Can you refinance a VA loan?

A VA home loan is backed by the U.S. Department of Veterans Affairs and is available to veterans, service members, and eligible surviving spouses. These loans typically come with low interest rates and don’t require a down payment.

If you have a VA-backed mortgage, you may be wondering if you can refinance to get a lower interest rate or tap your home equity to pay off debt or cover an expense. You have several ways to refinance your current VA loan. Keep reading to learn how each option works and what steps you can take to refinance.

• Can you refinance a VA loan?
• VA streamline refinance
• VA cash-out refinance
• Conventional refinance
• How to refinance a VA loan

Can you refinance a VA loan?

It's possible to refinance a VA loan, provided you meet certain eligibility requirements.

When you refinance a VA loan, you take out a new loan with your existing lender or a new lender to pay off your current loan. The new loan will ideally have a lower interest rate or lower monthly mortgage payments. And with some types of cash-out refinances, you can take out a new loan that’s larger than your current loan and pocket the difference in cash.

You have three options for refinancing your VA loan:

VA streamline refinance

A VA streamline refinance, also known as an interest rate reduction refinance loan (IRRRL), allows you to refinance to a new VA loan with a lower interest rate. As a result, it could lower your monthly payments and help you save on interest.

Choosing a VA IRRRL could make sense in several situations. For example, if you have an adjustable-rate mortgage (ARM) with unpredictable monthly payments, this type of loan allows you to refinance to a VA loan with a fixed rate, making your monthly payments more predictable. This loan could also be a good option if you want to refinance to a lower rate without undergoing a credit check.

Who’s eligible for a VA streamline refinance?

You can qualify for a VA streamline refinance if you meet these conditions:

• The loan you’re refinancing must be a VA loan.
• You can prove you previously lived in or currently live in the home.
• Your new loan term can’t be more than 10 years longer than your original loan term; it also can’t exceed 30 years and 32 days.

What are the costs for a VA streamline refinance?

When you do a VA streamline refinance, you’ll pay a one-time VA funding fee that’s 0.5% of the loan amount. For example, if the loan amount is $100,000, the VA funding fee will be $500. You’ll also have to pay any closing costs and appraisal fees that the lender charges. You can typically include the funding fee and any other closing costs in the new loan.

VA streamline refinance pros and cons

Here are some pros and cons to keep in mind when considering a VA refinance loan:

Pros

• Home doesn’t have to be your primary residence to qualify for refinancing
• Appraisal may not be required
• Typically no credit underwriting required

Cons

• Closing costs
• VA funding fee of 0.5%
• Underwriting required if your monthly payments increase by 20% or more

VA cash-out refinance

A VA cash-out refinance allows you to tap the equity in your home. You can also refinance from a non-VA loan to a VA loan (if you’re eligible) without taking any cash out.

With the cash-out refinance, you’ll replace your existing mortgage with a new, larger loan. Once your old loan is paid off, you’ll receive the difference in cash at closing, minus closing costs. You can borrow up to 100% of your home’s appraised value, which is unique. Most conventional cash-out refinances only allow you to borrow up to 80% of your home’s appraised value.

If you have a conventional loan but want better terms and a lower rate, you may also be able to switch to a VA cash-out refinance.

HOW A CASH-OUT REFINANCE CAN HELP YOU PAY FOR HOME UPGRADES

Who’s eligible for a VA cash-out refinance?

You must meet all these conditions to qualify for a VA cash-out refinance:

• You must live in the home that you’re refinancing.
• You must be eligible for a Certificate of Eligibility (COE) from the Department of Veterans Affairs — this document proves to a lender that you qualify to take out a VA mortgage.
• You must meet both the VA’s and your lender’s standards for credit, income, or other requirements (this will vary by lender).

What are the costs for a VA cash-out refinance?

The costs for a VA cash-out refinance include an appraisal fee and any closing costs the lender charges. You’ll also have to pay a one-time VA funding fee that’s 2.3% of the loan amount if it’s your first time doing a VA cash-out refinance. If you’ve done one previously, you’ll pay a VA funding fee that’s 3.6% of the loan amount.

VA cash-out refinance pros and cons

Before you take out a VA cash-out refinance, make sure you understand its pros and cons:

Pros

• Cash can be used to pay for school, improve your home, or refinance debt
• Borrow up to 100% of your home’s appraised value

Cons

• 2.3% VA funding fee (first use); 3.6% VA funding fee (afterward)
• Appraisal required

Conventional refinance

A conventional refinance is when you refinance an existing VA loan or a non-VA loan into a new conventional loan — a loan that’s not insured by the federal government. Similar to the two refinancing options above, it involves switching to a new loan that hopefully has better terms and a lower interest rate.

Refinancing from a VA loan to a conventional loan could make sense if you want to avoid paying the VA funding fee, and it allows you to save more. Just keep in mind that with a conventional loan, lenders may not be willing to refinance your loan if you have less than 20% equity in your home.

Who’s eligible for a conventional refinance?

Although requirements vary by lender, here are some factors lenders consider when you apply for a refinance loan:

• Lenders typically require borrowers to have a minimum credit score of 620.
• You’ll typically need a debt-to-income ratio (DTI) of 36% or less. Your DTI compares how much of your gross monthly income goes toward paying your monthly debts. For example, if your monthly debt is $2,000 and your gross monthly income is $4,000, your DTI is 50%. The higher your DTI ratio is, the less likely you’ll qualify.
• Lenders often require you to have at least 20% equity in your home to qualify for a conventional refinance.

5 REASONS TO GET A CASH-OUT REFINANCE

What are the costs for a conventional refinance?

Although conventional refinance costs vary by lender, you may have to pay an application fee, appraisal fee, origination fee, and closing costs. The exact amount you’ll pay depends on several factors, including your loan amount and credit score. On average, you can expect to pay around $5,000 in closing costs, according to Freddie Mac.

Conventional refinance pros and cons

Refinancing to a conventional loan from a VA loan has its advantages and disadvantages:

Pros

• No VA funding fee
• Home doesn’t have to be your primary residence

Cons

• You may not be eligible for a conventional refinance if you have less than 20% equity in your home
• Lending requirements are often stricter than VA requirements

How to refinance a VA loan

If you think refinancing is a good idea, here’s what you need to do:

1. Shop around and compare lenders. Since loan terms and rates vary, It’s important to shop around to find the lender that offers you the best deal. You can do this by prequalifying with as many lenders as possible to check your estimated rates and terms, without affecting your credit score.
2. Apply for refinancing with the lender you choose. Once you’ve chosen a lender that best matches your borrowing needs, submit a refinance application. Although document requirements vary by lender, you’ll likely need to submit copies of your most recent pay stubs, W-2s, federal tax returns, and your VA Certificate of Eligibility.
3. Close on your refinance loan. If approved, the final step is to close on your loan by signing the closing documents and paying any closing fees that haven’t been rolled into the new loan. You’ll also receive a check at closing if you opted to tap your home equity with a VA cash-out refinance.