Current VA mortgage holders have the option to refinance with the VA IRRRL program. This rate/term refinance doesn’t require verification of any qualifying factors outside of a timely mortgage payment history and the presence of a net tangible benefit. However, there are limitations to the program that may have you looking elsewhere for a refinance program.
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The VA IRRRL does not allow for any cash out. If you don’t have a net tangible benefit, such as a lower payment or less risky loan (i.e. ARM to a fixed rate) you won’t qualify. If you need other options, read below.
VA Cash Out Refinance
If the point of refinancing is to tap into the equity of your home, you’ll need a cash-out refinance. The VA also offers this program. However, it differs from the IRRRL. You will need to verify all aspects of your qualifying factors.
For example, your debt ratio cannot exceed 41%. This means your new mortgage payment with the cash out, plus all other monthly debts cannot take up more than 41% of your gross monthly income. If you will use the loan’s proceeds to pay off debts, you’ll need proof of the amount of those debts with a current statement from the creditor.
You’ll also need to prove your eligibility for the VA loan with your Certificate of Entitlement, a decent credit score, and a stable employment history. Each lender has their own requirements regarding a ‘decent’ credit score and stable employment history. The VA doesn’t specify the minimum for either factor. You may find different requirements from lender to lender.
Conventional Loan Refinance
Just because you are a veteran doesn’t mean you have to use your VA benefit. If you have good enough credit and enough equity in your home, you may want to refinance with a conventional loan. The main difference is the lack of a funding fee. The VA IRRRL costs 0.5% of your loan amount. On a $200,000 loan, that means $1,000. Conventional loans don’t have a funding fee.
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However, if you owe more than 80% of your home’s value, you’d pay Private Mortgage Insurance every month until you owe less than 80%. This is something to keep in mind if you consider a conventional loan. In order to qualify, you’ll need:
– High credit score (over 680)
– Debt ratios no higher than 28/36
– Stable income
– Stable employment
– Assets in reserves
Again, each lender differs, as does each situation. In general, though, you need good credit and low debt ratios to qualify.
FHA Loan
The FHA loan is another government-backed program, but it’s similar to the VA loan. The main difference is the upfront mortgage insurance and annual mortgage insurance you would pay. The VA loan does not charge mortgage insurance, even on a cash-out refinance. Essentially, the FHA loan would cost you more and has stricter guidelines. The FHA loan requires:
– Minimum 580 credit score
– Maximum front-end ratio 31%
– Maximum back-end ratio 43%
– Stable income and employment
In most cases, it makes more sense to use the VA refinance option or a conventional loan refinance if you qualify.
Home Equity Line of Credit
If you need to refinance to tap into your home’s equity, you can also leave your VA loan alone and take out a home equity line of credit. This is a 2nd lien on your property. Your current VA loan remains the same. You can usually take out cash up to 85% of your home’s value; however, each lender differs in their requirements.
The HELOC is usually easy to qualify for, but again, vary by lender. You’ll need:
– Decent credit (Usually 650 or higher)
– Stable income and employment
– Total debt ratio that does not exceed 43%
The HELOC works differently than a cash-out refinance. Rather than receiving one lump sum of money, you receive it an account along with a checkbook and/or debit card. You can then draw the funds as you need them. Your payments for the first 10 years consist of interest only and only on the money you withdrew. If you choose to pay the principal back, you can continue drawing the funds until the draw period is over (10 years). After the draw period, you pay back the principal and interest over a 20-year period.
You have many options when you want to refinance your VA loan. If you simply want to lower the rate and/or change the term, the VA IRRRL often makes the most sense. It’s the least expensive and most flexible program. If you need cash out or want to try to get a conventional loan to avoid the funding fee, you have that option as well. Shopping around and comparing offers from different lenders will help you make the right choice.
