VA loans make refinancing quick and affordable
It's not only easier to buy a home with a VA loan, it's easier to refinance a home with one, too.
Because so few veterans default on their mortgages and the Department of Veterans Affairs guarantees 25% of the home's purchase price to the lender if it has to foreclose, these loans are less risky for lenders.
That means you can have more debt, a lower credit score and less equity in your home than you'd need to qualify for a traditional loan.
Indeed, you don't need any equity in your home to refinance with a VA mortgage.
Yet VA loans don't require borrowers to buy mortgage insurance and have lower interest rates than conventional mortgages.
The average cost for a 30-year fixed-rate VA loan (for purchasing and refinancing) is 3.54%, according to Ellie Mae Inc., a California-based mortgage technology firm whose software is used by many lenders.
That's more than a quarter of a point less than the average cost of a conventional mortgage and represents a particularly good deal for borrowers with dinged credit who normally would have to pay more than average rates without government help.
VA Refinance vs. Conventional Refinance
|VA loan refi||Conventional refi|
|Average FICO credit score||710||743|
|Average debt-to-income ratio||40%||37%|
|Average home equity||3%||34%||Source: Ellie Mae Inc., November 2016 Origination Insight Report.|
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Your path to a new VA loan depends on whether you just want to lower your monthly payment, want cash back from your refinancing or have been delinquent on your VA loan.
Here are your three options:
Option 1. Lower your monthly payments.
If all you want to do is take advantage of lower interest rates, the streamline loan (or interest rate reduction refinance loan) is for you.
It's available to veterans who want to refinance an existing VA home loan with a history of on-time payments. One mortgage payment that was less than 30 days late in the last 12 months is OK, as long as you're current now.
A streamline loan can be easy because the VA does not require you to obtain a new certificate of eligibility, document your income, have your house inspected or appraised, or even undergo a credit check.
Although lenders are not prohibited from requiring a full appraisal, they're much more likely to depend on a computer-generated value that doesn't require an appraiser to examine the inside of your house.
While the VA does not have a minimum credit score requirement, lenders typically want to see a score of at least 620.
Changes in the way lenders evaluate applications also mean borrowers who have been turned away before may now qualify for a VA refinancing or be approved to borrow more than before.
If, for example, you pay off your credit card balances in full and on time each month, or if you've been carrying a credit card balance that you will pay in full at or before closing, it won't count against your debt-to-income ratio like it did in the past.
In parts of the country that still have depressed real estate values, a streamline loan may be your only option for refinancing because lenders don't have to require an appraisal.
You will pay 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 loan costs.
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.
There's an exception to this rule: You may receive up to $6,000 in cash to pay for renovations that make your home more energy efficient and were made within 90 days of the closing on your new loan.
A higher monthly payment is also allowed if you refinance:
- From an adjustable-rate mortgage into a fixed-rate mortgage.
- Into a shorter-term loan, such as going from a 30-year to a 15-year mortgage.
If your new monthly payment will be at least 20% higher than your old one, the VA requires lenders to underwrite your loan, meaning you'll have to provide pay stubs, pass a credit check and do all the other things a streamline loan doesn't normally require.
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Option 2. Do a cash-out refinancing.
If you have equity in your home and you need cash to pay off other debts, improve your home, buy a car, pay tuition or use for any other lender-approved purpose, choosing a cash-out refinance is your best bet.
To qualify, you must live in the home and not be underwater. You can refinance up to 100% of your home's appraised value, plus a little extra if you need it to make energy-efficiency improvements or pay the VA funding fee.
You can even use this loan to refinance from a non-VA home loan into a VA home loan.
You'll also need to obtain a certificate of eligibility, just as you did when taking out your first VA mortgage. It's easiest to have a lender obtain it for you.
The cash-out refinance process will take a little more work than the streamline option.
You must requalify and have your home appraised.
Home values continue to increase, so you might qualify now even if you couldn't before. The national median home price reached a new record high last year, breaking the old record set at the peak of the real estate bubble in July 2006.
Like any refinance, you'll pay closing costs. You can use some of your cash proceeds to pay these charges.
Borrowers can pay the VA funding fee out of pocket, but most add it to the loan. The fee is waived for veterans who have a service-connected disability.
Option 3. Refinance a delinquent mortgage.
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 mortgage, however, you're in luck.
Being delinquent does not make you ineligible to refinance. You will have to submit your application for what the VA calls "prior approval" and go through credit approval and underwriting to refinance a loan 30 days or more past due. But it can be done with either of the above options.
The VA's guidelines even let borrowers refinance late payments and late charges from the old loan, as long as doing so won't result in an unaffordable monthly payment.
After you apply, your loan officer will analyze your case and determine whether your reasons for falling behind on your payments have been resolved. For example, you might have been unemployed or ill but are back at work.
They also must determine that you're willing and able to make the proposed new loan payments after you refinance.
You can't simply have been careless with bill-paying and still expect to get a loan.
Finally, whether you've been delinquent or not, the VA wants to make sure borrowers benefit from any refinancing.
The government requires lenders to show you the interest rate and monthly payments for the new loan versus the old loan, as well as how long it will take for you to recoup your closing costs from refinancing with the lower monthly payment on your new loan.
You won't find this helpful extra step with most other loans.
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