA home loans are not only easier to get than traditional loans, they're easier to refinance, too.
Department of Veterans Affairs refinancing is open to borrowers with slightly below-average credit and requires no mortgage insurance.
The rates are as favorable as those given to people with stellar credit scores in non-VA loans. And you can borrow more of the value of your home than you would be able to without VA backing.
That makes VA refinancing the best deal you're going to find for homeowners who qualify.
Your path to a new VA loan depends on whether you want cash back from your refinance, if you have been delinquent on your VA loan or if certain circumstances in your life have changed.
Here are your three options:
Option 1. Streamline loan: The fastest, easiest way to refinance.
If all you want to do is take advantage of lower interest rates, the streamline loan is for you.
It's available to veterans who want to refinance an existing VA loan and have been current on their mortgage payments for at least 12 months.
A streamline loan is easier because the VA does not require you to document your income, have your house inspected or appraised or even undergo a credit check. That doesn't preclude lenders from asking for an appraisal or credit check, according to the VA.
With depressed real estate values in many parts of the country, the reappraisal requirement for traditional loans is the sticking point. Many people are stuck with higher interest loans because they cannot refinance a house that has declined in value.
With a VA loan, however, "if you're going back to the same investor, you don't have to have a reappraisal. There are so many benefits of that," says Louise Thaxton, national director of Military Mortgage Specialists at Fairway Independent Mortgage Corp.
Suddenly, refinancing becomes possible.
You will have closing costs, points and funding fees, as with any refinance, but these costs can be rolled into the new loan. Or you can take a slightly higher interest rate in exchange for the lender paying the costs of the loan.
Other than the amount of your closing costs, you aren't allowed to borrow more than you need to refinance the balance on your current loan.
The purpose of the program is to reduce your monthly payments, so you're not allowed to get cash back or consolidate other loans, no matter how much equity you have.
This option might not be available to you if your marriage status has changed.
If you took out the original home loan with a spouse you have since divorced or if you want to apply with a new spouse, you must go through the qualification process, just as you did with the first mortgage.
Option 2. Cash-out loan: Get cash from your home equity.
If you're fortunate enough to have equity in your home and you need cash to pay off other debts, improve your home, buy a car, pay tuition or any other purpose, choosing a cash-out refinancing for your is your best bet.
To qualify, you must live in the home and have enough equity in it. You can refinance up to 90% of your home's appraised value.
You'll also need to obtain a certificate of eligibility, just as you did when taking out your first VA mortgage.
Thaxton, a mortgage banker in Leesville, La., recommends you have your lender get the certificate for you.
"Many people struggle with getting their certificate of eligibility, and then they struggle with reading it," she says. "A lender can guide them through the process and make it less stressful."
This process will take a little more work than the streamline option.
You must requalify and have your home appraised. If your house has declined significantly in value, this option probably won't work for you.
Like any refinancing, you'll pay closing costs, although you can add them to your loan. (They don't count toward the maximum percentage of your home's value you can borrow.)
Option 3. Refinance your delinquent mortgage: Lower interest rates, even if you've fallen behind.
It's a catch-22 for many people. You're having trouble keeping up with mortgage payments and other bills. A lower interest rate would help, but you can't refinance a delinquent mortgage.
If you have a VA loan, however, you're in luck.
Being delinquent does not make you ineligible to refinance. You will have to submit your application for prior approval and go through more steps to get refinanced. But it can be done.
Banks more readily lend to borrowers who have gotten behind on their payments with VA loans because the government guarantees up to 25% of the loan amount if you should default.
That doesn't mean you can become careless with bill-paying and still expect to get a loan, however.
"VA will insure loans that have borrowers with lower credit scores, but the challenge is finding a bank that will lend the money," Thaxton says.
She says borrowers often go to the VA website and read that they can get a loan with damaged credit, so they think their credit score doesn't matter. It does.
"The VA only guarantees the money," she says. "You still have to find an investor who will lend the money. Just because the VA says it can be done doesn't mean the bank will do it."
And if you have more than a few credit dings, you're probably out of luck. Most subprime borrowers (anything below 620) probably won't get a loan.
"It's been a long time since I could have done a VA loan with a credit score in the mid-500s," she says.
After you apply for a loan, your loan officer will analyze your case and determine that your reasons for falling behind on your payments have been resolved. For example, you might have been unemployed or ill but are now back at work.
The loan officer must assure the VA the loan will help you by comparing the interest rate and payments on the old loan with those on the new one. They also must figure out how long it will take you to recoup your closing costs, whether you pay them out of pocket or add them to your loan.
The lender will get your credit report and other information to make sure you are qualified for your new loan.
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