VA loans help veterans purchase a primary residence. What happens when you rent the home out but want to refinance? Looking at the basic requirements of the VA loan, you would assume you are not eligible to refinance a rental property. It flat out states you must occupy the property. There is a loophole, though. We will discuss how it works below.
How the VA IRRRL Works
First, let’s look at how the VA IRRRL program works. Its full name is the VA Interest Rate Reduction Refinance Loan. The name says it all – interest rate reduction. This streamlined program helps you lower your interest rate. There are other uses, though.
Aside from an interest rate reduction, many borrowers use the program to get out of an adjustable rate loan. Whether they wait until the rate adjusts or they refinance beforehand is up to them. In either case, it may be that your payment increases. This may be okay, as long as the increase is not too much. The VA states the increase cannot be more than 20%. Some lenders decrease that amount just to protect themselves. If they do allow the higher increase, they may verify your income to ensure you can afford the higher payments.
In any case, the VA IRRRL program does not require very much documentation. The VA only requires:
- Proof that you occupied the home at some point as your primary residence
- Proof of timely mortgage payments (all payments must be on time for the last 12 months with the exception of one allowed 30-day late payment in that time. The late payment may not be within the last 3 months, though.)
You don’t need an appraisal, a certain credit score, or proof of your income. However, as we discussed above, a lender may have their own additional requirements. This is not unusual. Lenders fund the loans, so they must protect their own assets. If they see you as a high risk, they may require a little more information.
Getting Away with a Rental Property
If the VA guidelines state you must prove occupancy of the home, how can you get away with refinancing a rental property with the streamline loan? There is a loophole that active duty military, as well as inactive members, can use.
You used your VA guaranty already. This is the amount you are entitled to as a veteran. The VA guarantees the lender they will pay them back if you default on the loan. You can only use this guaranty once. The only way to use it again is to pay off your existing loan. In the case of a refinance, you are not freeing up your guarantee. Instead, you are basically reusing it. You keep the same property, you just change the mortgage. You don’t have to prove that you will occupy the property moving forward.
What’s the catch? There is a small one – you cannot use your VA benefits again. If you rent out the property with the VA financing and you want to purchase another home, you must use other financing. This means coming up with a down payment. It also means you likely need a higher credit score. It’s not the end of the world, especially if you want to keep your current property.
Reasons to Keep your Current Property
You might wonder why it’s a big deal to refinance your VA loan if the home is now rental property. There are several reasons. Obviously, the lower your payment, the higher profit you make. But what if you aren’t in it for the profit? This is the case for many active duty military personnel. They get deployed or transferred, yet they don’t want to give up their home. Sometimes getting transferred can cause financial hardship. This is not what the VA wants to happen. So they allow the refinance of the investment property. This way when your active duty is over, you have a house to come home or if you kept it.
However, even inactive duty members can refinance an investment property. Some people do it for the money. There is nothing wrong with that! Your home is one of the largest investments of your life. If you have experience with renting or you think you can handle it and make a profit – go for it! The VA does not limit the opportunity to refinance to just those who are active in the military.
Should you Refinance?
Now the bigger question is, should you refinance? If you don’t live there, what’s the benefit of refinancing? Of course, the biggest is to save money. If you collect rent, hopefully this means higher profits. If you don’t have a renter, it keeps your mortgage payment more affordable.
Consider how long you will keep the property. If you see this as a long-term investment, take the refinance and start saving money. Don’t forget, you must pay off your closing costs before you realize the savings. VA loans don’t have high closing costs, though. You may even be able to negotiate a no-closing cost loan for a slightly higher interest rate. Some borrowers even wrap the closing costs into their loan.
The possibilities are endless. If you have a rental property, don’t be afraid to refinance your VA loan with the IRRRL program. If you have the opportunity to save money, take advantage of it! At the very least, you know you will save money on interest. The VA cannot control your property taxes or homeowner’s insurance, which are bound to go up eventually. Take advantage of the savings and start paying your principal down faster. In the end, you will own your home faster which is probably your ultimate goal anyways.
If you do decide to refinance, shop around with different lenders. See what interest rates and closing costs are available to you. Chances are, different lenders will have different quotes for you. Don’t settle for the first one – comparison shop and get the best deal!