If you use your entitlement to obtain a VA loan, you do not have to keep it for the entire term. You have options to refinance. If you want to keep the loan within the VA program, you have two refinance options – VA IRRRL or VA cash-out refinance. Both offer similar benefits to the ones you realized with the original loan. Understanding the difference between the two can help you make the decision that is right for you.
The VA Streamline or IRRRL as One of the Refinance Options
The VA Streamline known is also known as the Interest Rate Reduction Refinance Loan. This program helps veterans with a current VA loan, lower their interest rate or save money each month. The only exception to the rule is if you have a risky loan type that you want to refinance into something less risky. For example, if you have an ARM that is about to adjust and you want a fixed rate loan. You may have to take a higher interest rate, but you lower the riskiness of the loan. This falls under the VA IRRRL program.
The VA Streamline refinance allows you to refinance your loan with little to no costs involved. There are closing costs, but the lender can wrap them into your loan. As long as you meet the minimal requirements of the loan program, you can take advantage of the benefits. There are a few requirements you must meet in order to qualify for this program.
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Qualifying for the VA IRRRL Program
The guidelines are very simple for the VA IRRRL program. You do not need to provide proof of your income, assets, or credit. You do not even have to go through the appraisal process. The lender can use your original income, credit, and the value of your home to qualify you for the loan. The lender can only do this, though, if you show some type of benefit for the refinance. The most common is to lower your interest rate. For example, if rates were 6% when you originated your VA loan and now you could get a 4%, this is a significant benefit. If you need to refinance in order to get out of a risky loan, this often qualifies as a benefit as long as your payment does not increase too much. There is something to be said about the stability of a fixed rate loan versus an ARM, for example.
The largest factor the VA and any lender considers is your mortgage history. Technically, the VA allows one late mortgage payment (no more than 30-days late) within the last 12 months. Many lenders do not allow any late payments, though. This is the basis of your VA IRRRL approval. Some lenders may add their own requirements, such as checking your credit to make sure nothing catastrophic happened since you originated your VA loan. They may also call and verify your employment to ensure you have income. It is up to each lender, but the VA does not require these things. They only require the timely mortgage payments and proof that you occupied the home after you originated your VA loan. You do not even have to live in the home to get approved for the VA IRRRL.
VA Cash-Out Refinance is One of the Refinance Options
The VA Cash-Out Refinance is just like any other cash-out loan. You tap into the equity of your home and take it out in cash. You then have a larger mortgage and less equity in the home. Unlike the VA IRRRL program, you do not need to have a VA loan currently. You do have to be a veteran with enough service time to qualify for the program, but you can refinance an FHA or conventional loan with a VA cash-out refinance.
You can use the cash-out refinance for a variety of things. Most veterans use this program to fix up their home. They take the funds from the equity of their home and invest it right back into the home. This is the smartest use of cash-out funds. However, other borrowers use the funds to pay for a wedding, vacation, or even college tuition. You can use the money as you see fit as long as you qualify for the loan.
Qualifying for the VA Cash-Out Refinance
Unlike the VA IRRRL program, you must verify every aspect of your loan application. Nothing gets overlooked in this situation. The lender will evaluate your income, employment, assets, credit score, and the value of your home. You also need to provide proof that you lived in the home prior to the refinance and plan to do so after the refinance.
The good news is, you may still take out up to 100% of the value of your home in a cash-out refinance. Most conventional programs max the LTV at 85% for cash-out loans. Of course, different lenders have different requirements. Because the lender funds the loan, not the VA, you may have to shop around to find a lender allowing 100% financing.
Another difference with the VA Cash-Out Refinance is the funding fee. On a VA IRRRL, you only pay 0.5% for the new loan. For the Cash-Out Refinance, you pay between 2.15 and 3.3% of the loan amount in a funding fee. On a $150,000 loan, this means between $3,225 and $4950.
You might find different requirements between lenders regarding your credit score and debt ratio. Technically, the VA does not have a minimum/maximum for either factor. Most lenders, however, require at least a 620 credit score, with many not allowing scores lower than 680. As far as your debt ratio, the VA puts more emphasis on the disposable income you have after paying your monthly obligations than your debt ratio. Of course, they will not let anything-overwhelming slip through the cracks. However, they abide by the disposable income requirements the VA sets in order to determine who qualifies for the VA Cash-Out Refinance.
Whether you need the VA IRRRL program or the VA Cash-Out refinance, make sure you weigh your options. Look closely at the fees and the interest rates charged. Talk to your lender about the options you have and how the cash-out may affect your future. The VA usually offers very competitive rates and low fees making any of its programs a viable option for veterans.
