Veterans who did not take advantage of their benefits to secure VA financing when they purchased a home can refinance into this lucrative financing option. It might seem strange to refinance from a conventional loan to a government-backed loan since government loans often have extra charges conventional loans do not have, but it can save you money in the long run. The VA mortgage does not charge monthly mortgage insurance and will provide cash out up to 90% of the property’s value. The only catch is every a borrower refinancing from a conventional to a VA loan must go through the full verification process.
Streamline vs. Full Verified Loans
Veterans who used their VA benefits and secured VA financing have the chance to streamline their refinance. This program, called the Interest Rate Reduction Refinance Loan, enables borrowers to refinance into a lower interest rate with very few verifications. These borrowers do not have to verify income, employment, assets or the value of their property. All of the factors used to initially approve them for the VA loan is used for approval purposes. The downside to the streamline program, however, is the inability to take cash out. The program is strictly to help borrowers lower their interest rate and save money every month.
Fully verified loans are reserved for borrowers who have a current VA loan and want to take cash out or borrowers who have a conventional loan and want to refinance into a VA mortgage. The fully verified process is not overly complicated and offers very forgiving guidelines, making it easy for veterans to qualify for the program, though.
How to Qualify for the VA Mortgage
Qualifying for the VA mortgage requires you to meet the following stipulations:
- Credit score of at least 620, but every lender sets their own minimum score requirement
- No more than one 30-day late payment during the last 12-months
- All collections should be paid-in-full
- 2 years must pass after a Chapter 7 bankruptcy discharge
- If you have a Chapter 13 bankruptcy, you must have 12 consecutive on-time payments
- You must not have any federal debt liens or judgments outstanding
- Debt ratios around 29/41 have the greatest chance at approval, but every lender differs
- You must be able to verify your income with paystubs, W-2s or tax returns
- You must be able to provide your Certificate of Eligibility based on your time of service
One factor that you must meet without exception is the amount of disposable income you must have after you pay your mortgage and any other monthly obligations. The amount required is divided between four areas of the country. If you live in the Northeast, you must have at least $1,025 left over each month; in the Midwest and South you must have $1,003 left and in the West, you must have $1,117 left.
The conditions you must meet in order to qualify for a VA mortgage are similar to the conventional mortgage guidelines with the exception of the disposable income. Generally, if you qualified for a conventional mortgage, you will not have any trouble securing a VA loan. The largest factor is whether you can secure your Certificate of Eligibility. This VA provides these certificates to veterans who served adequate time and who have an honorable discharge. Veterans who served during peacetime must serve at least 181 consecutive days and veterans who served during wartime must serve at least 90 consecutive days.
Benefits of Refinancing from a Conventional Loan to a VA Loan
There are many benefits you can realize if you refinance from a conventional to a VA loan. These benefits include: securing a lower interest rate, which gives you more disposable income; you can take up to 90% of the value of your property in a cash-out loan, whereas with a conventional loan, you can only take up to 80% of the value of the home.
If you have more than 80% of the value of your home outstanding in a conventional mortgage, chances are you pay Private Mortgage Insurance fees. This adds onto the cost of having a loan and you do not see a return on this investment no matter how long you pay it. You must pay this premium until the amount of your mortgage is less than 80% of the value of the property. With a VA mortgage, there are no monthly insurance premiums. Once you pay the upfront funding fee, you do not pay anything outside of the standard principal, interest, taxes and insurance on your mortgage.
If you did not take advantage of your veterans’ benefits right away or you became eligible after you already owned a home, you can refinance a conventional loan into a VA mortgage easily. The costs are minimal and the benefits are immense, making it a smart choice for any veteran that wants to save money. If you wish to make the change, find VA approved lenders in your area and compare the interest rates and fees they offer to see who has the best deal for you!